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The following guest post is courtesy of Jens Chrzanowski, Member of the Management Board of Admiral Markets Group AS.
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How many times have you tried to fight the market just to find out that it is virtually impossible to win unless you join it? Today, we will focus on the matter, and this week’s article is inspired by my trader colleague Nenad Kerkez. If you wish, join him and me live in our brand new webinar series Real Time Daily Trading Ideas, weekdays at 10:00 London time.
You always need to be aware of the fact that the leveraged trading markets like Forex & CFD are far more active and fast-paced than the stock market, and new traders always need to be cautious. To be a successful in Forex & CFD trading, you need to know the basics of Forex trading and what factors might influence price movements.
Forex trading has enough might and power to make you improve yourself financially, but always make sure that you have an experienced Forex trader and broker guarding your back.
The first lesson may sounds easy, but actually is the biggest challenge when it comes to daily trading: try to understand the magic effect of leverage. Leverage multiplies your potential profits and could bring you 20%-50% profit in a single day. However, the magic effect can also works against you. If you are on the wrong side of the market, the same multiplier runs for your losses.
If you are willing to feel the adrenaline in your veins, then you are ready for the next steps:
In a highly dynamic market, such as Forex, the prevailing supply and demand forces affect the currency rates, but there are plenty of other factors you need to consider when trading the Forex & CFD market. So, don’t fight them, join them!
Trend Is Your Friend
To join the fray, you need to realise that trend is your friend. Trends are shaped by big sharks that are at the top of the food chain in the market, and you are a small fish following the shark.
A trend is an overall current direction of the market on a particular time frame, always a series of thrusts and pullbacks. It can exist on every single time frame. In order to successfully follow the trend, you also need to look at a higher time frame than the one you are currently trading. Determine the trend. When the higher frame and your trading time frame match, look for a retracement and enter.
When losses happen during intraday trading, they tend to happen during the transition period, i.e., when the trend is changing. In order to limit losing trades in times of transition, try to watch out for a price to hit a major area of support & resistance on a higher time frame. When this happens, Nenad looks for a potential reversal trade and a trend change. If it doesn’t reverse, he looks for a retracement to the POC zone and expect a bounce and continuation. If we can’t identify a trend or a pullback, we should move to another pair that clearly shows the trend.
History Repeats Itself
When it comes to the Forex market, historical buyers and sellers are usually very aligned with now-moment buyers and sellers. If the price bounced off a strong level in history, the chance is that it will also bounce up in the now moment. Join the shark! Be a smart trader and follow smart money. At the end of the day, protect your profits.
Follow The Logic of the Market Shapers
We will use the example of the USD/CAD and Oil. It is important to note that based on its historical relationship, when oil prices rise, the USD/CAD falls, and vice versa – when the oil price goes down, the USD/CAD rises.
The Canadian economy is highly dependent on its exports, and around 80% of its exports go to the United States (source). For this reason, the USD/CAD can be greatly affected by how American consumers react to changes in oil prices.
When the U.S. demands increases, the price of oil rises and the price of the USD/CAD goes down. Conversely, when the U.S. demand falls, the oil price decreases and the USD/CAD price rises.
There is a good reason for trading USD/CAD correlation instead of buying crude oil directly – interest rates. The Canadian Dollar against the US Dollar carries a positive overnight rate (swap). That means that if you go long on the Canadian Dollar, you might be able to earn an additional interest rate.
On the other hand, if you trade crude oil directly, you will have to pay an overnight rate (negative swap value). When you stay in the market for longer periods, this interest-rate difference can prove significant. Going long on CAD/JPY and short on USD/CAD might be better than buying crude oil directly as your profit potential might grow exponentially due to CAD exposure.
Don’t try to chase the market. The market is like a shadow – if you run after it, you will never catch it. However, if you stand still, it will come to you.
Don’t go into this business with unrealistic expectations. You cannot make 50k a month on a 1k trading account. It’s not going to happen. Try to increase the account size through organic gains, not by making more deposits. Be humble and accept the losses. Keep them small and keep track of them. At the end of the day, it’s not how much you are willing to make, but rather how much you are willing to risk.
Nenad is a trend follower. One of the reasons why his analyses, trading ideas, and setups have been successful is that he always follows the big shark carefully. Nenad wants to be able to see the whole wood, not just a tree. And again, see him live, in our daily webinars, and ask him questions – in real time!
See you next week!
Do you have any feedback, concerns, requests, maybe even compliments? I’d love to hear them. Please contact me via: [email protected].
Trading on margin carries a high level of risk, and this article should not be seen as advice or solicitation to buy or sell, but written for informational purposes.