Shares Magazine
November 22, 2007

By: Marilyn McDonald

Welcome to our last and final article in our six week series from IBFX and IBFU. We will be helping you develop your own forex trading plan. Creating a trading plan doesn’t involve me telling you what and when to trade. It has nothing to do with a super fabulous secret system and honestly it won’t be easy. You will need to look at yourself and decide why you want to be in this market and what you are trying to achieve.

We will walk you through the mechanics of setting up your trading plan because it is extremely important for you to know why you are placing the trades you are. In my opinion if you know why you placed the trade and got in and out a points that you have predetermined then you have made a successful trade, even if it wasn’t a profitable trade. If you are not willing to put some work into creating your own trading plan, I think it would almost be more beneficial for you to place your money in a managed account simply to give it a fighting chance in this arena. Developing your 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 (or trading). 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 to 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.

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

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 wish to include.
State Your Purpose
- Why do you want to trade in the Forex market?
- What do you hope to gain from trading?
- What are your trading goals?
- How do you plan on becoming a better trader?
- 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)?
- 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 use technicals and when not to use them.
- 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.
- 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 will be incorporating stops into my strategy as I move forward.
- How much are you willing to lose if this trade goes bad?
- 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.
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 stock 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.
Money and Risk Management
- How will you keep your risks to a minimum?
- How will your 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 they 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.

I have a workbook that will help you develop your trading plan on the homepage of my website – www.marilynmcdonald.com. I also have a webcast talking about developing your trading plan you can view at www.moneyshow.com, just search for my name.

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.

Interbank FX is an off-exchange retail foreign currency broker and can be reached at www.interbankfx.com. It’s free Forex education site can be found at www.ibfxu.com. And Marilyn McDonald is an author and foreign exchange trader. She can be reached via her website at www.marilynmcdonald.com

Shares Magazine
November 15, 2007

By: Marilyn McDonald

Welcome to week 5. It’s time to pull a Dr. Phil. It’s time to get inside your own head. Let’s find out, are you mentally prepared to trade? During week five of the IBFX and IBFXU series, we are going to take a closer look at some of the things you need to do before you make your first trade.

One of the first things you need to do before you place your first trade is to determine exactly what you want to achieve. Create your own trading plan. Get out a piece of paper and write it down. Do you want to eventually live off your trading? Or are you just trying to outperform your savings account. Be as specific as you can and then pin this up by your computer.

Once you have created your own trading plan, take 4 or 5 minutes and review your goals before you start clicking that mouse. This will help you keep your goals in mind as you trade. If your goal is to make 20 pips per day then you will start each trading day with that particular goal in mind. It is easy to get wrapped up in the emotion of the moment and forget your larger picture. Taking a few minutes before the day starts will help you focus on your goals.

Be aware that when you start trading, particularly if you are new to trading, you may be confronted by negativity from your friends or relatives. They simply don’t understand what you are doing or the language you are now learning. Some people react to new situations with fear and frustration. You should join a traders group, whether it be online or in person. Make sure you have friends and associates that understand the new language you speak and can possibly help you learn from their mistakes.

Another nugget of wisdom I have for you is to remain focused. Every new trader will hit a wall. They will become over confident and lose a lot of money, potentially even their entire account. This usually comes after a series of wins. The true test of your character as a trader is going to be what you do with yourself after this happens. Do you quit? Or do you dust yourself off and build on the hard lessons that you have learned? Your actions at this stage of the game are going to help form what kind of trader you will grow to be. My advice for this situation is to lean on your fellow traders. Anyone who has been in the market for any length of time has been through this. This is what separates the men from the mice (so to speak).

If you are having emotional responses to your trades it is time to pay attention. During these times, walk away from your computer if you can. When you lose your emotional detachment you have lost your perspective. You are now far more likely to place bad trades, second guess yourself and close out everything at a loss. Take a break, get out of the house, and come back when you can look at the charts and your account impassively.

Another caveat for you is to beware of greed. This is one of the seven deadly sins for a reason. Greed can cause you to act impulsively and irrationally. Set your goals for the trading session, achieve your goals and be grateful for another day of trading successfully.

You should also track your progress. As long as you can see that you are progressing down your projected path then you will continue to stick to your trading plan. This also gives you the confidence you need to see that you plan is working. Don’t deviate from your plan, remain steadfast and you can achieve your goals. Think slow and steady and you maintain your trading edge.

Set profit targets for yourself. I like to make 10 or 15 or 20 pips and get out. Do I miss out on some terrific moves? You betcha! Do I make a profit while some people lose everything they have gained because the pair retraces? You betcha. I am happy making a bit of money and getting out. I don’t get too greedy mostly because it makes me nervous. Decide how much you think it will go up or how much will make you happy and set that Take Profit level.

Limit your losses. Setting a stop loss can allow you to decide how much you want to lose. This one is a toughie. Because if you set it too close in volatile conditions the market is likely to dip down, bump you out of your trade and then reverse back up and make a profit. However, they will save your behind if you simply read the market wrong and make a bad decision.

There are plenty of sites out there willing to tell you where to place your take profit and stop loss orders. I am not going there… I will simply default to my mantra… read everything you can get a hold of, try it out on a demo account, and make your own decisions. You can download my workbook – Create Your Own FX Trading Plan from my website – www.marilynmcdonald.com. This will take you through the step by step thought process you should follow when you are setting up your own trading plan.

Interbank FX is an off-exchange retail foreign currency broker and can be reached at www.interbankfx.com. It’s free Forex education site can be found at www.ibfxu.com. And Marilyn McDonald is an author and foreign exchange trader. She can be reached via her website at www.marilynmcdonald.com

Shares Magazine
November 8, 2007

By: Marilyn McDonald

Possibly one of the most crucial pieces to consider when you begin to trade in the forex market is money and risk management. That may sound daunting but it is pretty simple. All you need to do is answer the following questions;

- How will you keep your risk to a minimum?
- How will you keep total account value at a maximum and grow it?
- What money management techniques will I use?
- What sort of leverage do I want to use?

I have met many traders with many strategies and one of my favorite examples of why money management and risk management are so crucial is the trader that subscribe to the theory that the market is random. This person has decided that it really doesn’t matter which trade they take as long as they are using valid money and risk management techniques. For example, I know a gentleman who has a trading group. They place their trades based on the first paragraph of the lead story on the front page of the local paper. Each letter has a corresponding value and that translates into trade recommendations. The theory is that if this is a truly random way of placing trades then their success rate should be about 50%. If they are using good money and risk management techniques their winning trades should generate more profit than their losing trades lose. Last I heard, this group had been consistently profitable for some time. That should server to illustrate how important money and risk management are.

Keeping Your Risk to a Minimum

Trading in the spot market has been equated to gambling. However, there are a number of things you can do to limit your risk that tilt the odds slightly in your favour. The first thing you need to do is check the ego at the door. This market trades an average of 3 trillion dollars a day. Many of these traders are PhD level economist and central banks. You cannot expect to win every trade, be satisfied with results that are a little better than average.

Another key to keeping your risk low is diversification. The spot forex market is one of the riskiest investments that you can get involved with. I would recommend that you put no more than 10% of your risk capital into this market, not your retirement account.

Growing your Account

This is a fun one to explore. How will you grow your account and what will you do with it? Let’s say that you were to open an account with 1,000. If your goal is pay you’re your mortgage then each time you work your account up to 1,500 you might remove that extra 500 and use it to pay down your principal on your loan. Remember, this is the riskiest of all the financial markets. Do you really want to turn your 1,000 into 10,000 and then lose it all? Or perhaps you would like to supplement your income. So, your goal is to make an additional 100 a day. Each week you can pay yourself an additional 500. Some weeks you will make your goal and some weeks you won’t, don’t stress out if you miss a week or two. Just build that into your plan. Aiming for 100% success rate is just setting yourself up for failure.

Money Management

This will require you to research money management techniques – there are many – and can include how much money or what percent of your entire portfolio value to use in each trade. I would recommend that you avoid what I call Trading Prophets, particularly the ones that claim incredible success rates. Trading Prophets are those people that will tell you exactly what the market is going to do. This market reflects economies, news events and rumors from all over the world. No one person can be sure of what will happen or when. Take all of this advice in and then make your own decision.

As you begin to adopt rules for buying and selling make sure you maintain a standard ratio between the open trades and your total account value. It is easy to start over-leveraging your account as you make successful trades. Over-leveraging means you are using more of your available margin to hold open positions. The danger with this is that if the price moves against your trades you may find yourself in a margin call. This is definitely something to be avoided. Remember slow and steady wins the race. Be the turtle, not the rabbit.

Leverage

Leverage (some call it margin) can be a very useful tool for many traders, but can be scary and risky it not used properly. Margin gives you extra buying power but also increases your risk. I would recommend using margin cautiously and wisely. You don’t have to take that 200:1 leverage, remember, some traders do not use margin at all.

Review and Renew

My last point before I leave you is that your trading plan should never really be done. You should be reviewing in periodically and fine tune it as your performance drops or plateaus.

As you are answering these questions for yourself I would suggest that you learn as much as possible. There are forums, discussion groups, websites and an entire software industry that has grown up around trading strategies. Don’t be afraid to ask questions and explore options. This should be an enjoyable process, not a hard or scary one. Remember, trading is fun!

Interbank FX is an off-exchange retail foreign currency broker and can be reached at www.interbankfx.com. It’s free Forex education site can be found at www.ibfxu.com. And Marilyn McDonald is an author and foreign exchange trader. She can be reached via her website at www.marilynmcdonald.com

Smart Trade Digest
November 2007

There has been plenty of info in the news and trading forums lately about the volatility that has been seen in the markets since summer. Traders of all types are buzzing about what has been happening and how it is affecting their trading. One topic that seems to float to the surface again and again is the carry trade, particularly among certain groups of currency traders.

What is the carry trade?

The carry trades originates from traders borrowing money in countries with extremely low interest rates, such as Japan at 0.5%, and then investing that money in higher yielding investments in countries with higher interest rates, such as US Treasury bonds – essentially borrowing short and investing long. The term ‘carry trade’ has since come to encompass a wide range of borrowing-short-investing-long sort of strategies but the theory is the same. Thousands of currency traders, including myself, have a trading strategy that involves some form of cross currency hedging with the idea of accruing interest, or swap. So the shake up with the US and JPY economies has those traders buzzing around the hive looking for bits of information that can help them make wiser decisions.

The USD Outlook

One of the biggest issues for carry traders is the current devaluation of the USD and the lowering interest rates. I recently read a report that put the USD in the bottom half of the G10 currencies if you ranked them by interest rate. This is raises concerns for carry traders as the USD is no longer one of the higher yielding currencies, nor is the interest rate low enough to make it an interesting funding currency.

And the future of the USD is far from certain. Economists are pretty evenly divided as they speculate over further rate cuts in December. And from where the US consumer sits it is a murky business. While rate cuts may sound positive in the first instance, with oil prices pushing through the stratosphere there is the real possibility we could see upward pressure on inflation. And we haven’t even touched spectacular highs on gold, the Sterling and the Euro. The euro has gained almost 70% against the dollar in the last 7 years.

The Japanese Economy

If we consider the traditional carry trade we have to take a quick glance at the state of affairs in Japan. One topic that is whispered about is what will happen when the carry traders that have borrowed Yen to buy USD back securities start to ‘unravel’ their trades.

My opinion on this matter is that Japan has more to worry about right now than unraveling their carry trade investments. Early last week the Japanese government revealed that the index of leading economic indicators hit zero for the first time in ten years. Add to that an unemployment rate that unexpectedly climbed for the second consecutive month in September and you get economists world-wide starting to suggest that the country’s five year expansion might be showing signs of slowing down. These factors have suggested to most that there is little likelihood of an immediate interest rate rise on the horizon for the Bank of Japan.

That’s not all the bad news, Japanese housing starts have foundered and sales of trust funds have dried up as the result of new legislation. Wages have remained subdued and consumer confidence has dropped sharply this year. To wrap it up bankruptcies among small and medium-sized companies in particular are up 29 per cent in the first half of the year compared with the same period last year, according to Teikoku Data Bank, an independent research firm.

Putting it all together

When you look at the issues dogging both the US and Japanese economies what you end up with is two economies that are trying to find purchase in soft sand. If one were more successful than the other then I think there would be a rush to unwind the carry trade that would strengthen one economy and shake the other. At the moment the two are entwined so tightly that is difficult to separate them, particularly when it comes to this issue.

The USD may not be one of the worlds highest yielding currencies any more, but don’t automatically assume that this translates into the USD as a funding currency. Unlike the Yen or the Swiss Franc, it is not backed by a country with a large current account surplus and it has been subject to volatile swings in the global market – both of which detract from its appeal. As far as the carry trade issue is concerned, all hope is not lost yet. My advice is to watch carefully and wait for the recent volatility to stabilize. Viva le carry trade!