Shares Magazine
Vol 9 Issue 17 | 26 April – 02 May 2007
You wouldn’t approach a battle without a strategy for victory, or a football match without a system of play. The same goes with trading. Marilyn McDonald of Interbank FX outlines her approach to forex dealing

Once you’ve decided you are ready to trade in the forex market, it is imperative to take the time to develop a trading plan. This market is too unpredictable to jump in without putting some thought into how, what and when you are going to trade. I would recommend that you steer clear of black box systems. I think it is very important for you to know why you are placing the trades you are. Plus, most black box systems are over-hyped moving average cross systems and not worth the paper they are printed on. If you are not willing to put some work into creating your own trading plan, I think it would be more beneficial for you to place your money in a managed account simply to give it a fighting chance in this arena.

So, where should you start when you are ready to take the plunge and commit to developing a business plan? The first thing that you need to know is that you are going to have to put in the hard yards and develop your own trading style. Not mine or some suit from a presentation, or even a slick website sales man. When you set about to define your trading style, it needs to be yours and yours alone.

Developing a trading plan is very similar to a company business plan. It is a device for you to define how you intend to operate your business. A trading plan lays out how you will make trades – the time, price, volume, and news are all essential components of the trade. While your trading plan may not necessarily be for others, it is still your own road map to tell yourself, and reaffirm to yourself, how you expect tot get there. Include goals in your plan: 3 month, 6 month, 1 year, 2 year, 5 year, 10 year, and even 20+ year goals. You would like to reach through your trades and investments. When I developed my trading plan and set my goals, I tried to keep in mind the quote from Yogi Berra: ‘If you don’t know where you are going, you’ll end up someplace else.’

Elements to Consider

- What times during the day are you trading (which sessions)?
- What currency pairs are you following?
- Will you be trading during volatile market moves (fundamental news announcements)?
- How long will you hold your trades?
- How much are you willing to risk in the markets?

One thing to be aware of when you are picking the time of day, currency pairs and how much you want to gain in a day is how much your chosen currency pair moves in that period of time. Take a quick look at the table below. This shows the average pip fluctuation in a currency pair for a given trading session in Eastern Standard Time. So if you goal is to make 30 pips per day and you can only trade for a few hours during the Europe and Asia Overlap session, you may want to re-examine the validity of your plan. Most currency pairs show a relatively low volatility during this time. Another point worth making is that high volatility isn’t necessarily a good thing. Take a quick peek at the average fluctuations on the GBP/JPY. At first glance this pair looks very promising due to the huge trading range. However, as one that bears the scars, this pair can pack a tremendous wallop. You are nearly as likely to loose that much money as you are to gain it.

Essentials

There are many essentials you may want to consider in your trading plan. These essentials lay the foundation of your plan and will help you reach your goals. Here are some essentials you may with to include:

State Your Purpose

- Why do you want to trade in the forex market?
If you are looking for safety and security you may be in the wrong market. If you are a thrill seeker and are looking to raise your hear rate a bit you are in the right place.
- What do you hope to gain from trading?
Be specific. Are you after fame and glory? Or do you just want to outperforms your 401k?
- What are your trading goals?
- How do you plan on becoming a better trader?
Are you going to join a trading group? Read books? Attend seminars?
- How are you going to use your trading plan?
- Clearly define your purpose for trading and investing.
- State your goals and what you hope to gain and achieve through trading.

Strategy for Buying

- How are you going to find which pairs to trade?
Examples: news, research, technical analysis, fundamental analysis, etc.
- How will you refine your buy list?
Currency pairs on your radar you are considering buying.
- Will you be using technical analysis?
You need to understand what you are looking at. Understand how the indicators you use work and what they are measuring. Your favorite indicator may not be useful in many situations. In fact, I recommend using a number of indicators rather than just one. You must know when to used technicals and when not to use them.
- Will you be using fundamental analysis?
The fundamental news announcements can trigger the most volatile movements in this market. Make absolutely certain you understand how fundamentals work.

Strategy for Selling

- Set a desired minimum goal for each trade.
You may be happy making 20 pips per trade. Or 50 pips per trade. Set a goal you are happy with and stick to it. Once you are starting to be successful it is a common trap to become cocky. At this stage you are likely to enter into too many trades and then not cut your losses because you think that the market will turn back in your favour. This happens to every trader. The ones that remain traders are the ones that pick themselves up after that devastating loss and figure out how to learn from their mistakes and move on.
- Use stop-loss orders to reduce risk by automatically selling at a pre-determined lowest price.
Oddly enough this is a hotly debated subject. I didn’t used to trade with stops at all. Lately the Euro and the Pound have taught me some hard lessons and I have been incorporating stops into my strategy as I move forward.
- How much more are you willing to lose if this trade goes bad?
This is a hard one. Not many people like to admit they were wrong. Pulling the plug on a trade and admitting you were mistaken is a huge hurdle for some. It is the double whammy of feel bad – not only are you admitting you made a crappy trade, you are going to lose a bit of money as well. Some traders continually raise their stop-loss prices as the trade goes in their direction. This is called a trailing stop and can be a very useful tool for locking in gains and reducing risk.
- You must set in stone how you are going to protect your trading capital.
In achieving your goal of making money, a trade must be protect its capital. How can you make money if you don’t have money to trade with? Please consider what happens if you keep losing money. This has little to do with trading but rather your own financial situation. Are you prepared to lose every cent of your allocated trading capital before you are forced to stop, or do you think you would like to hold on to some of the money and commit it somewhere else?

Strategy for Holding

- What will you do if the price does not move at all after you buy – sell it and move on, or hold it and wait for action?
Some traders will hold on to the trade until more activity and volume pick up. They are comfortable waiting it out. This action may require more capital in your trading account, as you may have to hold on to more than one non-moving trade. It also requires a stomach of steel. I have more than one person call me or email me just needing to talk through several trades they are sitting on that are either doing nothing or have gone way against them. Ask yourself this: Will I be able to sleep comfortably with open trades? If the answer is yes then you are either placing well though-out trades or you are just nuts.

Money and Risk Management

- How will you keep your risks to a minimum? How will you keep your total account value at a maximum and grow it?
Research money management techniques – there are many. This can include how much money or what percent of your entire portfolio value to use in each trade.
- Margin. Margin can be a very useful tool for many traders but can be scary and risky if not used properly. You can get a margin call from your broker at any time, which means that want to collect their money now. Margin gives you extra buying power. Margin also gives you additional risk. Use margin cautiously and wisely. Some traders do not use margin at all.

It is also important to note that you should write down your trading plan. Many traders like to take short cuts and have the plan in their head. When you don’t have a written plan it is too easy to drift away and go back to old habits.

Having a written plan provides you with something tangible – something you can place your hands on. Your plan will guide you to making the right decisions. Also, don’t hide your plan away in a desk drawer. Pin it up on the board next to your computer. It can be really easy to get wrapped up in the moment and deviate from your plan. Having it hanging right there next to your monitor can help keep you in your ‘zone’.

Consider the difference between knowing what has to be done and what you want to do. Like the Boy Scouts say, be prepared. Preparation for the Forex trader means making your plan, developing your strategies, testing your techniques and continually refining it all. The process is never really over and there are good trading opportunities to take advantage of out there. Having a well thought out plan is a solid foundation for a beginning trader. Be dedicated to your plan and stick to it.

I would recommend trading on a demo account until you can show decent returns. Then begin to trade micro lots on a mini account. This will ensure that your plan is built upon sound principles and will benefit you in the long run.

Equities Magazine
April 2007

It’s been said in the past that “When the U.S. sneezes, the world gets a cold.” While that might still be true, it’s fair to say that in today’s market when China sneezes, the world ducks for cover. This was highlighted dramatically in late February and early March, when the Chinese stock market dropped a 9%-loss pebble into the world market pond, which sent ripples across equity and forex markets worldwide.

The Chinese markets had been skyrocketing over the previous year, building what some saw as a bubble primed to burst. There have been many that point to the offending needle, but the truth combines a lack of real liquidity and fears of additional Chinese legislation and taxes. The frenzy started in the Asian markets and continued around the globe as markets opened. As New York and London came online, the markets were in utter confusion.

The U.S. markets were further jolted by a drop in the fourth quarter GDP, the dreaded R world uttered by Mr. Greenspan, and problems in the U.S. subprime mortgage market, not to mention a couple of computer glitches. All of that combined to send those markets into a tailspin. In one day the Dow Industrial average dropped 3.3% and the S&P 500 dropped nearly 3.5%.

For Forex traders, the risk was seen in the overextended carry trade that spurred considerable bids for the Japanese Yen and the Swiss Franc. The yen posted huge gains against most of its currency counterparts, particularly against the New Zealand Dollar. It also confirmed a downward trend against the U.S. dollar.

There’s no debate that all this combined to fuel major changes in the FX markets and furthered the U.S. dollar’s decline against the yen. Japan’s Nikkei index then fell 3.3% to solidify the worldwide retreat in the equities markets. These dramatic moves echoed across the other currency pairs in equally dramatic fashion. On February 29, the EUR/USD also took a turn and headed south

What does this all mean? Well, hindsight is 20/20. the Dollar/Yen sank to a new three month low. But as the equity markets start to gain back some ground, trades will see the corrections being mirrored in the FX charts.

So much of the new reported throughout this time was overly hyped and poorly analyzed. Even the local news channel, which never makes market analysis, led with a big news item speculating about market crashes and the general populace losing retirement accounts. It was an insanely over-dramatized snapshot of what was going on. In reality, the Chinese market has seen growth of 100% annually over the last two years. So a 9% correction on stocks that were up 13% over the previous month shouldn’t have been the portfolio-threatening event it was portrayed as.

It’s clear that ripples in the equity markets can quickly translate to earthquakes in the forex market. Whether February 28, 2007 will be seen as a great buying opportunity or the emergence of a new trading range remains to be seem.

Considering U.S. Treasure Secretary Paulson’s comments that global economic conditions are very healthy, signs of recovery are clear. Nevertheless, it wasn’t the catastrophe that many foretold in the early hours of the moves.

As Coleridge says, “In politics, what begins in fear usually ends in folly.” This same advice lends itself to the markets. So don’t lose your head, do some thoughtful research into the situation and make your own fact-based decisions. Only then can you judge a ripple from a tsunami, and trade accordingly.