need to stay on your toes, and keep thinking about and monitoring the market while your trade is still active. The market will always be moving, sometimes faster than at other times, and new information will still be coming into the market. In Chapter 11, we look at several different ways you can monitor the market while your trade is open, as well as how and when you should adjust your trade strategy depending on events and time.
Exiting each trade is the culmination of the entire process, and you’re either going to be pleased with a profit or disappointed with a loss. Every trade ends in either a profit or a loss (unless you get out at the entry price); it’s just the way the market works. While your trade is still active, however, you’re still in control and you can choose to exit the trade at any time.
Even after you’ve exited the position, your work is not done. If you’re serious about currency trading as an enterprise, you need to review your prior trade for what it tells you about your overall trading style and trade execution. Keeping a record of your trading history is how you stay focused, learn from your mistakes, and avoid lapses in discipline that could hurt you on your next trade. Only then is it time to move on to the next trading opportunity. (And don’t forget the last step regarding your trades: the potential tax bite. Find out more in Chapter 12.)
Chapter 2
What Is the Forex Market?
IN THIS CHAPTER
We like to think of forex as the Big Kahuna of financial markets. The foreign exchange market — most often called the forex market, or simply the FX market — is the largest and most liquid of all international financial markets. (See the later section “Getting liquid without getting soaked” for our discussion of liquidity.)
The forex market is the crossroads for international capital, the intersection through which global commercial and investment flows have to move. International trade flows, such as when a Swiss electronics company purchases Japanese-made components, were the original basis for the development of the forex markets.
Today, however, global financial and investment flows dominate trade as the primary nonspeculative source of forex market volume. Whether it’s an Australian pension fund investing in U.S. Treasury bonds, a British insurer allocating assets to the Japanese equity market, or a German conglomerate purchasing a Canadian manufacturing facility, each cross-border transaction passes through the forex market at some stage.
The forex market is the ultimate traders’ market. It’s a market that’s open around the clock six days a week, enabling traders to act on news and events as they happen. It’s a market where half-billion-dollar trades can be executed in a matter of seconds and may not even move prices noticeably. That is what’s unique about forex — try buying or selling a half-billion of anything in another market and see how prices react.
Firms such as FOREX.com, Saxo Bank, Oanda, CMC Markets, and IG Group have made the forex market accessible to individual traders and investors. You can now trade the same forex market as the big banks and hedge funds.
SOME EYE-OPENING STATS ON TRADERS
“Ninety-five perfect of all traders fail.” How often have you heard that? If I (coauthor Paul) had a dollar for every time I heard that, I would’ve gotten back my money from my first failed trade! That is closer to the truth than you may realize, however. The folks at Tradeciety (www.tradeciety.com) posted the eye-opening results from a recent study that studied broker data about trading. Now I can’t attest to the veracity of these findings, but my gut and experience tell me this rings true. Here are some of the findings:
Eighty percent of day traders quit within two years.
Forty percent of traders quit after one month of activity.
Only 7 percent remain in their trading activity after five years.
Day traders with a strong past performance tend to continue doing well into the future. But only about 1 percent of all day traders are predictably profitable after factoring in fees and commissions.
Lower-income individuals tend to spend a greater portion of their income on lottery tickets, and they tend to increase lottery purchases as their income declines.
The study lists 24 findings, which can be found at https://tradeciety.com/24-statistics-why-most-traders-lose-money/. The big takeaway from this study is that traders (and speculators) are more apt to succeed when they approach trading as a disciplined activity coupled with ongoing education and sticking to proven and tested trading action plans. The biggest reasons cited for unsuccessful trading were that folks came in with big dreams of success but traded on emotion and guesswork. But I bet you guessed that.
Getting Inside the Numbers
Average daily currency trading volumes exceed $6.6 trillion per day (as of 2019). That’s a mind-boggling number, isn’t it? $6,600,000,000,000 — that’s a lot of zeros, no matter how you slice it. To give you some perspective on that size, it’s about 10 to 15 times the size of daily trading volume on all the world’s stock markets combined.
That $6-trillion-a-day number, which you may have seen in the financial press or other books on currency trading, actually overstates the size of what the forex market is all about — spot currency trading.
Trading
