Guide to Forex Trading
I'm going to spend some time updating this old post from 2007 where I had a banner year trading Forex. Granted, this was for a tiny account but I wanted to see if I could make the returns that everyone was shouting about.
The short answer is "YES! but..."
There's always a 'but' when investing, trading, or speculating in any traded market. As promised, see the PDF link below for my entire 2007 Forex trading log. These were actual tickets and trades generated for my $100 Forex Experiment. You can see I had a few ups and downs but my trading equity grew over 50% this year, amazing!!!
I wanted to elaborate on these results, after 13 years! This experiment was one of the best things I did for myself to learn how to trade. I had to watch my risk, read the market (currency pairs), and trade with the trend. I'm sure there was some luck in here as well but I took an analytical approach to all this.
If you read the top of the header of the PDF you'll note something called expectancy.
Expectancy is what I can expect to make for every trade I put on. It's the summation of all my winners and losers and how much I won or lost in money. When that expectancy is positive, it means my trading strategy is working. When it's negative, it means I'm donating my hard-earned money to the markets.
You'll also notice that the amount of my winners outpace my losers BUT my average win is a bit lower than my average loss. That's not good, it should be that my average loss is a lot smaller than my average win. In this case, I had a lot more wins that increased my trading capital but when I made a mistake, I paid for it.
What should I have done? Now that I trade Forex when I think there's a good trade to make, I keep these losses very small and I try to increase my trade wins. The old trading adage, 'keep your losses small and let your winners run' is what I'm trying to live by but in the Forex market, things are crazy and I take profit when I can.
Forex trading strategy
There are a lot of tweaks to old Stock trading sayings when you retail trade Forex. In stock trading, you want to trade with the trend and use stocks. In my experience when you trade Forex you want to trade with the trend but don't put in stops. If you read that last sentence you'd think I'm bonkers and dangerous, and I'd say you're right.
It's been my experience that price volatility and stop-hunting in Forex always blow you out of a position right before the price action goes back in your favor. I've seen this happen time and time again and it's frustrating. How do I get around it? I position size and limit the number of trades. So far, this method has yielded me positive Forex Trading Performance.
In the past year, I saw my account go up almost 11% and my win rate is 78%. Those are very good numbers. My risk-to-reward ratio is a bit low, I like it 1:2 (or 2:1) but I'm ok with making an average of $1.71 for every $1 I risk. I also let my winners run and cut losers quickly with such a high disposition of 8.65. I hold my winners almost 9 times longer than I do my losers.
Granted, I only have $262 in my Forex Trading account right now and I've been playing around, but for me to make this into a viable trading business I'd need to do a few things like open up a business account and deposit more cash.
Technical analysis updated
I use zero technical analysis trading the way I do. This is now wrong. I started using support and resistance areas to help me understand if I'm about to hit support or resistance (duh) and make my long/short trades accordingly. I also started using a Stochastic Oscillator momentum at different time intervals to help me execute my entries.
The thing with trading Forex is that your current strategy will work only so long, you have to be able to adapt as the market changes. That said, your old strategy might work again in the future, so remember it. I used to 'trade while sleeping' meaning I would place a trade order and wait for a break out when London opened. That strategy doesn't work anymore BUT using the Stochastic Oscillator with a support/resistance technical approach works for me now. I place a trade before going to bed if the indicators line up and close out the trade in the morning, usually, it's profitable.
Trend trading
I just look at the price action and which way the overall trend is going. I like long trends and a good carry trade in favor of the trend. As of this date, the EURUSD is the only pair I like to trade that is in a long-term downtrend, and shorting it gives me a positive return to offset any margin costs.
I mostly look at the daily charts but use the 15-minute charts to find a good entry. Before I enter a trade, I use a position sizing calculator set for a 200-pip stop with 1% account risk. That gives me a very small position size and a rough exit point of 200 pips in case the trend does change.
The only weakness in this method is NOT setting a stop and despite my successes here, I've seen massive swings in the EURUSD that go beyond 200 pips and I DIDN'T EXECUTE it. I think I need to ponder this more and come up with maybe a 2 or 3-standard deviation stop. This way I can have a stop and still risk 1% of my trade giving me enough room to maneuver.
Naked Forex
I wanted to write a long review of Alex Nekritin's book titled Naked Forex, but the short of it was that it did help me work through a lot of issues with trading Forex. He was able to put into words what I was observing and provide me with some clues on how to develop my strategy going forward.
Measuring performance
In the old days, I created a spreadsheet to help me understand if I would make money for every trade I make. That's called expectancy and I did. Now, the market maker I use (Oanda) has a new tool called "Trading Performance" which does all that for you.
I can see where I messed up and where I make money. For example, I took some big beatings this year when the EURUSD trend flipped from down to up. I let my emotions get out of control, I should've honored my internal stops.
The Trading Performance app is nice because I can see if my trading makes money and how much over the day, week, month, and year. This lets me assess quickly if my strategies need to change or if I'm being stupid. Usually, it's a combination of both.
Automation
I've been giving serious thought to trading Forex again in a more serious manner. Yes I have a ton of passive investments and I will continue to do that for my retirement accounts BUT I'm convinced that I can make Forex Trading a business as well.
The way is through automation and the codifying of various strategies in Python. For example, my Stochastic Oscillator (SO) momentum strategy is quite a simple thing to build in Python. I just need to extract the periods, check the SO levels, and make my trades accordingly. I can even write an optimal risk vs reward sizing calculator.
Yes, the trick to help any trader make money in Forex is through automation. You can buy the fancy MetaTrader and other stuff or you can do it all with Python and Oanda's V20 feed.
End notes
I have such a love/hate relationship with trading and Forex in general. In the early 2000s and then up to 2008, I did well 'day trading' stocks and Forex and I deluded myself into thinking I was awesome when I was just lucky. Trading is damn hard, whether you do it in stocks and/or Forex, you have to be clinical about it.
You ultimately can't control the market. You can spot trends and enter a trade right as the trend changes. You can use indicators but hopefully will realize that all the indicators confirm what has happened in the past, it doesn't tell you the current market conditions.
You can use candlesticks in Forex but they don't work as well as they do in the stock market.
The moral of the story is that you can only control what you can and should, as this image from r/Forex hit explains.
From my experience, I've messed up trade entries and exits and I need to work on them better. However, the most important thing you should do is focus on risk, position-sizing, and trade journaling. That's it. Then it becomes a numbers game.
You have to document your trades and evaluate your strategy to see if you're making money or losing money, that's it.
Good luck.
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