Saturday, 27 April 2013

Building a Forex Position

Ralph Shell, Excel Analyst

Commenting this week on our website, a trader was celebrating because his long GDP/USD, that he had built over the past few weeks, was paying off.   In my opinion, the money you make from building and holding a position over a period of time is money you well deserve.  During the period when you hold the position, traders spend too much time screen-staring, watching the price, and scanning the news. 

Markets, especially those where traders employ high leverage, can be quite volatile.  Often there can be 50 pip moves because traders are entering or leaving the market.  The short-term scalpers think this is a breakout and the move is extended.  This then causes stop loss buying or selling, usually by under-funded traders who are trading without a plan.  Often, it is not possible to find a reason for this market action.  Perhaps there will be an explanation later in the news services, but much of this is written by journalists who can write but have never traded; the action should merely be referred to as random market noise.

How do you build a position in the markets? 

First of all, you must study the markets thoroughly and look for a trading opportunity.  Looking at the charts is important, but this can not be a technical exercise exclusively.  You should have an understanding of fundamental market inputs and combine this with technical analysis.  The charts, especially shorter time frames, have too much random noise.

Forex Razor Training and Social Trading
Learning to analyze in this manner takes time.  Listening to experts is interesting, but you cannot rely on others.  Why?  Well, experts generally talk their position up or they have a bias, even if they do not have a position.   When an expert changes his stance in the market, don't expect to be the first trader notified.  You must make up your mind which side of what market you are going to build your position.  You get yourself in and decide when it is time to exit.  Most traders with winning trades take the profits too quickly.

This might seem like a daunting task.  It is an education process that does not end, but it can be rewarding, and you are not required to retire at a specific age.  A friend, whose father was a working member at the Minneapolis Grain Exchange, traded well into his nineties.  When he passed away, he was  long over ten contracts of corn in the middle of a drought.

When getting started in forex, a demo account is instructive, teaching you the mechanics of trading, but it does not teach you to trade.  Further you can develop some bad habits such as trading too big, trading impulsively, or reading into the market what you wish it will do.  Hope is not a trading technique.

Position building in forex markets requires nerves, skill and risk capital.  A decision needs to be made as to how much money you are willing to risk.  As a rookie trader, keep the position small.  You are learning.  It is quite common to have early trading losses.  Be very careful with the leverage.  Eventually, your position should be big enough that is meaningful if you are right, and causes a little pain if you are wrong.  After you have some experience and trade too small in relation to your equity, there can be a tendency to trade too casually.  A small bad trade can turn into a costly mistake.

Personally, when building a position I am extremely wary adding to a position that has gone against me.  I would much prefer to add to winners.  Just remember it is easier to ride a horse in the direction it is going.  Finally, do not be too quick to take a profit.  Let your profits run but only lose what you decided to risk.
Facebook Excel Markets Tweet Excel Markets Reddit Excel Markets Digg Excel Markets

1 comment: