Success in trading – whether it is in the forex market or the stock market – really hinges on timing. Take for example October 19, 1987, a day that will remain in infamy as the day when the stock markets all over the world crashed. That day is now known as Black Monday. But do you know that even when the market crashed it was also a day that saw one of its biggest historical gains. On that day stock values declined by 23 percent by the end of trading day, but around 1:30 pm, the market saw a huge rally with the Dow Jones and the S&P indexes rise by more than 10 percent before it eventually sputtered.
While a majority of traders lost massive amounts of money that day, those who were able to buy stocks at the 1:30 pm bottom and sold after an hour came out of it with tremendous profits in what is also the best shot-term gains experienced in the history of stock trading.
While timing is really important in your success as a forex trader, it is a skill that is hard to master and involves so many factors that will be a challenge to keep up with. But even if you don’t master the art of timing, you can still earn gains on various trade scenarios, including those in ill-timed trades if you learn and follow these simple tips:
Avoid Margins
There is a misconception that traders who have poor timing will never succeed, especially in the forex market that is known for very high leverage and has stop driven price actions that would often force a margin call. The reality is, yes, you can still succeed even with poor timing.
One of the best anecdotes that illustrate this tip is the story of Jim Rogers and his now famous gold trade in 1980. In that year, gold prices were reaching record highs but Rogers thought that the gold market is overextending and that prices could not be sustained at the levels at which gold was pegged at that time. Because of his belief he decided to short gold at the $675 per ounce price. But it was poor timing, prices continued to skyrocket and before he know it was already at $800 an ounce. Any other trader would not have been able to sustain that position given the discrepancy in the prices. But Rogers knew that things will eventually go his way at some point, and he was right. He held on and by the time gold prices went down to $400 per ounce he has already covered his short.
What made Rogers’ ill-timed trade a success? His great analysis skills, nerves of steel, and the fact that he didn’t use leverage. By refusing to use margins, he was never at a position where the market was going to “do” things for him – he could liquidate his position at any point he chose and not be at the mercy of a margin call that would force him out of his trade. Rogers stayed in the trade and was also able to add to his position when levels got even higher, which gave him better blended prices in the end.
Go slow
The Rogers story showed how not using leverage can actually be a good thing because it increases your margin of error, allowing for greater gains without having to be extremely accurate. It also prevents you from getting margin called even from a position that will turn out to be in your favor. An important lesson or tip based on Rogers’ experience is that you should enter your position cautiously and slowly. Use small capital at first and only use the smallest of leverages, if at all, to start your trade.
Slow and Low is the Way to Go
For currency traders, the Rogers trade in gold holds many lessons. Experienced traders are familiar with being stopped out or margin called from a position that was going their way. What makes trading such a difficult vocation is that timing is very hard to master. By using little or no leverage, Rogers provided himself with a much larger margin for error and, therefore, did not need to be correct to the penny in order to capture massive gains. Currency traders who are unable to accurately time the market would be well advised to follow his strategy and deleverage themselves. Just like the common cooking saying, success in FX trading is based on the idea that ‘slow and low is the way to go’. Namely, traders should enter into their positions slowly, with very small chunks of capital and use only the smallest leverage to initiate a trade.
Here’s a sample strategy that illustrates this tip well. You want to trade in USD/JPY and based on your analysis the value is going to go down. You short at 95 but only use a very minimal leverage of 5:1 on your capital of $10,000, translating to a sell of $50,000 at the 95 level. When the pair rises to 98, your trade is still safe and you only have a minor floating loss. Now since you’re conservative and entering the trade slowly, you now post another sell order at the 98 level, you now have a better blended price. If the currency pair goes down in value, even if it simply trades back to the original price you entered, you are already profitable from your conservative trade.
Use Stops
If there is one flaw to Rogers’ gold trading story, it’s the fact that he did not use stops. Even the most conservative trading strategy can benefit from using stops. Without it your position is very vulnerable. If some sudden economic event occurs that will push currency values to shoot to extremes that are counter to your position you are going to be wiped out.
Include frequent stops in your trading strategy, so you avoid any runaway losses. These calculated losses can be absorbed at some point especially if you think your analysis is spot-on and you’re just not timing your trades correctly.
Go look at the technicals
Most traders are content using fundamental analysis as the foundation of their trading strategies but technical indicators can complement the fundamentals. One of the most effective technical indicators is the relative strength index (RSI). This index compares the strength of the currency pair’s current gains to the strength of its recent losses. This is turned into a number ranging from 0 to 100. A value over 70 is seen as being overbought, while a value of 30 or less is seen as oversold. Traders should look at the RSI to help confirm if the sentiment he is expecting is supported by the index.
About The Author
Mario Singh is a renowned forex expert who talks about forex trading strategy in his website Askmariosingh.com.
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