Questions and answers

If you want to succeed at forex trading then you need to be able to answer the question in this article. If you can't answer it then you are going get wiped out by the markets so here it is...

What's your Trading edge (defined)

Now before you answer this question let me tell you what a trading edge is NOT:

- You have a day trading or forex scalping system

- You think you can predict forex prices

- You think forex moves to a scientific formula

- You have a simulated track record from a vendor you have bought

- You like to buy low and sell high

- You think you can trade expert opinion and news

- You think you are clever

- You think you have a complicated system that can beat the market

Most forex traders think the above will give them a trading edge - but believe any of the above and the market will take all your money and do it quickly.

Think about this simple fact:

95% of traders lose money in the market and you need to think what your edge is i.e why you should succeed while others fail.

Now let's be clear - anyone has the potential to be a successful forex trader yet few succeed. The reason most fail is they believe common myths like the ones on the above list, or they don't have the right mindset.

Successful forex trading is built on three pillars:

- Knowledge and understanding and getting the right forex education

- Confidence in your method to make money longer term

- The discipline to follow your forex trading system through periods of drawdown to ultimate success

Your trading edge is not just about a method, it's about having confidence in it, so you can have the discipline to apply it through drawdown and emerge a long term winner.

Forex trading is simple and your method needs to be too.

A simple method works

A simple method works best because it is more robust in the face of brutal market conditions and has fewer elements to break than a complicated one. Furthermore, it will be easier to understand and have confidence in.

If you think that you need to be clever or put a lot of effort into your trading think again - you get rewarded for being right with your trading signal and market timing, nothing else. Sure in many jobs you get paid for effort but in forex trading it's all about being right.

So do you know what your trading edge is? If you don't and you can't define it, then its back to learning forex and your forex education until you do.

Fundamentals Catch up with Yen

In hindsight, it is now clear that the Japanese Yen’s dramatic rise in 2008 was mostly due to financial, rather than economic factors. In other words, a decline in risk aversion led to the unwinding of the Yen carry trade and a subsequent inflow of capital into Japan. Unfortunately, the recession and inflated currency have since taken their toll on the Japanese economy, resulting in an annualized 13% contraction in GDP for the latest quarter. The balance of trade has also shifted, to such an extent that Japan actually recorded a trade deficit in the most recent month. Having concluded, for the moment at least, that forex intervention is no longer necessary, the Central Bank has announced plans to deploy some of its $1 Trillion+ forex reserve hoard to help ailing companies. Barron’s reports:A reversal of the yen, from strength to weakness, will have “major global implications…” Perhaps beleaguered Japanese authorities already have begun reacting to the “carnage” the yen’s rise has wrought.

Spike in Eastern Europe is Short-Lived

Last week, the currencies of Eastern Europe (Hungary, Poland, Czech Republic, etc.) received a nice bump from the announcement of a $25 Billion loan from several multilateral banks, as well as from a slight pickup in risk aversion. The sense of optimism proved to be short-lived, however, as the EU recently rejected a request to provide large scale ($200 Billion+) assistance to the the region. The swift and decisive refusal to intervene injected a fresh wave of uncertainty into a region that is already among the hardest-hit from the credit crisis. The move also carried important political implications, conveying that the EU still sees a clear distinction between eastern and western Europe. Bloomberg News reports:Growth in Poland, the biggest eastern European economy, will slow to 2 percent, the slackest pace since 2002, the European Commission forecasts. Latvia, a former Soviet republic, will contract 6.9 percent.

Forex Achieves New Prominence

The credit crisis has resulted in a collapse in prices for nearly every type of investable asset class (i.e. stocks, bonds, commodities, real estate)- with the notable exception of one: currencies. Of course, this is an inherent quality of forex: a rise in one currency must necessarily be offset by a fall in another currency. While you are probably rolling your eye at the obviousness of this observation, it is still worthwhile to make because it implies that there is always a bull market in forex. Accordingly, capital from both institutions and retail investors continues to pour in, causing daily turnover to surge by 41% (according to one survey), which would imply a total of $4.5 Trillion per day!
Investment banks, especially, are trying to increase their forex business in order to compensate for a decline in other divisions. Said one representative: ”We have probably made more of an aggressive leapfrog in growing our revenue base, which has virtually doubled in 2008 versus 2007. With the situation that has been developing over the past six months, where banks are clearly re-embarking on a new role leading back to basics, foreign exchange has to be one of the products that tops that list.” Based on New York data, which generally reflects global forex activity, transactions between the Dollar, Euro, and Yen (i.e. not including outside currencies) now account for more than half of the total.
Contrary to popular belief, however, most foreign exchange transactions involve derivatives, rather than spot trades. In the case of swaps, it is the nominal value of the swap that is reported, which well exceeds the total amount of currency that is exchanged, and thus results in an inflated estimate of total daily turnover. One would expect that the increase in both liquidity and the role of derivatives in forex markets would result in a corresponding decrease in volatility. Of course, this is quickly belied by the turbulence of the last six months, in which many currency pairs set daily, weekly, and/or monthly records for swings and volatility. I recently read an article about so-called “predictive markets,” which use a grassroots approach to make forecasts by “by giving people virtual trading accounts that allow them to buy and sell “shares” that correspond to a particular outcome. Shares in an outcome that is considered more likely to occur then trade at a higher price than those that represent a less likely outcome.” Given that the “experts” are almost invariably wrong, I think this idea has tremendous potential to make forex markets even more transparent.

Dave Knaack Says

Regarding fractional reserve lending. After spending lots of time reading about how banking systems work (including lots of really dry stuff like international settlement systems) I’ve come to the conclusion that fractional reserve practices fill critically important and likely delicate roles in highly interconnected and critical global systems and that leading the charge to change those rules would be tilting at windmills. This is not the sort of problem where we should write a new system, reinstall and reboot.
We should instead address one of the major flaws of the system, the accumulation of debt in excess of the money supply (think of it as an in-memory patch).
Perhaps this issue could be solved with by tasking the Treasury with issuing into circulation of non-debt dollars in a quantity equal to the interest paid for each reporting period (quarterly I’d suppose).
I’m not convinced that the ‘boom and bust’ cycle is solely the result of Fed control of the monetary system (seems to me that complex social factors probably also play in important role; consider the development of CDOs and MBSs), or that it is /necessarily/ a bad thing. Booms encourage and enable new ideas (lots of money available results in funding of wild and harebrained ideas that just might work but that wouldn’t be able to pay off in an environment of higher interest rates one would expect in a completely stable economy), and busts weed out marginal or weak practices (the harebrained ideas). The cycle (provided it describes mild recessions rather than Great Depressions) may help to prevent stagnation.
What is bad is that in conjunction with the current practice of creating only principle rather than principle+interest the system can be managed to (or perhaps must) cause an accumulation of debt obligation toward the entities permitted to practice fractional reserve lending.
Perhaps we can greatly improve the system simply by causing to exist each quarter all the money required to pay off the interest on loans. This would begin the injection of credit money into the system with minimal impact on business.

Paul Monroe Says

Thanks, BJ. I enjoyed reading through that discussion - I doubt there are many Congressional candidate’s websites were so much interesting commentary can be found.
There certainly is a potential danger in inflating a currency, but I think that banks would realize that if they provide a bank note which has an unstable value or which devalues over time, people would be more reluctant to use it.
I don’t think that the supply of a bank’s notes would fluctuate much in practice, as banks would likely settle on a ratio and would probably not alter it much from there.
Also, doesn’t the discovery of gold confiscate the purchasing power of gold? The same goes with any other commodity. I think the morality argument applies more with the current system since it is a policy decision to debase the value of the currency. Even still, it is certainly debatable that it would also be immoral in a “free banking” system.