Trading Methodology 2

Written by JS T Alexander | 11 July 2010

Developing a methodology in foreign exchange trading through years of market experiences and trades have enabled market strategists to endure and outlive volatile conditions during critical times. Maintaining a high degree of studies and keen analysis will serve to be an advantage in preserving equity and investment capital.

Placed in between winning trades there are the corresponding contrary positions that serve a cushion to safeguard the gains that had been attained during the tenure of the trading plan. These are hedging techniques that are essentially to protect positions susceptible to wild adverse fluctuations. This is true enough in the spot/cash market of foreign exchange wherein no limit moves are in place for the prices unlike in currency futures where the exchange sets trading limits for a day. However, the case may be, cash market movements do not necessarily reflect financial futures price changes on a one-to-one scale. Clearly monitoring both instruments will define differences in liquidity, volume, price differentials, open-interest just to name a few. The indicators mentioned are part of a simple process where comparison studies done on both the spot & futures market could be very important trading strategy, which is in fact, one of the highlights and a key element in the methodology of trading the foreign exchange (FOREX) market.

The correlation between them will enhance the ability of understanding the market and the psychology behind the movement through a series of methods to identify the true sentiments of the over-all market. Expected reports, current events are factored in and priced in normally ahead of time, however with strategies in place even before any positive-negative news affects price movements, these technical factors are in position to help absorb the impact that may be brought upon the market. Thereafter, spill over may or may not occur, otherwise the sentiments of a technically-driven market will prevail. Normalcy can be seen with the price behavior and buildup of market movements are expected almost always during opening, closing hours and significantly roll-over hours between time-zones of global trading partners.

Sentiment value measured by the majority of participating traders and analysts would collectively be discussed based upon what most contributory banks provide in their institutions purchase and sale particularly the size and frequency of the transactions. More often, these institutions whether banks, hedge funds or private investors would balance-in their respective portfolios and assume a positive stance alongside with the current trend. Not a whole lot of speculative trades are made especially when interest rate differentials are wide between countries an example would be a carry trade of Japanese yen and the Australian dollar. Unless the respective traders’ experience are utilized well enough, choosing to implement a plan of how best to use investment funds would be left behind not serving the investors interest. However, savvier investors who avail of this information direct from their banks’ recommendations have the tendency to acquire a full range of services catered more to their liking and/or fondness of investment instruments. That is because most of these investors/clients have been dealing with their bank counterpart for a longer period and knows exactly what type of profile the clients have.

This also applies with the type of clients that larger broker-dealers offer some kind of preferential treatments to their most active clientele who frequently trades move often and this gives brokers increased revenue resources than most regular trade investors do. Most transactions in foreign exchange do not charge commissions and that is why these broker-dealers some of which are market makers of these currencies favor savvy investor/traders that do most of the work for them. Although most of these client/investors who would prefer to call their orders either by phone and/or thru electronic trading platforms that they have provided themselves with have learned to take up certain special workshops on the mechanics of trading the foreign exchange market.

The primary objective (of this book) is to provide certain guidelines most effective in preserving capital and building equity thru a series of applied methods in trading the foreign exchange market. The procedures outlined have been used countless times in the market thru the course of 23 years of trading. And the rate of successful trades over losses have been marked for comparison and analysis. Although as most disclaimers would state that past performances are not indicative of future results. But this phrase had been a standard policy in the industry as to representations being made or presented verbally and in written formats.

The complexity of trading the foreign exchange has increased whenever software programs have been developed the past decade. With new technology hardware systems designs making accurate speed, trading calculations move viable than what it used to run with. Mechanics of the trade are being acknowledge by more experienced professionals who strategizes with the market than just simply buying and selling it. But what is more important are the information of flexible strategies that can be applied into useful trade parameters available for those traders that are barely starting their careers or professions in this industry. Paying for a high tuition fee for experience may also lead to unnecessary losses that could have been avoided thru proper approach in training. Having a good set of trading principles and financial philosophy would be a key factor in developing sensible trading practices that can only be very helpful to the success of the trade.