Identifying Forex Trading Opportunities

Table of Contents
Chapter 1: Educating Yourself About the Forex Market
Chapter 2: Identifying Good Forex Trading Opportunities
Chapter 3: Developing Your Forex Trading Strategy
Chapter 4: Managing Forex Trading Risk
Chapter 5: Become a Successful Forex Trader

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Chapter 2: Identifying Good Forex Trading Opportunities
There are No Guarantees
Stay Flexible and Adaptable
Choose Your Battles
Objectivity
Distinguish Between Trends and Movements
Identify Opportunities
Keep Sight of Your Reasons for the Trade
Never Try to Outguess the Market
Never Wait for the Best Price
Follow the Trends and Know When to Quit
Retract when Wrong
Use Past Experience to Hone Judgment
Avoid Narrowing Your Perspective

Chapter 2: Sound Judgment

A successful forex trader is one who has great judgment and applies it to every one of his trades. Judgment is more important in forex trading than in any other investment because of the high levels of volatility witnessed in currency prices. Constant fluctuations often mar the judgment of investors and push them into making decisions that are not rational or sound.

Investors looking to enter the forex trading arena should learn to make judgments with the following aspects in mind.

There are No Guarantees

The foreign exchange market is one where prices are constantly changing. The direction and the magnitude of change in prices can vary significantly from one day to another. There is no certainty in this market and this makes it very difficult to stay committed to a trade.

Investors use technical and fundamental analysis to predict price movements in the market. But there is no guarantee that your predictions will come true. When you invest in a currency pair, there is no saying how the equation will change and how soon. Smart investors are always prepared to get into damage control mode quickly and proactively to curb losses. Keep this basic characteristic of the forex market in mind when you make buy and sell decisions.

Stay Flexible and Adaptable

Given this constantly changing nature of the forex market, it is important to keep an open mind when using your judgment. Rigid ideas or attitudes will not work with forex trading. At times, you will need to completely retract on an earlier judgment if the market conditions reverse.

Such situations can discourage you immensely, leading to doubts about your judgment. Remember that your earlier judgment was not really off the mark. The circumstances have changed dramatically to make a new perspective necessary.

Smart investors think on their feet, making quick decisions based on a good judgment of the market conditions. In order to do this, you obviously need a sound knowledge of the markets, the currencies you are dealing with, and fundamental and technical aspects that affect prices. Price changes may occur every few minutes or just once in a few hours depending on how much volume is being traded in that currency, and how popular it is.

Choose Your Battles

Choose your forex battles to identify those that you have a good shot at winning. Do not let huge potential gains cloud your judgment and push you into a trade where the currencies are unfamiliar or you cannot identify which trend is in force. It is not necessary to trade each and every day with forex. It is only when your currency pair begins to move discernibly in either direction that you need to start following the movement and open a position in it.

Objectivity

Objectivity in judgment often spells the difference between a big loss and a big gain. Never allow emotions to cloud your judgment. A poorly performing currency position can put a lot of pressure on you. But don’t forget that sometimes the biggest opportunities lie in a panic situation. When people around you are behaving irrationally, you need to stay focused and objective. The fact that the forex markets are volatile should be factored into your strategy.

Distinguish Between Trends and Movements

Price movements are an inherent part of the forex market and all movements do not herald a trend. A mere fluctuation in price occurs due to the billions of transactions being conducted across the globe at that time whereas a trend is the beginning of a sustained fall or rise in prices. Use your judgment to distinguish between the two so that you can decide when you need to take a position and when you should stay on the sidelines until the market realigns itself.

Identify Opportunities

The greatest advantage of forex trading is that a price decline can be as fruitful as an increase. However, a decline can be very disheartening to a trader who has a stake in that currency; clouding his judgment and forcing him into an ill thought buy or sell decision. For instance, when a currency loses value, the trader may panic and resort to selling to restrict losses without giving it enough time to regain lost ground.

Often, external factors drive prices up or down momentarily, only for the currency to bounce back to original levels within a short period. If the trader has already sold off his currency in a knee jerk reaction he not only loses money but also fails to make good on an opportunity to make gains.

It is very important for a forex trader to remember that both declines and increases in price are opportunities for gains. Careful decision making combined with a sound knowledge of the factors influencing the price make a winning combination even in a falling market.

Keep Sight of Your Reasons for the Trade

When you take a particular position on a currency pair, make sure your judgment is based on some solid reasons. Once you have entered the trade, keep in mind the original considerations that led you to take your current position on the trade. Any time you get the feeling your judgment was flawed because you have not made enough gains, make an objective analysis of whether any of the fundamental factors have changed dramatically enough to validate a reversal of your position.

Never Try to Outguess the Market

The market is your friend. It can lead you to stupendous gains but it can be very volatile at times. Never attempt to outguess the market. The price fluctuations are dependent on a combination of several different factors and many of these may not be apparent to you at all. At times, it is impossible to understand why the price of a particular currency is moving in a specific way.

If there are too many unknowns then resist opening a trade. When the unpredictability in the market is so high that you simply do not understand what is happening in the market, it is best to step aside for a while until a clear pattern or trend emerges. The markets may be reacting to news or phenomenon in other parts of the world. You may not even be aware of these factors and you cannot make proper judgment in such a scenario. Remember that a forex trader does not have to trade 24 hours a day to make profits.

Never Wait for the Best Price

Your buy and sell decisions must be based on your underlying strategy and your investment judgment. Never allow greed or fear to override judgment or caution, making you stay in a trade to get the highest possible price. While it may be possible to predict the overall direction a currency will take, it is impossible to accurately judge maximum or minimum prices.

Follow the Trends and Know When to Quit

In forex it is fashionable to follow the trend. If the market is showing a clear movement pattern, simply invest in it. Your analysis and judgment should be used to choose the entry and exit price.

Whether you are following a trend or backing a promising combination, it is important to know when to quit. Often, a bad trade can be worsened by a trader who refuses to pull out in time. Remember that taking losses is an inevitable part of forex trading and even the best and most successful traders make losses regularly.

Similarly, quitting when you are ahead is important. A great trade can quickly turn sour when rising prices suddenly start falling. There can be significant changes within a very short span of time in forex markets, leaving your position open until the very last minute also leaves you wide open to risk.

Understand how timing can affect your trading outcome. Judging the right entry and exit time does more than curb risk – it increases your profits. A test drive with a demo package will let you understand exactly how timing can impact your trading outcome.

Retract when Wrong

Your strategy and judgment need not always be spot on. There may be some factors you may have missed out or some that you misjudged. If you have given sufficient time for your currency pair to regain lost ground but still fail to make profits, it is time to consider whether you made a flawed judgment call. Do not hesitate to retract and start all over again with a completely opposing view, if you think it is necessary.

Use Past Experience to Hone Judgment

You may have made gains or faced losses in your previous trades. No matter which outcome resulted, use the experience to hone your judgment. The forex market is very unpredictable so never use your past trades as a representative of what will happen to prices, but to gain an understanding of what is possible. This constant learning is what hones the judgment of smart investors.

Avoid Narrowing Your Perspective to Your Investment Time Frame

A look at the long term scenario can often give you a better perspective of what will happen over the shorter time frame. When making your judgment about a particular currency, make sure you take long term considerations into account even though you may be investing for a very short term. This will give you an option to hold on to your trade if the short term scenario goes against what you anticipated.

Next Chapter: Developing Your Forex Trading Strategy