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Automated Forex System Trading - Maintaining Positive Expectancy

What is Positive Expectancy?

Positive expectancy sounds like something a motivational speaker would talk about or a psychiatrist. In fact, there are some people that use the term for those reasons. This article is about using the term in the context of Forex trading strategies, STATISTICS, and MATH. One of the major advantages from using an automatic Forex trading system is built in discipline that maintains a high POSITIVE EXPECTANCY that can lead to large profits. Positive expectancy defined in its most simple form, is that on the average, there is a probability that you will make more money than you will lose.

If the Forex trader gets nothing else from this article the MOST IMPORTANT POINT that must be understood is that WITHOUT POSITIVE EXPECTANCY in any Forex trading system automatic or otherwise, there are no money management procedures or trading techniques that will prevent you from losing all your money.

Most traders confuse positive expectancy with the probability of winning. Forex traders and especially Forex system developers love to brag that their system "picks winners 97.3% of the time", and fall for the easy but incorrect logic and "feeling" that a high percentage of wins means a high profit. Sadly, this is NOT TRUE! Winning 97.3% of the time will not generate Forex profits if the 2.7% of losing trades wipe out your account. Confusing win probability with positive expectancy is what ultimately leads to Trader's Ruin.

Trader's Ruin is the mathematical certainty that over time the trader will lose all his money to the market if he trades without positive expectancy. Many very successful traders and auto Forex trading systems have a win probability of about 40%, with a high positive expectancy that returns huge profits.

If an automatic currency trading program wins 9 out of 10 times (90% wins!), and the average win is $10 but the average loss is $100 - that system has a negative expectancy and will lose money!

If an automatic Forex currency trading system wins once every 20 trades (5% wins!), losing an average $5 each losing trade but makes an average $100 on each win, that system has positive expectancy and over the long run will make money.

Did that tie your brain in a knot? Let's explain a little further.

To be able to say an automatic Forex trader, or any system, has positive expectancy means that on average the system will make more money than it loses. On any given trade, it may win or it may lose, but the average over time and many trades is profitable. This should include costs and slippage and be measured over an absolute minimum of 30 to 100 trades, preferably many more.

This analysis assumes the Forex trader and the Forex trading tool are properly capitalized and the trades are properly sized to reasonably ensure the system will survive the inevitable periods of losses.

"Properly capitalized" means you have enough money in your account that you can make properly sized trades and survive long enough for the average returns to grow your account. If the account is too small, it is much more likely a run of losses will wipe you out before you have time to generate profits.

"Properly sized" trades means that the average size of expected profit on any trade is large enough to cover expected average losses plus trading costs and still have positive expectancy.

"Exit loss" will be defined for this article as the amount the trade will be allowed to move against us before it is "stopped out" by our stop loss setting and we exit the trade. This applies to both winning and losing trades.

"Costs" in Forex trading are usually in the form of "bid/ask" spreads, Forex brokerage fees or commissions are usually small or non-existent. There are still real costs that figure into the expectancy of the system.

"Slippage" is defined as the difference between the price a trader expected to pay when a trade is ordered and the actual price paid. The Forex market is always moving and if the market moves against our trade, the time between our contract order and when it is executed in the market may allow the price to change. A good Forex automated trading system has an average known slippage value figured into the system also.

To make this easier to understand, let's put some numbers to it. These are simplified examples to illustrate the concept and the numbers may or may not match real FX trading strategies.

If my automatic Forex trading system follows a set of rules that allows an exit loss of $10 before it is stopped out, and my costs are $10, and my "slippage" averages $5 then my average loss will be: $10 exit loss + $10 costs + $5 average slippage = $25 average loss per losing trade. These trades are generally trades that immediately move against the trader.

Choose the Best Forex Indicators For You

When dealing with foreign exchange trades, it is always best to use the most accurate forex indicators. Therefore, you should be always mindful of the things that you have to consider in choosing the forex indicators that will give you a different story, a different analysis. You have to be good in choosing the indicators that, when combined, produce the most accurate analysis.

They must supplement each other and not just complement each other. It's because when forex indicators only give identical analysis on the prices, it might just duplicate rather than confirm the information. The best way to do avoid this is to check on the type of forex indicators that you have to use in your analysis.

What are the common types of indicators that can be used? For one, there is the category of trend indicators. What are trend indicators? These are the indicators the objectively measure the trends in the prices. Next common category is the volume indicators. These are the indicators that confirm whether the trends are strong or weak. The third commonly used indicator category is the momentum indicators. The momentum indicators are responsible for tracking the price momentum to check on the sellers and buyers enthusiasm. On the other hand, the next category of indicators is the volatility indicators. What are volatility indicators? These indicators focus on the magnitude and size of the fluctuations in the prices. Lastly, the last category of forex indicators is the cycle indicators. These indicators, on the other hand, analyze the cycle of ups and downs in the prices.

How do you know if you have chosen the best indicators that supplement each other's analysis and not just duplicate them? You can set the forex indicators that you have chosen on a chart, and when you happen to see a trend, like falling or peaking at the same point in the same intervals, you probably have the same set of foreign indicators that supply the same information.

You can actually have as many forex indicators as you deem it necessary. There is no problem with that. However, you must always check each indicator regarding the information that it is providing you, or your analysis may not be useful at all.

There are many forex indicators that are available online, offered by some of the most respectable firms when it comes to foreign trade. You just have to pick the most useful and accurate indicators that will give you the best analysis. As you know, you have to get the precise analysis for the reason that prices play a big role in your business. While there are really some indicators that do not give you accurate data and instead give you estimates of the peaks and fluctuations of prices, you also have to trust those firms that are known to be credible. You may visit indicator reviews and check first on the information that they give and how people think about them before relying on one. This only makes sure that you land on the indicators that give the best analysis.

Frank is a Forex Enthusiastic Trader.

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Forex: Benefits of Trading the Forex Market

Trading the Forex market has become very popular in the last years. Why is it that traders around the world see the Forex market as an investment opportunity? We will try to answer this question in this article. Also we will discuss come differences between the Forex market, the stocks market and the futures market.

Some of the benefits of trading the Forex market are:

Superior liquidity.

Liquidity is what really makes the Forex market different from other markets. The Forex market is by far the most liquid financial market in the world with nearly 2 trillion dollars traded everyday. This ensures price stability and better trade execution. Allowing traders to open and close transactions with ease. Also such a tremendous volume makes it hard to manipulate the market in an extended manner.

24hr Market.

This one is also one of the greatest advantages of trading Forex. It is an around the click market, the market opens on Sunday at 3:00 pm EST when New Zealand begins operations, and closes on Friday at 5:00 pm EST when San Francisco terminates operations. There are transactions in practically every time zone, allowing active traders to choose at what time to trade.

Leverage trading.

Trading the Forex Market offers a greater buying power than many other markets. Some Forex brokers offer leverage up to 400:1, allowing traders to have only 0.25% in margin of the total investment. For instance, a trader using 100:1 means that to have a US$100,000 position, only US$1,000 are needed on margin to be able to open that position.

Low Transaction costs.

Almost all brokers offer commission free trading. The only cost traders incur in any transaction is the spread (difference between the buy and sell price of each currency pair). This spread could be as low as 1 pip (the minimum increment in any currency pair) in some pairs.

Low minimum investment.

The Forex market requires less capital to start trading than any other markets. The initial investment could go as low as $300 USD, depending on leverage offered by the broker. This is a great advantage since Forex traders are able to keep their risk investment to the lowest level.

Specialized trading.

The liquidity of the market allows us to focus on just a few instruments (or currency pairs) as our main investments (85% of all trading transactions are made on the seven major currencies). Allowing us to monitor, and at the end get to know each instrument better.
Trading from anywhere.

If you do a lot of traveling, you can trade from anywhere in the world just having an internet connection.

Some of the most important differences between the Forex market and other markets are explained below.

Forex market vs. Equity markets

Liquidity

FX market: Near two trillion dollars of daily volume.
Equity market: Around 200 billion on a daily basis.

Trading hours

FX market: 24hr market, 5.5 days a week.
Equity market: Monday through Friday from 8:30 EST to 5:00 EST.

A Beginner's Guide to Forex Currency Trading - Try Before You Buy!

Forex currency trading (or Foreign Exchange trading) is one of the most lucrative forms of stock trading today. The Forex market was once limited to lending institutions and government banks, but is now open to all investors. If you are currently a stock investor or are interested in stocks, then you don't want to miss the amazing opportunity the Forex market offers. More than $2 trillion dollars in currencies are being traded daily with Forex currency trading!

This brief beginner's guide will explain what Forex currency trading is and how it can benefit you. Also, the guide will show you how to avoid the pitfalls of Forex currency trading.

Explanation of Forex Currency Trading

If you're familiar with the stock market, then you already know how much research it takes to keep up with the thousands of companies in the market. You could spend hours per day trying to find stocks with the most profit potential and the least amount of risk. With Forex currency trading, this element of trading is almost non-existent. Why? Because Forex currency trading focuses on one type of stock - foreign currency exchange rates.

Buying and Selling in the Forex Currency Trading Market

With Forex currency trading, you are actually buying or selling a "pair" of foreign currencies online, by phone or other methods. "Pair" means two currencies that are being compared by pip, or a common denominator between the two currency values. Bids are placed for the pair based on what buyers are willing to pay. An asking price is what sellers are willing to take at any given time.

For example, you might buy Euro dollars with your US dollars, so you are actually buying the EUR/USD pair. The pair will either increase or decrease, depending on what buyers are willing to bid, giving you a gain or loss for your investment.

The rise and fall of pips in Forex currency trading will depend on each country's foreign exchange rate. The exchange rates can be affected by interest rates, unemployment rates, inflation, national events or disasters. If you have ever traveled to a foreign land, then you understand that your own currency could either be worth more or less than the currency of that nation.

Forex Currency Trading Leverage

Many Forex currency trading firms will allow you a leverage of 100:1 for your trading. Some will offer even more. If you have a 100:1 leverage, you can invest $1,000 of your own money, but trade $100,000! You can actually double your money with an increase of only one pip. However, you can also lose your entire investment with a decrease. This could equal big profits or losses, so be sure to consider the risks before jumping in with both feet.

Forex Currency Trading Systems

The forex currency trading system is the system, which lets the forex traders buy one currency and sell the other simultaneously. This is a platform where you can also participate in the currency trading game and make lucrative profits by buying and selling currency pairs.

According to the basics of forex currency trading system, when the value of a currency falls the currency should be bought and when it rises, the currency should be sold off. However, you must know the basics of forex trading before you start using forex currency trading systems. The forex currency trading system is the relatively new venture into the financial world; over three trillion dollars worth of transactions are taking place everyday in the forex market with forex currency trading system.

The Forex currency trading system works like this. For example, you anticipate that the value of Euro will increase relative to Dollar, and you buy Euros with Dollars. So, if the Euro rate increases relative to the Dollar, you sell the Euros and make your profit. The first currency of each currency pair is referred as the base currency, and the second is as the 'counter' or 'quote currency'. Each currency pair is expressed in units of the counter currency needed to get one unit of the base currency. If the price or quote of the EUR/USD is 1.2545, it means that 1.2545 US dollars are needed to get one EUR.

These currency pairs used in the forex currency trading system are usually traded and quoted with a 'bid' and 'ask' price. The 'bid' is the price at which the broker is willing to buy and the 'ask' is the price at which he is willing to sell.

Fibonacci currency trading system is based on the world famous Fibonacci sequence - which is formed by a series of numbers where each number is the sum of the two preceding numbers, such as 1,1,2,3,5,8,......and so on. The forex currency trading system benefits a lot from this mathematical system; if you closely monitor the forex rate charts you will see Fibonacci series type oscillations in prices.

When applied to the field of currency trading, the ratio derived from this sequence of numbers, i.e. .236, .50, .382, .618, etc., it has been found that the oscillations observed in forex charts, follow Fibonacci ratios very closely. Since the Fibonacci system calculates the points, levels or currency pair in advance, you, as a trader, easily come to know when to enter into the market for trading and when to exit.

There are over 60 currency pairs available in a forex currency trading system to trade on. However, there are four currency pairs that dominate the forex currency trading system. These are:

EUR/USD: Euro vs. USD (U.S. Dollar)

GBP/USD: British Pound vs. USD

USD/JPY: USD vs. Japanese YEN

USD/CHF: USD vs. Swiss franc

Forex Factory - How To Prepare For Your Trading Session

The Forex Factory web site is a very popular site among developing Forex traders as shown by an Alexa rating of around 5,400 most visited sites on the web. Any site within the first 100,000 gets serious traffic!

Forex Factory provides 3 main services listed in my personal order of importance:

• Calendar
• News
• Forum

Calendar

The main attraction of the Forex Factory calendar of upcoming economic reports and fundamental announcements is that it is so visual and easy to read.

A color coding system gives an indication at a glance as to how volatile the announcement is expected to be:

• Yellow - Low Impact
• Orange - Medium Impact
• Red - High Impact

Another good feature of this calendar is the ability to customize the time to your own time zone. So instead of having to add or subtract a certain number of hours from GMT to arrive at the time of the economic report in your country, you can set the calendar according to your time zone and see the time accurately displayed.

This feature saves some confusion and prevents a newer trader from leaving a trade in around a volatile news report because of getting the time mixed up!

News

A number of news reports are featured daily from authorities and advisors in the financial markets.

Within a few minutes the trader can come up to speed on the latest economic factors that might impact the market.

Forums

The Forums at Forex Factory have a huge appeal as indicated by the thousands of users online each day.

The forums are divided into various themes including:

General Discussion

Trading Systems

Broker Discussion

Forex Beginner Questions and Answers

How To Get The Best From Forex Factory

For me, the calendar is by far the most useful feature at Forex Factory. I consult it each day in preparation for the next trading session and make sure I am out of the market around volatile news releases (flagged by the red icon) and also many times the medium impact reports (flagged by the orange icon).
The News feature is also useful to get a broad overview of market sentiment. At the same time caution is needed if you use technical analysis as your main trading tool as the comments and opinions of others can sometimes blur your own analysis and lead to flawed trade entries.

You may have detected a perfectly good trade setup and the trade is going well. Then as it starts to stall the comments of a news analyst come to mind and you exit prematurely from what could have been a very profitable trade.

So it is good to view the News objectively and coordinate it with your own technical analysis.

Forums - Be A Little Cautious

For newer traders the discussion forums can be helpful in bouncing ideas off other newer traders. One of the main benefits is encouragement and motivation from hearing how others are getting on.

However, as to whether you can get good trading tips and strategies from the forums is in my mind a little doubtful.

After I attended a Forex seminar run by a licensed professional who trades the Forex every day and is a fund manager, I noted his comment that the really successful Forex traders rarely have time to visit online forums and participate in discussions. They are too busy making money on the Forex!

So as long as you approach forum discussions with the realization that most participants are also in the learning stage, you can evaluate their comments and suggestions accordingly.

There is no doubt Forex Factory (forexfactory.com) provides an excellent group of services for newer Forex traders. Definitely use the calendar to the full and depending on your level of expertise, use the News and Forums features to gain a better perspective of daily market activity.

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