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Understanding The Forex Game

A Very Profitable Game

Speculating on the price of one currency in relation to another is like betting on a game; in the Forex market, the game is between the bulls, who want to pull prices up, and the bears, who want to pull prices down.  The most successful trader will not put himself in the middle of that game just as you or I would not go onto the field in the middle of a professional football game (unless, of course, you happen to be a professional football player).

Instead, the successful trader will stand above the game for the best view and the best chance to bet on the team with the winning play.  With over 1.5 TRILLION dollars traded each day in the Forex market, it’s IMPOSSIBLE for us to influence the outcome of the game between the bulls and the bears – so we don’t try; instead, we take our best, informed, educated guess at who will win a given play, and we bet on it – we speculate.

The fact that we are not actually able to influence the outcome of the game, we are simply speculating “betting” on it, is very important to remember, because it means that what matters to us is not so much who has a better quarterback, or whose coach makes better plays.  Instead, what matters is what other people think.  Which team are other traders going to bet on?  The bulls may be superior in a certain play but if everyone bets that the bears will win, then . . . the bears win.

Trading the Forex IS NOT as much about picking the strongest currency, identifying which country’s particular economic, social, and political situations make its currency the best buy that day.

Trading the Forex market IS about foreseeing which currency the crowd will pick, picking it before they do, and being right.  You want to be able to predict where the herd is going, but you don’t want to get trampled by it in the process.

Trusting the Indicators

That’s why judgment-based indicators (charts) and mathematics-based indicators (technical indicators) can work so well in the Forex market if you do it right – because you are not betting on which currency is stronger, but on which currency the crowd will think is stronger and, in turn, bet on themselves.  The Forex indicators we’ll talk about in this book don’t lead to winning trades 100% of the time.

They lead to winning trades more often than not.  That’s because people are predictable.  Based on history, which tends to repeat itself, we can make well-informed, and educated guesses about which team the crowd will pick based the crowd’s past picks in similar situations.  In essence, trading the Forex spot market is much more about speculating on people’s behavior than on the strength of one currency relative to another.

Bulls Vs Bears in the Forex

In the Forex market, a bull refers to increasing prices, where the trading period’s close is higher than its open.  This means that in that trading period the bulls won the tug-of-war: they succeeded in getting the market to close at a higher price than it opened.  A bear is the opposite; it refers to decreasing prices, where the trading period’s close is lower than the open.  In a bearish period, the bears succeeded in getting the market to close at a lower price than the open.

There is not, unfortunately, any way to guarantee that your trades will be profitable 100% of the time.  In fact, they ABSOLUTELY won’t.  Even the most experienced, disciplined traders take losses.  The difference between experienced, disciplined traders and reckless novice traders is that the disciplined, experienced traders trade based on sound equity management principles so that in every trade they are managing their potential loss (the risk).

While no one can show you a way to make profitable trades 100% of the time, you can greatly increase the probability that many of your trades will be profitable.  You increase the probability that you will profit overall by educating yourself.

1. Learn to Read Charts (I’ll be blogging about this a lot)
2. Learn to use chart-based indicators and technical indicators to know when to enter and exit the market

If you educate yourself on the ways to maximize the probability that you will profit, and if you follow the lessons you are now learning on the rapid forex blog, then you should profit on more trades than you lose.

Posted in Forex Basics

Introduction to the Forex Market

What is the Forex?
FOREX, stands for the FOReign Currency EXchange, is a market in which currencies are traded.  Specifically, traders in the Forex market are trading one currency against another.

As in some other markets (commodities, for instance), there are several different types of players in the game.  These players buy and sell currencies, trading one against the other.

The players engaging in this kind of Forex market activity are very large banks and corporations as well as countries (the United States, for example, always holds a certain amount of other countries’ currency in addition to its U.S. dollars).  There are also options traders in the Forex market, just as there are in the commodities market, for example.

Finally, there are speculative traders, the category into which nearly all individual traders fall.  As a speculative trader, you are not actually buying or selling currencies – you do not have to have $100,000 U.S. dollars in your bank account to give in exchange for $130,000 Euro dollars.  Instead, you are speculating on the value of one currency with respect to another.

You are, essentially, betting on which currencies will increase in value and which will decrease in value – you are betting on the actions of those players who are actually exchanging the currencies.  While understanding the fundamental factors that contribute to the value of a country’s currency is important for you, it is not nearly as important as understanding the factors that contribute to the major players’ decisions.

It happens to be that they are actively analyzing a country’s fundamental factors and buying or selling its currency based on that information – but you don’t need to be an economist or a political scientist to be a successful Forex trader – you do need to be able to recognize when the major players are making a move.

The point of this blog is to help you do just that – to help you recognize movements by the major players that will change the value of one currency against another.  If you learn to recognize these movements, you will be able to make sound bets on their effects on the price of a currency.

Posted in Forex Basics