Why You Should Trade the Crosses?
Finding the right currency pair to trade should be of utmost importance to you as an individual trader. As an individual trader you will only have $1000 to $10,000 at the most as equity in your trading account. Opportunity cost is a real cost for most individual traders. Funds committed to anyone position are funds that cannot be used for in other possibly more profitable trades.
In forex trading, almost all the currency pairs are linked to one another, one way or the other. As an individual trader, if you only trade US dollar, you risk missing promising trades and opportunities offered by other currency pairs.
Most of the trading in the currency markets is done through the direct buying/selling of USD. You should always keep an eye on the crosses while deciding about a trade in order to gauge the strength/weaknesses of a currency. This way you know which currency pair is the best to trade.
What are the crosses, you may ask? Currency pairs that do not involve the dollar are known as Crosses such as EUR/AUD, CHF/GBP, EUR/JPY, EUR/GBP etc. Almost 90% of the currency pairs that are actively traded in the forex markets involve the US dollar. In simple terms, over 90% of the all the currency trades have US Dollar on one side of the trade. So what is so special about a cross?
Lets make it clear. A reasonable way to trade equities is to trade from big to small. Suppose, you determine that the stock market is expected to rise. But since you have limited funds as individual investors, you need to choose your stocks carefully.
It would be good to look at the sector specific indices. Find the most promising sector. From there, you should look within that index. Find the most promising companies that are expected to perform well over the coming months. This big to small thinking is very solid. You need to think in the same manner while trading forex.
Movements in crosses should never be overlooked as they can often hide the footsteps of large players. For example, a major investor like Warren Buffet may be bullish on Euro due to some fundamental reasons. He may try to fly under the radar and buy Euros against Pound Sterling, Swiss Francs, and Yen etc. Warren Buffet is sometimes heavily involved in currency trading when he senses an opportunity. He has sometimes been successful and sometimes unsuccessful.
Crosses are extremely important to swing or momentum traders, they are used as forecasting tools to predict which currencies are leading the pack. Ignore the crosses and you will be stuck often with currency pairs that do not move at all.
Limited funds in your account means you should always try to choose the currency pair that is expected to move the most. But, how exactly can you come to a reasonable conclusion? By taking a look at the crosses!
Cross movements sometimes work to amplify the move of a major currency pair or sometimes these movements minimize the effects. For example, in EUR/USD currency pair, if Euro is dropping against USD but rising against the GBP also called Cable, the net effect would be to limit the size of the EUR/USD fall. If ERU/GBP is rising, it is an indication that the Euro is outperforming the British Pound.
Since you have limited funds, which currency pair is the best to chose? Any EUR/USD selling pressure is likely to be offset by the buying pressure of EUR/GBP. GBP/USD sales will likely to be amplified by the cross sales EUR/GBP.
Since, EUR/GBP is rising; it would be better to short GBP also called the Cable instead of Euro. In simple words, you should short the pair GBP/USD; the chances are you will make many pips as compared to shorting EUR/USD. If we had not done our homework and randomly picked one of the two currency pairs for shorting, we may have missed a good opportunity.
Forex Trading – Is this an Opportunity for you
Currency traders earn money by buying and selling currencies of different countries. If they expect the currency of one country to rise against another countries thy will buy it and vice versa.
Is this an opportunity for you?
Forex trading really looks like a game for newcomers. When we first see how can money be made we think that there is no education and preparation is needed to make large amount of money. Nothing can be farther form the truth.
If you look at the past of currency exchange you will see that indeed people needed to have an education to trade currency at big financial institutions or have large investing funds for themselves. But that’s not the case anymore. Today anyone can invest a few hundred dollars to fund his trading account and start trading Forex. However this fact does not make it easy to make money trading currencies.
Automated trading robots or Expert Advisers are becoming more and more popular. Many new traders are looking for the “Holy Grail”. They hope that having very little skills in manual trading and no understanding of the price dynamics they could become profitable traders using the automated trading software.
Why People Get Involved in Currency Trading
The pros and cons of becoming a currency trader.
People join Forex for obvious reason of making money. There are however number of other reasons. Here is the pros of trading in Forex:
1. You can open trading account with smaller amount of money compare to other markets.
2. You will have a high leverage that can help you to make high returns on your investment.
3. Orders are filled quickly because of high liquidity of Forex market.
Having said that it is also necessary to mention the cons of trading Forex.
1. First of all the leverage can work against you as well making this business very risky. The higher leverage you use the higher risk of losing money you have.
2. A trader needs to acquire right skills and knowledge to trade profitability. That leads to additional spending money, time and effort.
3. Discipline and emotional control is absolutely necessary for a trader to make profit consistently. Sometimes developing a discipline is an obstacle much harder to overcome than anything else in trading.
At the end it comes to the point when you see that successful Forex traders are regular people. They just devoted their time to develop certain traits. Anyone who is committed to become successful in currency trading can do this.
Can You Learn To Trade Like a Hedge Fund Manager? (Part II)
You must have read Part I of how hedge fund managers trade forex. You need to understand that hedge fund managers are always on their nerves edge. They constantly look for strategies that work.
Hedge fund managers aim is to make good money consistently while always on their guard because a trade can go bad any time. If a trade goes bad, they know beforehand how to get out of a bad position before it results in a huge loss. You as individual investors also would put your own money at stake in the hope of making good money.
You should decide whether you want to range trade or trend trade? Many hedge fund managers are trend following traders. If you want to become a trend trader than you need to become a master of predicting and anticipating trends in your favorite currency pairs. If you want to be a contrarian trader and range trade, than you should understand how to scalp.
You also need to decide the time frame that you will trade most. You should decide whether you will use the 5 min charts, 30 min charts, 4 hour charts , daily charts etc and why.
Do you want to hold your position overnight or you are happy as a day trader? If you are in a job, do you have time to trade in the evening or the night and how much time you can spare? What time is best for you?
Learn the art of entry and exit. You will need to learn technical analysis for this. Technical analysis is essential for your success. Should it be multiple entry, multiple exits? Should it be single entry, single exit? Should it be multiple entries, single exit? Should it be single entry, multiple exits?
You should understand the money management rules. Never ever put more than 1% of your equity at stake in a single trade. Learn to calculate the risk/reward ratio.
Now, test drive the forex system by back testing and forward testing. Back testing can be done on Metatrader and other platforms. Forward test your strategies on a demo account.
Open a mini account and try to test it live with a small amount of money. This way you will not lose much money but will be playing against your emotions.
Ultimately trading is all about developing discipline and controlling emotions. You dont get this feel in demo trading when you know nothing is at stake.
Get intimate with your strategies. There are two primary types of trading strategies”one that has a high percentage of profitable trades and one that has a high profit factor.
The key factor here is to know and find out what type of market environment your trading strategy performs well in and what type of market environment your trading strategy fails in. Because only then will you know what works under what conditions and what does not work.
Understand how much drawdown you can afford on your trading account with this trading strategy. You can establish a bench mark figure using a back test. Decide before hand how much drawdown is acceptable before you pull the plug out of the trade.
The last step of thinking or trading like a hedge fund manager is self reflection on your past trading performance. Self reflection is very important. Most of the time we become so absorbed with trading that we do not notice the obvious and keep on repeating it again and again.
This is why it is good to spend some time on a weekly or monthly basis to self reflect on your past trading performance. You need to fix a certain level of pips per day for yourself and keep on tweaking your trading strategies until you reach that figure.