subject: Forex Trading - Are You Leaving Money On The Table [print this page] No one likes to leave money on the table whether they are buying a car, selling a house or trading in the largest financial trading market in the world; the Forex market.
One of the mistakes many traders make in learning to trade Forex is entering a trade at the wrong time. This happens for a variety of reasons most commonly because new traders become gun-shy as a result of previous trades. When a trader becomes gun-shy it means they have been burned by entering trades that turn out to have bad results.
For example, many new traders are drawn to trading around the time economic news is released to the market. For the U.S. Dollar this occurs typically at 8:30am and 10:00am EST (Eastern Standard Time). When this news comes out, the market reacts with volatility. Many amateur traders like to decide ahead of time which direction they think the market will go and then place their entry right beforehand with a stop loss close by just in case they turn out to be wrong.
We won't get into the sanity of this type of trading methodology but suffice to say that it certainly can be exciting and for the most part, a money loser. But it is like the high one gets at the tables in Las Vegas; sometime you strike it rich and sometimes you don't.
What might this trade look like? The economic news hits the Internet and before the result can even be viewed prices start moving, sometimes with rocket speed. New traders typically are glued to their monitors. This is what they have been hearing about; the excitement of Forex! With their eyeballs popping out and perspiration starting to show on their forehead they press the "Buy" button on the trading screen. They can feel their heart pounding as price starts up in the direction they anticipated. They watch as profit races from the spread, to $60.00, then $120.00 then $180.00 where it slows down.
Now their mind starts to think. Before they were gambling, now they are thinking, do I stay in or do I take my profit? They decide to move their stop to break-even, but before they get it entered price dramatically drops 10 pips and they are up only $60.00. They decide to hold off to "give the trade room to breathe." It starts up a few pips, the trader relaxes, only to watch as it suddenly drops 20 pips; they are stopped out.
Now the brain gets into overdrive. All kinds of weird thoughts may start to enter and the reactions can go from depression to firing objects at the wall. The bottom-line is, once this happens, the trader takes his or her first steps to becoming gun-shy and looks for a safer more reliable trading method.
One of the most popular methods is to employ an indicator. Indicators fall into two categories; those that lag and those that lead. In short, a lagging indicator trails price and is used to confirm a signal after-the-fact. Moving averages for example are indicators that come late to the party and tell a trader a trend is in place, at least for the moment. I liken this to driving down a curving road until you hit a straight spot where you think you can gun it and suddenly there is another curve in the road.
Leading indicators do exactly the opposite, they indicate that circumstances are right for something to happen. A leading Indicator gets a trader into and out of a price swing earlier, and at a better price level therefore leaving less money on the table; better entry, better exit. An example is the RSI, the Relative Strength Index which compares the average price of the advancing periods with the average price change of the declining periods.
When the RSI signal is created by a divergence or better, a reversal, the entry can be taken at the time of the signal rather than waiting for a lagging indicator to confirm what was already known, leaving many pips on the table. When you begin to build your trading system you might want to skip gambling and consider the type of indicator that you will want to trade with, will it be a leading indicator or will it be lagging?
