How To Become A Successful Forex Trader

Retail traders just starting out in the forex market are often unprepared for what lies ahead and, as such, end up undergoing the same life cycle: first they dive in head first - usually losing their first account - and then they either give up, or they take a step back and do a little more research and open a demo account to practice. Those who do this will often eventually open another live account, and experience a little more success - breaking even or turning a profit. To help avoid the losses from hastily diving into forex trading, this article will introduce you to a framework for a medium-term forex trading system to get you started on the right foot, help you save money and ultimately become a profitable retail forex trader. (For background reading, check out Top 4 Things Successful Forex Traders Do.)

Tutorial: Introduction To The Forex Market
Why Medium Term? 
So, why are we focusing on medium-term forex trading? Why not long-term or short-term strategies? To answer that question, let's take a look at the following comparison table:

Type of Trader	Definition	Good Points	Bad Points
Short-Term (Scalper)	A trader who looks to open and close a trade within minutes, often taking advantage of small price movements with a large amount of leverage.	Quick realization of profits or losses due to the rapid-fire nature of this type of trading.	Large capital and/or risk requirements due to the large amount of leverage needed to profit from such small movements.
Medium-Term	A trader typically looking to hold positions for one or more days, often taking advantage of opportunistic technical situations.	Lowest capital requirements of the three because leverage is necessary only to boost profits.	Fewer opportunities because these types of trades are more difficult to find and execute.
Long-Term	A trader looking to hold positions for months or years, often basing decisions on long-term fundamental factors.	More reliable long-run profits because this depends on reliable fundamental factors.	Large capital requirements to cover volatile movements against any open position.

Now, you will notice that both short-term and long-term traders require a large amount of capital - the first type needs it to generate enough leverage, and the other to cover volatility. Although these two types of traders exist in the marketplace, they are often positions held by high-net-worth individuals or larger funds. For these reasons, retail traders are most likely to succeed using a medium-term strategy.

The Basic Framework 
The framework of the strategy covered in this article will focus on one central concept: trading with the odds. To do this, we will look at a variety of techniques in multiple time frames to determine whether a given trade is worth taking. Keep in mind, however, that this is not amechanical/automatic trading system; rather, it is a system by which you will receive technical input and make a decision based upon it. The key is finding situations where all (or most) of the technical signals point in the same direction. These high-probability trading situations will, in turn, generally be profitable.

Chart Creation and Markup 
Selecting a Trading Program 
We will be using a free program called MetaTrader to illustrate this trading strategy; however, many other similar programs can also be used that will yield the same results. (For more tips on how to find one, see Forex Automation Software For Hands-Free Trading.) There are two basic things the trading program must have:

• the ability to display three different time frames simultaneously
• the ability to plot technical indicators, such as moving averages (EMA and SMA), relative strength index (RSI), stochastics and moving average convergence divergence (MACD)

Setting up the Indicators 
Now we will look at how to set up this strategy in your chosen trading program. We will also define a collection of technical indicators with rules associated with them. These technical indicators are used as a filter for your trades.

If you choose to use more indicators than shown here, you will create a more reliable system that will generate fewer trading opportunities. Conversely, if you choose to use fewer indicators than shown here, you will create a less-reliable system that will generate more trading opportunities. Here are the settings that we will use for this article:

• Minute-by-minute candlestick chart
  • RSI (15)
  • stochastics (15,3,3)
  • MACD (Default)
    
• Hourly candlestick chart
  • EMA (100)
  • EMA (10)
  • EMA (5)
  • MACD (Default)
    
• Daily candlestick chart
  • SMA (100)

Adding in Other Studies 
Now you will want to incorporate the use of some of the more subjective studies, such as the following:

• Significant trendlines that you see in any of the time frames
• Fibonacci retracements, arcs or fans that you see in the hourly or daily charts
• Support or resistance that you see in any of the time frames
• Pivot points calculated from the previous day to the hourly and minutely charts
• chart patterns that you see in any of the time frames

In the end, your screen should look something like this:

Figure 1: A forex trading program screen

Source: MetaTrader

Finding Entry and Exit Points 
The key to finding entry points is to look for times in which all of the indicators point in the same direction. Moreover, the signals of each time frame should support the timing and direction of the trade. There are a few particular instances that you should look for:

Bullish

• Bullish candlestick engulfings or other formations
• Trendline/channel breakouts upwards
• Positive divergences in RSI, stochastics and MACD
• Moving average crossovers (shorter crossing over longer)
• Strong, close support and weak, distant resistance

Bearish

• Bearish candlestick engulfings or other formations
• Trendline/channel breakouts downwards
• Negative divergences in RSI, stochastics and MACD
• Moving average crossovers (shorter crossing under longer)
• Strong, close resistance and weak, distant support

It is a good idea to place exit points (both stop losses and take profits) before even placing the trade. These points should be placed at key levels, and modified only if there is a change in the premise for your trade (oftentimes as a result of fundamentals coming into play). You can place these exit points at key levels, including:

• Just before areas of strong support or resistance
• At key Fibonacci levels (retracements, fans or arcs)
• Just inside of key trendlines or channels

Let's take a look at a couple of examples of individual charts using a combination of indicators to locate specific entry and exit points. Again, make sure any trades that you intend to place are supported in all three time frames. 

Figure 2: A screen showing several indicators that point in the same direction

Source: MetaTrader

In Figure 2, above, we can see that a multitude of indicators are pointing in the same direction. There is a bearish head-and-shoulders pattern, an MACD, Fibonacci resistance and bearish EMA crossover (five- and 10-day). We also see that a Fibonacci support provides a nice exit point. This trade is good for 50 pips, and takes place over less than two days.

Figure 3: A screen showing indicators pointing in a long direction

Source: MetaTrader

In Figure 3, above, Here we can see many indicators that point to a long position. We have a bullish engulfing, a Fibonacci support and a 100-day SMA support. Again, we see a Fibonacci resistance level that provides an excellent exit point. This trade is good for almost 200 pips in only a few weeks. Note that we could break this trade into smaller trades on the hourly chart.

Money Management and Risk 
Money management is key to success in any marketplace but particularly for the forex market, which is one of the most volatile markets to trade. Many times fundamental factors can send currency rates swinging in one direction only to whipsaw into another in mere minutes. So, it is important to limit your downside by always utilizing stop-loss points and trading only when good opportunities arise. (To learn mroe, read Forex: Money Management Matters.)

Here are a few specific ways in which you can limit risk:

• Increase the number of indicators that you are using. This will result in a harsher filter through which your trades are screened. Note that this will result in fewer opportunities.
• Place stop-loss points at the closest resistance levels. Note that this may result in forfeited gains.
• Use trailing stop losses to lock in profits and limit losses when your trade turns favorable. Note, however, that this may also result in forfeited gains.

Conclusion 
Anyone can make money in the forex market, but this requires patience and following awell-defined strategy. However, if you approach forex trading via a careful, medium-term strategy, you can avoid becoming a casualty of this market.

Understanding The Risk In The BRICs

When Goldman Sachs economist Jim O'Neil first dubbed the four nations of Brazil, Russia, India and China as theBRICs, back in 2001, he made one of the gutsiest long-term global macroeconomic calls of all time. Featuring the right demographics, vast commodity wealth, growing middle classes and relatively steady fiscal andmonetary policies, O'Neil postulated that these nations would be the biggest drivers for future global growth. So far, the economist's prediction has generally come true. The MSCI BRIC index has risen by more than eight times what the S&P 500 index returned during the past decade, and the BRIC's combined GDP soared to $13.3 trillion last year.

That outperformance has prompted many investors to add the four horsemen of the developing world to their portfolios as a way to cash in on the group's torrid growth. Despite the rosy long-term growth picture for the BRICs, there are plenty of risks, aside from the global macroeconomic pressures in these nations. In the end, these nations aren't called "emerging" for nothing.

With the BRICs continuing to contribute so much to the global economy and with the nations making up a huge portion of emerging market assets, it is critical for investors to understand these risks. Yet, each of the four nations is a completely different animal and comprehending the differences in each of their risk profiles can be a daunting task. Here are some of the internal risks when investing in the BRICs.

A Dragon of Lies
When it comes to emerging market investing as a whole, China remains at the top of many investors' minds. After all, the nation represents the hallmark of the developing market thesis. However, investing in Asia's Dragon economy isn't as easy as buying stock in Germany. 

Perhaps the biggest problem is the lack of GAAP or international accounting standards. That issue has even caught some of the best investors by surprise. For example, billionaire hedge fund manager John Paulson lost a bundle on Toronto-listed Chinese forestry firm Sino-Forest Corp. It was accused of faking land holdings and "cooking the books." Others have been accused of falsifying bank deposits and accounts. That lack of transparency and disclosure of information makes it a lot harder to see the real picture, especially compared with developed market stocks.

That picture gets even muddier when investors are forced to deal with questionable official Chinese data and a heavily regulated/bureaucratic communist government. The majority of the major firms in the nation are in some way owned or controlled by Beijing.

Russia's Corruption Woes Despite the nation's recent entry into the World Trade Organization (WTO), there are still somesignificant investment risks in Russia; corruption and political will are the two biggest. Bribes and organized crime infiltrating legitimate businesses remain standard practices. According to a report by the Information Science for Democracy Foundation, the average amount of petty bribe in the Russian Federation has increased steadily in the last 10 years. Back in 2001, it was roughly 1,817 rubles. By the time 2010 rolled around, it had grown to 5,285 rubles and represented 93% of an average worker's salary.

Then there is the national government to contend with. Voicing an opinion that conflicts with President Vladimir Putin's wishes could lead to your business or investments being seized as well as a potential prison sentence. Just ask Mikhail Khodorovsky, former Chairman and CEO of Russian oil giant Yukos, who was convicted of fraud in 2005 for reasons that are believed to be politically motivated.

LATAM's Commodity King
While outright corruption isn't as big of a problem for Brazil as it is for Russia, the government does have a hand in creating risks for investors that stem from its "protectionist" attitude. The country now has the second-highest number of protectionist measures in Latin America, after Argentina. This includes rules to favor local products, high tariffs on imported goods, tax breaks to encourage domestic production and limiting the access of foreign investors to strategic natural resource assets. For example, investors wanting to tap the nation's vast oil wealth must partner with state-owned energy giant Petrobras. Overall, these policies could derail some investment returns if Brazil decides to go one step further and nationalize various assets.

Asia's Bureaucratic Nightmare
With a democracy as large as India's, you would expect there to be some red tape when it comes to successful investment. However, the nation's bureaucracy has been called the "most stifling in the world." Starting a business in India is incredibly hard, as the local and national governments generally have a hand in the commercial markets. Likewise, enforcing contracts can be impossible, especially when there is a propensity for business partners to enter into undeclared third-party transactions. The Political and Economic Risk Consultancy, a Hong Kong-based think tank, estimates that India's bureaucratic system will prevent it from matching the growth rates of other rival nations.

The Bottom Line
The BRICs offer much in the way of portfolio and economic growth, however, there are some pretty big risks for individual investors as well. Understanding these risks is key to navigating these emerging giants successfully.