A Difficult
challenge facing a trader, and particularly those trading e-forex, is finding
perspective. Achieving that in markets with regular hours is hard enough, but
with forex, where prices are moving 24 hours a day, seven days a week, it is
exceptionally laborious. When inundates with constantly shifting market
information, it is hard to separate yourself from the action and avoid personal
responses to the market. The market doesn’t care about your feelings. Traders
have heard it in many different ways — the only thing you can control is when
you buy and when you sell. In response to that, it is easier to know how not to
trade then how to trade. Along those lines, here are some tips on avoiding
common pitfalls when trading forex.
1)
Don’t read the news —analyze the news.
Many times, seemingly straightforward news
releases from government agencies are really public relation vehicles to
advance a particular point of view or policy. Such “news,” in the forex markets
more than any other, is used as a tool to affect the investment psychology of
the crowd. Such media manipulation is not inherently a negative. Governments
and traders try to do that all the time. The new forex trader must realize that
it is important to read the news to assess the message behind the drums. For example,
Japan’s Prime Minister Masajuro Shiokowa was quoted in a news report on Dec. 13
that “an excessive depreciation of the yen should be avoided. But we should
make efforts and give consideration to guide the yen lower if it is relatively
overvalued.” When a government official is asking, in effect, if traders would
please slow down the weakening of his currency, then we must wonder whether
there is fear the opposite will happen. In this case, that was the outcome as
on Dec. 14 the dollar vs. the yen surged to a three-year high. The Prime
Minister’s statement acted as a contrarian indicator. This is what “fade the
news” means. Often, a bank analyst or trader will be quoted with a public
statement on a bank forecast of a currency’s move. When this occurs, they are
signaling they hope it will go that way. Why put your reputation on the line,
saying the currency is going to break out, if you don’t benefit by that move? A
cynical position, yes, but traders in the forex markets always need to be on
guard. Read the news with the perspective that, in forex, how the event is
reported can be as important as the event itself. Often, news that might seem
definitively bullish to someone new to the forex market might be as bearish as
you can get.
2) Don’t
trade surges.
A price surge is a signature of
panic or surprise. In these events, professional traders take cover and see
what happens. The retail trader also should let the market digest such shocks.
Trading during an announcement or right before, or amid some turmoil, minimizes
the odds of predicting the probable direction. Technical indicators during
surge periods will be distorted. You should wait for a confirmation of the new
direction and remember that price action will tend to revert to pre-surge
ranges providing nothing fundamental has occurred. An example is the Nov.12
crash of the airplane in Queens ,
N.Y.
3) Simple is
better.
The desire to achieve great gains in
forex trading can drive us to keep adding indicators in a never-ending quest
for the impossible dream. Similarly, trading with a dozen indicators is not
necessary. Many indicators just add redundant information. Indicators should be
used that give clues to:
1) Trend
direction,
2) Resistance,
3) Support and
4) Buying and
selling pressure.
Getting
the Point
Market analysis should be kept
simple, particularly in a fast-moving environment such as forex trading.
Point-and-figure charts are an elegant tool that provides much of the market
information a trader needs.
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