Published On: Mon, Dec 10th, 2012

Good and Bad Forex Trading Methods

Many forex experts emphasize the importance and power of screen time.  In particular, there are two types of screen time. The first one is to study historic charts by walking through them in order to identify trading setups.  The second type of screen time is real-time which involves being physically in front of a computer screen and observing tick by tick how trading situations develop.

Consequently, this second method allows you to witness how a strategy or robot copes with differing market conditions.  For instance, at any point in time a currency pair could be either trending or range trading.  To be successful at Forex trading, you must be able to readily identify and distinguish between these two differing market conditions. Therefore, studying screen time is not only about understanding why a strategy or robot has opened new trading positions but also determining why they did so during the prevalent market conditions. Just as important is that you should gain an understanding why positions were not opened under different market conditions.

One of the best exercises that a trader can undertake in order to analysis strategies in action is to print out lots of trading charts. You can then study the charts and mark them by clearly showing your entry, exit and stop levels for every position that you have opened.  For each one, you should also record the rules that you applied for that trade.  You will find that you will learn extensively if you write your rules directly on the applicable charts.  One of the main attributes of top professional Forex traders is that they never stop learning about their markets, their brokers, their methodologies, other strategies, their charting software, their robots, and most of all about themselves.

You must understand that there exists no magical formula that will ensure you instant success at forex trading. However, you can easily obtain this impression if you were to believe the many advertisements promoting the Forex market. In order to protect yourself from the numerous scams that are prevalent these days, you need to learn to read and understand this literature by applying a professional analysis.

Many marketers boost about how well their forex products trade because their main design concepts are based on a famous theory or formula.  However, before you get taken completely onboard there is something that you must understand about Forex trading which is well-known and appreciated by all expert traders. That is that this type of investment speculating is done in real-time and at high pace. Currency pairs can produce the most complex waveforms during these periods which are difficult to forecast and subsequently hard to trade accurately.

Now unless a design concept from another activity fully matches the above specification, then it will produce only mediocre results at best when it is transferred onto forex trading. Failed examples are the martingale system, which is rooted in gambling, and the bell-shaped curve, which was designed to analyze distributions. Let us now study the former one in order to illustrate why trying to apply such concepts to forex trading is the equivalent of fitting a square peg into a round hole.

The Martingale method advises that after each loss the size of subsequent bets should be doubled and was originally invented in 18th century France on the idea that you cannot lose forever. When initially deployed in casinos, its advocators would constantly double their bets after each loss based on the assumption that a win would eventually occur. In recent times, a number of forex robot designers have incorporated the concepts of the Martingale into their products.

Whenever a loss is encountered, the Martingale strategy requires that the subsequent lot size of the next trade must be doubled on the basis that a win will finally materialize. However, this is really financial suicide when trading Forex because a currency pair can progress for an extended time in the losing direction, without any reversals, until your equity is completely depleted as shown in the following diagram.

The above chart displays a sequence of sample trades taken from a larger batch which were labeled 103, 104, 105, 106, 107, 108 and 109.  They were produced by a forex trading strategy utilizing a seven tier Martingale structure. This meant that every losing trade would be doubled each time until a seventh was encountered. At that point, a loss would be recorded.

As the positive concept of screen time and the negative Martingale demonstrate, you must learn how to differentiate between those ideas that can boost your trading skills and those that will not.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.