Published On: Sun, Jan 20th, 2013

Solving advanced forex problems using fundamental analysis

Soon after you have commenced your forex career, you will be advised that one of your best routes forward is to develop a trading strategy based on fundamental and technical analysis. After completing this task, you will then have a means by which you can compare all your future modifications in order to optimize your trading performance. However, after a time you will encounter complexities that you will have great difficulty solving using these conventional methods.

One such problem is optimization which will require you to constantly modify and tweak your strategy in order to keep pace with Forex‘s ever-changing behavioral patterns. In addition, you will discover that most Forex product suppliers do not have a clue about how to completely solve such problems.

This is one of the main reasons why so many strategies, tools and robots produce limited periods of profitability before their performances begin to substantially deteriorate. In addition, you may deduce that strategies, such as scalping, just provide partial solutions to optimization because they only function properly under restricted Forex conditions.

As such, you must always be on your guard against the inadequate research behind most Forex products if you want to attain success. In contrast, you must strive to protect your money by seeking validated evidence that the offered devices really do work. For example, if you are interested in a Forex robot, then you should emphatically demand financial reports confirming that profits were really achieved over extensive time periods, e.g. at least 4 to 6 months.

This information must also be provided to you in a format that you can readily test and verify. For instance, you will need to confirm the win-to-loss ratio and expectancy value of all products under review. If such proof is not readily forthcoming, then move on as there are plenty more devices on the market.

To overcome complex problems, you require a new and more flexible concept on which to base the design of a Forex trading strategy. You will then provide better protection for your budget against the adverse trading conditions generated by optimization. You will also be able to operate trades for extensive periods whilst restricting your risk exposure.

Consequently, if you adopt these steps then you will be in a better position to solve complexities caused by optimization. In addition, your possibilities of developing or purchasing Forex products, capable of making consistent profits for lengthy periods, will also definitely increase.

The rate, that currency pairs fluctuate over a given time period, is called volatility. You will find that currency pairs move at a much faster rate over larger distances when volatility is high. Forex generates very high levels of volatility about 30% of the time and can produce very sharp price spikes during these periods.

Price movements can be so rapid and vicious during periods of high volatility that you cannot allow even the slightest emotional whim to interfere with your trading decisions. As a major priority, you need to lower your risk exposure during these times so that you can counter the increased levels of pressure that will be exerted on you. Unless you impose strict self-control and discipline, the sheer speed of price could overwhelm you resulting in serious financial losses.

To counter the effects of volatility, you must focus on the key elements of your trading strategy, such as its money management concepts, risk control and contingency plans, etc. For example, you should consider using tighter stop-losses in order to reduce your risk of financial loss.

For instance, you should aim to risk no more that 1% of your entire budget when Forex is volatile. You can still realize good profits because the size of your wins will be large as a result of the increased movements of price.

Under normal trading conditions, you may consider using a 100 pip stop-loss. When conditions are volatile, you should opt to provide more protection for your account balance by implementing just a 50 pip stop-loss.

You should research and perfect this concept by bench-testing different stop-loss values during periods of high volatility. For each value chosen, you will need to calculate the win-to-loss ratio and expectancy values of your strategy each time in order to compare results. You will eventually hone into the best stop-loss value by utilizing such an approach.

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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.