Forex Trading Strategies - Investing Versus Trading

By Henry Liu

One of the most important yet often ignored questions that all Forex traders should ask themselves, especially retail traders, is “what’s my goal?” or “what’s my endgame?”

Yes, it may seem absurd to bring this up at this stage of my 7-part series, but how many traders actually examine what do they really want from Forex?  Now, we are not talking about fantasy land here, but something realistic and achievable… and after you really thought through it, I think it comes down to either income replacement, or income supplement…  Of course, there are always those who want to strike it rich overnight, but I think you probably have a better chance at playing the lottery, because it takes just one combination of winning numbers to win millions of dollars, versus having series of winning trades, excellent mental discipline, and perfect timing to achieve your goal.  The odds are just astronomical; so yes, you’d have better odds at playing the lottery than trading Forex starting with a $500 investment and the explicit goal of turning it into $1 million.

Now that we get the myth out of the way, let’s understand the difference between Trading and Investing.

Trading – according to Investorword: is the buying and selling securities or commodities on a short-term basis,  hoping to make quick profits.
I think the key focus is “short-term”, as traders often enter and exit trades within minutes, hours, but very seldom, days.  News trading, straddling, scalping, all describing different types of trading with a short-term focus; as a matter of fact, most traders, especially the novice ones, tend to focus on this type of Trading, or in and out of the market on short-term basis.

Investing – on the other hand, is defined by Google as:

1. Expend money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property, or by using it to develop a commercial venture.
2. Devote (one’s time, effort, or energy) to a particular undertaking with the expectation of a worthwhile result.

Obviously investing is not short-term, but rather longer term ventures with goals of achieving profits that are worthwhile.
If your goal in Forex is income replacement or supplement, I’ll show you a way through investing to build up your portfolio.  If your goal is to gamble your account with expectations of huge returns, then the following may not interest you, however, you are welcome to follow along, because what you are about to read could change your Forex Trading forever.

Unless you are already a successful Forex trader, you may still make the same mistake: Closing profitable trades early while let losing trades run…  This is of course, human nature, and it is as true as gravity, because your brain is programmed to go to the path of least resistance.  A normal trader usually feels that taking a small profit is easier than taking a small loss… In a study into positive/negative framing, traders are usually biased against taking losses, even when logic states otherwise.  I’ll get into details in the final chapter of Forex Trading Strategies, but for now, just know that if you give a choice to 100 traders to take a loss of $3000 now, or $5000 later, but with a 10% of probability that market could come back to break even, 85% of traders would choose the $5000 or no loss scenario, when in fact the $3000 loss is the right choice mathematically.

The same applies to winning trades, and if we were to change the context, let’s say to either take profit on $3000 now, or $5000 later, but with 10% chance of making nothing, 85% of traders would take the $3000 scenario, leaving money on the table because of the fear in losing what you already have.  And in order to transform your thinking from trading to investing, we need to learn to do what’s hard, because if you are doing what 85% of traders are doing, you’ll end up with the same results of what 85% of traders are getting, and that’s losing…

And that brings us to the concept of Long Term Trades, or what I call: Currency Investment, or leaving your winning trades run. The idea behind the long-term trade is simple, trade based on major market developments, and once you are in the trade, stay in it until you have reasons to get out.  Start with a very small percentage of your account, preferably taking positions in the pair that will give you positive daily swaps, and then add more positions as the market goes in your direction.  Here are the specifics:

1. Study the market and wait for major breaking news that could change the entire market.  News like the Lehman Brothers, ECB Press Conference, Japan’s PM Abe’s snap election…  all of these news releases change the overall sentiments of the market and affect one or several currencies.
2. Choose a currency pair in the direction of the news that would yield positive daily swaps, or cost you less daily swaps.  If the swaps are mostly the same, choose the pair with the most liquidity (less spread), as it’ll end up costing you less.
3. Follow the market and start with a very small position, no more than 2x to 3x leverage.  Something that you can afford to leave running without losing sleep. If 2x leverage is still too much, take half of that.  (2x leverage is basically twice of your available balance.  If your available balance to trade is $10,000 USD, then 2x leverage would be $20,000 USD, or 2 mini lots.)
4. Once you are up 100 pips or so, move your stop loss to break even, and wait for the inevitable market retracement and add another 2x leverage position.  Note: As a rule of thumb, wait for market to retrace at least 100 pips from the high, then plan your entry.  Use previous Forex Trading Strategies such as Support/Resistance and Market Timing as your guides to enter.
5. Repeat step 2, 3, 4 and continue to add more small positions until you have reasons to get out of the trade.  Usually when a move like this happens, it is possible to see the trend last 3 months to 18 months.

These small positions could amount to huge profits in the long run.  I have accumulated 30+ positions on a trade with the first position giving me in excess of 1500+ pips of gain, and I have seen people with 10,000 pips of gain on one trade of shorting GBPJPY from 250.00 down to 150.00.  Even if you enter half of that, you will end up at least doubling your account with very little risk…  Remember, Rome is not built in one day, nor is your Forex portfolio.

Last but not least, let me share with you what kind of news you should paying close attention to… The kind that moves the market!  At the time of writing this strategy, market is particularly sensitive to whatever has to do with QE or Quantitative Easing.  Market is expecting the ultra easy policy to continue, so the next sharp move would take place when central banks stop QE, and that would signal potential concerns for inflation, which will lead to rate hikes.  So the first major central bank, ECB, Federal Reserve, Bank of Japan, or PBoC to talk about ending QE and hiking rates

What Should You Do When Your Online Forex Trading System Fails?

Forex trading systems cannot stay unchanged for too long. Market conditions change constantly and a winning system will eventually start losing. Sticking to the old system while hoping for the winds to change will likely end with a test of the depth of your pockets.
So what can you do?

Assuming that you are generally happy with your system, there are a few things you can do. It’s better to try some back testing, and then demo trading before making these changes on your real account.

• Switch to a higher time frame: Trading could become so choppy and “noisy”, in a way that your kills your system. On higher time frames, your system could work in a better manner.
• Switch to another currency pair: If you always stick to the same pair, perhaps the behavior of one of the currencies in the pair has changed, while the other hasn’t. Switching to crosses can be an alternative to the noise created by US events.
• Modify Stop Loss / Take Profit parameters: This is a small tweak that can make a big difference. It’s important to stress that you keep a normal risk/reward ratio and that you don’t extend the stops while you are trading.
• Remove one of the indicators: Too many systems use too many indicators. This complicates matters and makes it hard to understand why you won a trade and why you lost one. You might have the instinct to add another technical indicator to add extra validation. As aforementioned, this could only make things worse. Try refreshing your graph with one indicator less.
• Begin testing a totally different system: After already trying to make the necessary tweaks to your system, perhaps it’s time to acknowledge it doesn’t work and to seek a new one.