Trade Forex Like an Investment Bank
What I will explain to you today is exactly how you should trade the Forex market and that few traders do.
What I am going to tell you has great value. You will hardly find that information in other videos or courses, and surely not for free. It comes from over 25 years of experience in financial markets, even as a fund manager.
I tell you immediately that if you are not willing to toil, it’s useless for you continuing to read. I won't give you the magic formula to get rich just by pressing a button.
Do you think I have become a professional trader, that is a person who trades for a living, in a day or month? I spent several years to study; I had a hard time (most of all at the beginning). I had to overcome several difficulties before I became the trader I am today.
Hard work, in trading like in every field of life, is the basis of success.
So, how should you trade the Forex market?
First, a mistake most Forex traders make is to consider a currency pair as a single market, a price. But a currency pair is not a stock or commodity.
Instead, you have to see a currency pair as two opposing economies. For example, you don’t have to see Eur-Usd as a single market, but as the Eurozone economy versus the American economy.
Why should you trade Eur-Usd like Apple or Facebook? On the one hand, you have an individual company, on the other side, two economies.
So, get used to considering a currency pair, not as a single market, a price, but as two opposing economies. Now you also understand why most traders who use technical analysis are losers. It’s certainly not an indicator in the overbought or oversold zone that makes a currency pair rise or fall.
After having understood this fundamental aspect of the Forex market, the next step is to buy the strength and sell the weakness. But to do that, you have to compare the two economies.
First equation:
strong economy means strong currency
and
weak economy means weak currency
So, let's see how you should proceed
First, for each economy, you need to research the macroeconomic data that make the currency market movements. And this is the simplest thing to do. Several sites show this data in real-time.
We can divide the main macroeconomic data into 4 areas:
1) Interest rates.
2) Growth (Gross Domestic Product).
3) Employment.
4) Inflation
Then, you have to compare and interpret the data to understand, for both the economies, what the situation is. And this, at least initially, is a little less simple.
You have to create two tables, one for each of the economies, and insert the main macroeconomic data. Once you have completed this step, by using the data, you need to compare the two economies to figure out which one is stronger. You can also create a graph with Excel or other software for each data, so as to get a more immediate visual image.
For example, if the graph of the unemployment rate in the United Kingdom is falling while that of the United States is moving sideways, even though the American economy remains stronger than the British one, right now it’s the British economy that is strengthening over the American one.
Second, you have to read the reports of the central banks, and listening to the speeches (or reading the transcripts) of their Presidents.
These are fundamental to understand the monetary policy implemented by each central bank. Also, you find the situation in the country and often a vision of the world economy. Statements and Minutes are therefore essential for understanding the next moves of a central bank concerning interest rates.
Second equation:
raising interest rates leads to a stronger currency
and
reducing interest rates leads to a weaker currency
The reports, and speeches of central bank Presidents, are essential also because the decisions on interest rates are sometimes known before their release. Which means that a decision has already been priced into the market.
It’s probably a process that may be difficult to implement initially, but believe me that, over time, you will be able to analyse a currency pair simply and clearly. Certainly, better than with technical analysis.
That was the first pillar of your Forex trading. You have seen how you have to analyse a currency pair. First, you have to see a currency pair not as a market, a price, but as two opposing economies. And then, you have not to use the technical analysis and indicators, but studying and understanding the fundamentals that drive a currency.
Now, let's see the second pillar.
After analysing a currency pair, you need to select your trade entry. But before…
Never forget: in the medium to long-term, it’s the fundamentals that drive a currency pair, but in the short-term, it’s speculation to do it.
For this reason, to buy for example Eur-Usd just because your analysis has told you that the currency pair will rise, it’s a bad idea.
So, how should you decide when to enter?
By using subjective probability.
I tell you that no strategy can give you the perfect trade entry. It’s all about probability.
Subjective probability is the numeric measure of chance (probability) that reflects the degree of a personal belief in the likelihood of an occurrence.
Subjective probability judgments are people's evaluations of the probability of uncertain events or outcomes. It contains no formal calculations and only reflects the subject's opinions and past experience.
Now, let's see how to use subjective probability, in trading.
Before, an Advice: avoid trading with many markets. Focus only on those you know well.
Because it’s essential to know well the currency pair that is being traded, how it behaves and moves, so you can understand what the key levels are. In this way, you will know which are the price levels with the highest odds of success for your trade entry.
Let me give you an example with the currency pair EUR-USD. Look at the chart above. You will certainly have noticed how the X.XX20 levels (i.e. 1.0920, 1.1020, 1.1120, 1.1220, etc.) for EUR-USD are often, not always, sensitive price levels.
That's just one aspect, a characteristic of EUR-USD. Once you understand how the currency pair moves, when you know it perfectly, you will no longer even need to open the chart to decide your trade.
And what about the take profit?
First, you need to know when to take your profit before opening the trade (you have to decide it in your trading plan). Then, it has to be a take profit statistically achievable and have a Risk/Reward at least 1:1.
To select your take profit, you have to put into the field all your knowledge of that currency pair, and how you did with the trade entry, use subjective probability.
This was the second pillar of your Forex trading. You have seen how to select your entry and exit points in trade. You have to use subjective probability, and thanks to your experience and knowledge of a currency pair, choose the trade entry with the higher odds of success.
Now let's see the third and final pillar. How to select the stop-loss and cancel the emotions.
It is well known that success in trading is determined by our emotionality. You have to put yourself in the best conditions to trade.
The problem with the management of emotions is that we are all different. So, it’s impossible to have a system that works for everyone, without distinction.
To erase your fears, anxieties, before opening the trade, you have to decide how much you are willing to lose with that trade. Then, you have to set the stop-loss on equity, that is the current value of your trading account, not the price.
But where to set the stop-loss?
You have to use the Value-at-Risk (VaR).
Value-at-Risk measures the potential loss in value of a risky asset or portfolio over a defined period for a given confidence interval.
The key elements of Value-at-Risk are:
1. a specified level of loss in value;
2. a fixed time period over which risk is assessed (1 day, 1 week, etc.);
3. a confidence interval (usually 95% or 99%)
Let’s see an example. If the Value-at-Risk on Eur-Usd is 1.81% at one-week, 95% confidence level, there is an only a 5% chance that the value of Eur-Usd will drop more than 1.81% over any given week.
Unfortunately, here I can't explain the calculation, but you can find it on my Forex e-Book and for free on the internet, in particular on YouTube.
At this point, all you have to do is calculate the correct position size to open, based on the maximum loss that you are willing to suffer, and that you must have already decided in your trading plan.
That's the way to dispel your doubts about how to set the stop-loss, how to cancel your emotions because using the Value-at-Risk, you are working like an investment bank, a fund manager.
This was the third and final pillar of your Forex trading. You have seen how to cancel your emotions thanks to Value-at-Risk. Now you have all the information to become a profitable trader in Forex trading, to trade like an investment bank.
You can get significant results in Forex trading, maybe even better than mine, but only if you apply what I explained to you, and you will work hard.
Happy trading to you all!
What I am going to tell you has great value. You will hardly find that information in other videos or courses, and surely not for free. It comes from over 25 years of experience in financial markets, even as a fund manager.
I tell you immediately that if you are not willing to toil, it’s useless for you continuing to read. I won't give you the magic formula to get rich just by pressing a button.
Do you think I have become a professional trader, that is a person who trades for a living, in a day or month? I spent several years to study; I had a hard time (most of all at the beginning). I had to overcome several difficulties before I became the trader I am today.
Hard work, in trading like in every field of life, is the basis of success.
So, how should you trade the Forex market?
First, a mistake most Forex traders make is to consider a currency pair as a single market, a price. But a currency pair is not a stock or commodity.
Instead, you have to see a currency pair as two opposing economies. For example, you don’t have to see Eur-Usd as a single market, but as the Eurozone economy versus the American economy.
Why should you trade Eur-Usd like Apple or Facebook? On the one hand, you have an individual company, on the other side, two economies.
So, get used to considering a currency pair, not as a single market, a price, but as two opposing economies. Now you also understand why most traders who use technical analysis are losers. It’s certainly not an indicator in the overbought or oversold zone that makes a currency pair rise or fall.
After having understood this fundamental aspect of the Forex market, the next step is to buy the strength and sell the weakness. But to do that, you have to compare the two economies.
First equation:
strong economy means strong currency
and
weak economy means weak currency
So, let's see how you should proceed
First, for each economy, you need to research the macroeconomic data that make the currency market movements. And this is the simplest thing to do. Several sites show this data in real-time.
We can divide the main macroeconomic data into 4 areas:
1) Interest rates.
2) Growth (Gross Domestic Product).
3) Employment.
4) Inflation
Then, you have to compare and interpret the data to understand, for both the economies, what the situation is. And this, at least initially, is a little less simple.
You have to create two tables, one for each of the economies, and insert the main macroeconomic data. Once you have completed this step, by using the data, you need to compare the two economies to figure out which one is stronger. You can also create a graph with Excel or other software for each data, so as to get a more immediate visual image.
For example, if the graph of the unemployment rate in the United Kingdom is falling while that of the United States is moving sideways, even though the American economy remains stronger than the British one, right now it’s the British economy that is strengthening over the American one.
Second, you have to read the reports of the central banks, and listening to the speeches (or reading the transcripts) of their Presidents.
These are fundamental to understand the monetary policy implemented by each central bank. Also, you find the situation in the country and often a vision of the world economy. Statements and Minutes are therefore essential for understanding the next moves of a central bank concerning interest rates.
Second equation:
raising interest rates leads to a stronger currency
and
reducing interest rates leads to a weaker currency
The reports, and speeches of central bank Presidents, are essential also because the decisions on interest rates are sometimes known before their release. Which means that a decision has already been priced into the market.
It’s probably a process that may be difficult to implement initially, but believe me that, over time, you will be able to analyse a currency pair simply and clearly. Certainly, better than with technical analysis.
That was the first pillar of your Forex trading. You have seen how you have to analyse a currency pair. First, you have to see a currency pair not as a market, a price, but as two opposing economies. And then, you have not to use the technical analysis and indicators, but studying and understanding the fundamentals that drive a currency.
Now, let's see the second pillar.
After analysing a currency pair, you need to select your trade entry. But before…
Never forget: in the medium to long-term, it’s the fundamentals that drive a currency pair, but in the short-term, it’s speculation to do it.
For this reason, to buy for example Eur-Usd just because your analysis has told you that the currency pair will rise, it’s a bad idea.
So, how should you decide when to enter?
By using subjective probability.
I tell you that no strategy can give you the perfect trade entry. It’s all about probability.
Subjective probability is the numeric measure of chance (probability) that reflects the degree of a personal belief in the likelihood of an occurrence.
Subjective probability judgments are people's evaluations of the probability of uncertain events or outcomes. It contains no formal calculations and only reflects the subject's opinions and past experience.
Now, let's see how to use subjective probability, in trading.
Before, an Advice: avoid trading with many markets. Focus only on those you know well.
Because it’s essential to know well the currency pair that is being traded, how it behaves and moves, so you can understand what the key levels are. In this way, you will know which are the price levels with the highest odds of success for your trade entry.
Let me give you an example with the currency pair EUR-USD. Look at the chart above. You will certainly have noticed how the X.XX20 levels (i.e. 1.0920, 1.1020, 1.1120, 1.1220, etc.) for EUR-USD are often, not always, sensitive price levels.
That's just one aspect, a characteristic of EUR-USD. Once you understand how the currency pair moves, when you know it perfectly, you will no longer even need to open the chart to decide your trade.
And what about the take profit?
First, you need to know when to take your profit before opening the trade (you have to decide it in your trading plan). Then, it has to be a take profit statistically achievable and have a Risk/Reward at least 1:1.
To select your take profit, you have to put into the field all your knowledge of that currency pair, and how you did with the trade entry, use subjective probability.
This was the second pillar of your Forex trading. You have seen how to select your entry and exit points in trade. You have to use subjective probability, and thanks to your experience and knowledge of a currency pair, choose the trade entry with the higher odds of success.
Now let's see the third and final pillar. How to select the stop-loss and cancel the emotions.
It is well known that success in trading is determined by our emotionality. You have to put yourself in the best conditions to trade.
The problem with the management of emotions is that we are all different. So, it’s impossible to have a system that works for everyone, without distinction.
To erase your fears, anxieties, before opening the trade, you have to decide how much you are willing to lose with that trade. Then, you have to set the stop-loss on equity, that is the current value of your trading account, not the price.
But where to set the stop-loss?
You have to use the Value-at-Risk (VaR).
Value-at-Risk measures the potential loss in value of a risky asset or portfolio over a defined period for a given confidence interval.
The key elements of Value-at-Risk are:
1. a specified level of loss in value;
2. a fixed time period over which risk is assessed (1 day, 1 week, etc.);
3. a confidence interval (usually 95% or 99%)
Let’s see an example. If the Value-at-Risk on Eur-Usd is 1.81% at one-week, 95% confidence level, there is an only a 5% chance that the value of Eur-Usd will drop more than 1.81% over any given week.
Unfortunately, here I can't explain the calculation, but you can find it on my Forex e-Book and for free on the internet, in particular on YouTube.
At this point, all you have to do is calculate the correct position size to open, based on the maximum loss that you are willing to suffer, and that you must have already decided in your trading plan.
That's the way to dispel your doubts about how to set the stop-loss, how to cancel your emotions because using the Value-at-Risk, you are working like an investment bank, a fund manager.
This was the third and final pillar of your Forex trading. You have seen how to cancel your emotions thanks to Value-at-Risk. Now you have all the information to become a profitable trader in Forex trading, to trade like an investment bank.
You can get significant results in Forex trading, maybe even better than mine, but only if you apply what I explained to you, and you will work hard.
Happy trading to you all!
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