Currency traders regularly apply various forms of technical analysis to define and refine their trading strategies, with many people trading based on technical indicators alone.
Or something else may be a driving force
We’re not trying to be funny here. Honest. What we are trying to do is get across the idea of the many cross-currents that are at play in the forex market at any given time. Earlier in this chapter, we note that currency trading is just one form of market speculation, and that speculative trading involves an inherent market dynamic (see the section “What Is Currency Trading?” earlier in this chapter).
That means that in addition to understanding the currency-specific fundamentals and familiarizing yourself with technical analysis, you also need to have an appreciation of the market dynamic (see Chapter 8). And that’s where trading with a plan comes in (see the following section).
Developing a Trading Plan
If your email inbox is anything like ours, you probably get inundated with random penny-stock tips or the next great Chinese stock initial public offering (IPO). (If you’re not, please send us your spam filter.)
Those are about the only times you’re going to get a message telling you how to trade. The rest of the time you’re going to be on your own. But isn’t that what speculative trading is all about, anyway?
Don’t get us wrong; we’re not trying to scare you off. We’re just trying to make it clear that you’re the only one who knows your risk appetite and your own trading style. And very likely, you may not have even settled on a trading style yet.
Finding your trading style
Before you can develop a trading plan, settling on a trading style is essential. Different trading approaches generally call for variations on trading plans, though there are plenty of overarching trading rules that apply to all styles. (See the Appendix for more on trading strategies.)
Trade time frame: How long will you hold a position? Are you looking at short-term trade opportunities (day trading), trying to capture more-significant shifts in currency prices over days or weeks, or something in between?
Currency pair selection: Are you interested in trading in all the different currency pairs, or are you inclined to specialize in only one or two?
Trade rationale: Are you fundamentally or technically inclined? Are you considering creating a systematic trading model? What strategy will you follow? Are you a trend follower or a breakout trader?
Risk appetite: How much are you prepared to risk and what are your return expectations?
At the end of the day, though, zeroing in on a trading style that you feel comfortable with and that you can pursue on a consistent basis helps. Your own individual circumstances (including work, family, free time, finances, temperament, and discipline) will be the key variables, and you’re the only one who knows what they are.
Planning the trade
Whatever trading style you ultimately choose to follow, you won’t get very far if you don’t establish a concrete trading plan and stick to it. Trading plans are what keep small bad trades from becoming big bad trades, and they can turn small winners into bigger winners. More than anything, though, they’re your road map, helping you to navigate the market after the adrenaline and emotions start pumping, no matter what the market throws your way.
The starting point of any trading plan is to identify a trading opportunity. No one is going to give you a call or shoot you an email telling you what and when to trade. You have to devote the effort and gray cells to spotting viable trading opportunities yourself.
Throughout this book, we offer our own observations on how the forex market behaves in various market conditions. We think there are plenty of kernels for spotting trade opportunities in those observations. Above all, be patient and wait for the market to show its hand, which it always does, one way or the other.
Executing the Trading Plan from Start to Finish
The start of any trade comes when you step into the market and open up a position. How you enter your position, how you execute the first step of your trading plan, can be as important as the trade opportunity itself (see Chapter 10). After all, if you never enter the position, the trade opportunity will never be exploited. And probably nothing is more frustrating as a trader than having pinpointed a trade opportunity, having it go the way you expected, but having nothing to show for it because you never put the trade on.
The effort and resources you invest in researching, monitoring, and analyzing the market come to a concrete result when you open a trade. This process is made easier by formulating a personal trading system, with trigger points and setups to help you enter the trade. Placing the trade is just the beginning.
Just because you have a trading plan doesn’t mean the market is necessarily going to play ball. You need to be actively engaged in managing your position to make the most of it if it’s a winner and to minimize the damage if the market isn’t going in your favor.
