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[FONT=Courier New, monospace]Since there are some people who are interested in trading Forex, I have been thinking about what advice I could give them. My only qualification for giving advice, is that I have probably lost more money trading than anyone else here. So, take whatever I say with a grain of salt. As I thought about what I would suggest, I started formulating a method I want to try. [/FONT]
[FONT=Courier New, monospace]In Forex, you trade currency pairs, which is the price of one nation's money in terms of another nation's money. You can't say how much a US dollar is worth, unless you can compare it to something, like a gallon of gas, or the Euro. When you trade a currency pair, you are betting on the strength of the currencies of two nations. When you bet the EUR/USD is going to go “upâ€, you are betting the Euro will rise in value, and/or the US dollar will drop in value. [/FONT]
[FONT=Courier New, monospace]If you want to know if the US dollar is “going upâ€, you need to track at least 3 currency pairs. For example, if I want to know how “strong†the US dollar is, I need to compare it to 2 other currencies, and also compare those other currencies to each other. In Forex, you could use these currencies:[/FONT]
[FONT=Courier New, monospace]EUR/USD = Euro vs US Dollar[/FONT]
[FONT=Courier New, monospace]EUR/GBP = Euro vs Great British Pound[/FONT]
[FONT=Courier New, monospace]GBP/USD = Great British Pound vs US Dollar[/FONT]
[FONT=Courier New, monospace]Lets say all 3 of the pairs are going “upâ€, and look at what that means:[/FONT]
[FONT=Courier New, monospace]If the EUR/USD is going “upâ€, then the Euro is rising and/or the USD is falling.[/FONT]
[FONT=Courier New, monospace]If the EUR/GBP is also going “upâ€, the Euro is beating both the USD (above) and the GBP. So the EUR is indeed strong.[/FONT]
[FONT=Courier New, monospace]If the GBP is going up, then that means it is also beating the USD, and the USD is weak.[/FONT]
[FONT=Courier New, monospace]So we know the EUR is strong, and the USD is weak. The best single trade would be to bet the EUR/USD is going to go “upâ€.[/FONT]
[FONT=Courier New, monospace]In the above example, if the GBP/USD was falling, you would have:[/FONT]
[FONT=Courier New, monospace]EUR > USD (rising EUR/USD)[/FONT]
[FONT=Courier New, monospace]EUR > GBP (rising EUR/GBP)[/FONT]
[FONT=Courier New, monospace]GBP < USD (falling GBP/USD)[/FONT]
[FONT=Courier New, monospace]It would mean:[/FONT]
[FONT=Courier New, monospace]The EUR is strong because it is beating both the USD and GBP.[/FONT]
[FONT=Courier New, monospace]The GBP is weak because it is losing to both the EUR and USD.[/FONT]
[FONT=Courier New, monospace]The best single trade would be betting the EUR/GBP will go “upâ€.[/FONT]
[FONT=Courier New, monospace]If you wanted to diversify, you could put 50% of your bet on the best trade, and 25% on each supporting trade. From the first example, you could bet:[/FONT]
[FONT=Courier New, monospace]EUR/USD = bet 50% it is going up, since EUR is strong and USD is weak[/FONT]
[FONT=Courier New, monospace]EUR/GBP = bet 25% it is going up, since EUR is strong[/FONT]
[FONT=Courier New, monospace]GBP/USD = bet 25% it is going up, since USD is weak[/FONT]
[FONT=Courier New, monospace]From the second example:[/FONT]
[FONT=Courier New, monospace]EUR/USD = bet 25% it is going up, since EUR is strong[/FONT]
[FONT=Courier New, monospace]EUR/GBP = bet 50% it is going up, since EUR is strong and GBP is weak[/FONT]
[FONT=Courier New, monospace]GBP/USD = bet 25% it is going down, since GBP is weak[/FONT]
[FONT=Courier New, monospace]In trading, you normally want to have a way to sit on the sidelines when you are confused, but with Forex you cannot really do that since you are trading money itself. If you “go to cashâ€, you are still betting on some nation's currency (probably the USD if you are American). You are taking a position by virtue of having money. Because of this, this method does not include a timeout mechanism.[/FONT]
[FONT=Courier New, monospace]Above, when I mentioned investing 100% of “your betâ€, this is assumed to be something like 2% of your account size, not 100% of your account size. Putting “50% of your bet in to the single best trade†would be putting 1% of your account in to it. A winning trade would be added to it, probably by an additional 1% per period.[/FONT]
[FONT=Courier New, monospace]To decide trading frequency, I prefer to let that be dictated by the expected “run†of the trades. I don't usually use indicators, but in this test case I will probably use the Heikin-Ashi indicator on weekly Forex closing prices. The big gains are made on the trades that are allowed to trend, and weekly Forex data trends a lot better than daily data. Adding to a position each week would allow for pyramiding winning positions.[/FONT]
[FONT=Courier New, monospace]I have not worked out how to deal with the extreme leverage in Forex combined with the long multi-week hold periods, so I will have to just try it using minimal leverage and small bet sizes. I also ordered some back testing data which I will analyze to see if things still look promising.[/FONT]
[FONT=Courier New, monospace]I certainly don't suggest anyone try this approach until I see how I do, but I mention it because it is simple and contains a few important things:[/FONT]
[FONT=Courier New, monospace]1) It diversifies through time by investing 1-2% at a time[/FONT]
[FONT=Courier New, monospace]2) It diversifies through breadth by trading 3 pairs at a time[/FONT]
[FONT=Courier New, monospace]3) It uses a confirmation method (figuring out the strong and weak)[/FONT]
[FONT=Courier New, monospace]4) It does not over-trade because positions are adjusted weekly[/FONT]
[FONT=Courier New, monospace]5) It allows pyramiding (adding to) winning positions[/FONT]
[FONT=Courier New, monospace]6) It is always in the market, because it has to be[/FONT]
[FONT=Courier New, monospace]7) It is simple, it only uses the previous week's indicator[/FONT]
[FONT=Courier New, monospace]8) It is slow enough to not interest the day trading crowd
[/FONT]
[FONT=Courier New, monospace]In Forex, you trade currency pairs, which is the price of one nation's money in terms of another nation's money. You can't say how much a US dollar is worth, unless you can compare it to something, like a gallon of gas, or the Euro. When you trade a currency pair, you are betting on the strength of the currencies of two nations. When you bet the EUR/USD is going to go “upâ€, you are betting the Euro will rise in value, and/or the US dollar will drop in value. [/FONT]
[FONT=Courier New, monospace]If you want to know if the US dollar is “going upâ€, you need to track at least 3 currency pairs. For example, if I want to know how “strong†the US dollar is, I need to compare it to 2 other currencies, and also compare those other currencies to each other. In Forex, you could use these currencies:[/FONT]
[FONT=Courier New, monospace]EUR/USD = Euro vs US Dollar[/FONT]
[FONT=Courier New, monospace]EUR/GBP = Euro vs Great British Pound[/FONT]
[FONT=Courier New, monospace]GBP/USD = Great British Pound vs US Dollar[/FONT]
[FONT=Courier New, monospace]Lets say all 3 of the pairs are going “upâ€, and look at what that means:[/FONT]
[FONT=Courier New, monospace]If the EUR/USD is going “upâ€, then the Euro is rising and/or the USD is falling.[/FONT]
[FONT=Courier New, monospace]If the EUR/GBP is also going “upâ€, the Euro is beating both the USD (above) and the GBP. So the EUR is indeed strong.[/FONT]
[FONT=Courier New, monospace]If the GBP is going up, then that means it is also beating the USD, and the USD is weak.[/FONT]
[FONT=Courier New, monospace]So we know the EUR is strong, and the USD is weak. The best single trade would be to bet the EUR/USD is going to go “upâ€.[/FONT]
[FONT=Courier New, monospace]In the above example, if the GBP/USD was falling, you would have:[/FONT]
[FONT=Courier New, monospace]EUR > USD (rising EUR/USD)[/FONT]
[FONT=Courier New, monospace]EUR > GBP (rising EUR/GBP)[/FONT]
[FONT=Courier New, monospace]GBP < USD (falling GBP/USD)[/FONT]
[FONT=Courier New, monospace]It would mean:[/FONT]
[FONT=Courier New, monospace]The EUR is strong because it is beating both the USD and GBP.[/FONT]
[FONT=Courier New, monospace]The GBP is weak because it is losing to both the EUR and USD.[/FONT]
[FONT=Courier New, monospace]The best single trade would be betting the EUR/GBP will go “upâ€.[/FONT]
[FONT=Courier New, monospace]If you wanted to diversify, you could put 50% of your bet on the best trade, and 25% on each supporting trade. From the first example, you could bet:[/FONT]
[FONT=Courier New, monospace]EUR/USD = bet 50% it is going up, since EUR is strong and USD is weak[/FONT]
[FONT=Courier New, monospace]EUR/GBP = bet 25% it is going up, since EUR is strong[/FONT]
[FONT=Courier New, monospace]GBP/USD = bet 25% it is going up, since USD is weak[/FONT]
[FONT=Courier New, monospace]From the second example:[/FONT]
[FONT=Courier New, monospace]EUR/USD = bet 25% it is going up, since EUR is strong[/FONT]
[FONT=Courier New, monospace]EUR/GBP = bet 50% it is going up, since EUR is strong and GBP is weak[/FONT]
[FONT=Courier New, monospace]GBP/USD = bet 25% it is going down, since GBP is weak[/FONT]
[FONT=Courier New, monospace]In trading, you normally want to have a way to sit on the sidelines when you are confused, but with Forex you cannot really do that since you are trading money itself. If you “go to cashâ€, you are still betting on some nation's currency (probably the USD if you are American). You are taking a position by virtue of having money. Because of this, this method does not include a timeout mechanism.[/FONT]
[FONT=Courier New, monospace]Above, when I mentioned investing 100% of “your betâ€, this is assumed to be something like 2% of your account size, not 100% of your account size. Putting “50% of your bet in to the single best trade†would be putting 1% of your account in to it. A winning trade would be added to it, probably by an additional 1% per period.[/FONT]
[FONT=Courier New, monospace]To decide trading frequency, I prefer to let that be dictated by the expected “run†of the trades. I don't usually use indicators, but in this test case I will probably use the Heikin-Ashi indicator on weekly Forex closing prices. The big gains are made on the trades that are allowed to trend, and weekly Forex data trends a lot better than daily data. Adding to a position each week would allow for pyramiding winning positions.[/FONT]
[FONT=Courier New, monospace]I have not worked out how to deal with the extreme leverage in Forex combined with the long multi-week hold periods, so I will have to just try it using minimal leverage and small bet sizes. I also ordered some back testing data which I will analyze to see if things still look promising.[/FONT]
[FONT=Courier New, monospace]I certainly don't suggest anyone try this approach until I see how I do, but I mention it because it is simple and contains a few important things:[/FONT]
[FONT=Courier New, monospace]1) It diversifies through time by investing 1-2% at a time[/FONT]
[FONT=Courier New, monospace]2) It diversifies through breadth by trading 3 pairs at a time[/FONT]
[FONT=Courier New, monospace]3) It uses a confirmation method (figuring out the strong and weak)[/FONT]
[FONT=Courier New, monospace]4) It does not over-trade because positions are adjusted weekly[/FONT]
[FONT=Courier New, monospace]5) It allows pyramiding (adding to) winning positions[/FONT]
[FONT=Courier New, monospace]6) It is always in the market, because it has to be[/FONT]
[FONT=Courier New, monospace]7) It is simple, it only uses the previous week's indicator[/FONT]
[FONT=Courier New, monospace]8) It is slow enough to not interest the day trading crowd
[/FONT]
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