The three guidelines are simple to understand, and once fully understood, can be easily implemented into your forex trading strategies. We are confident that trading accuracy and confidence will increase dramatically in a matter of just a few trades with the information in this article.
Forex Trading Guidelines Number 1:
All traders must learn to understand currency transactions. A cash transaction versus an online transaction will tell you that they are exactly the same, except for the leverage with an online trade.
Currency Transaction Basics
First let’s compare online forex trading with physical currency exchange so we know exactly what happens in a typical currency transaction.
One way to have a currency transaction is by physical currency exchange. These are unleveraged cash transactions. If a USA citizen travels to New Zealand for six months they can exchange currencies before leaving on the trip. They can exchange US dollars for New Zealand Dollars. If a USA citizen exchanges $10,000 US Dollars for New Zealand dollars in an unleveraged transaction, this transaction is comparable to buying one mini lot of the NZD/USD online from a brokerage platform. Except that with online transactions you would only put up $200 margin on a 50:1 leveraged transaction, this is $10,000 US Dollars exchanged for New Zealand Dollars. This online transaction is essentially the same as the cash transaction except for the leverage.
If you buy $10,000 US Dollars worth of the New Zealand Dollar there is only one way you will profit from the transaction, this is if the NZD strengthens, or the USD weakens or both, after you make the exchange. There is absolutely, positively nothing else that will influence whether or not you make a profit on the trade because you sold the USD and bought the NZD. This is true for either type of transaction, direct cash for cash exchange or the online trade because these transactions are exactly the same. The logic is exactly the same for any other pair or any other online transaction. You are buying one currency and selling another currency to pay for it.
After the currency is exchanged or after the order is placed on your brokerage platform, absolutely nothing else will influence the outcome except for the individual currency strength or weakness. Yet, surprisingly, 99% of traders do not know this or don’t take this into consideration when they place a currency trade. It is actually quite astounding.
When the USA citizen returns from the trip they can exchange any remaining New Zealand Dollars back into US Dollars. If the US Dollar was weak or the NZD was strong during their trip, they can make a profit from this transaction. Individual currency strength or weakness is the only influencing factor, nothing else. This is very important.
Forex Trading Guidelines Number 2:
Currency pairs only move because one currency is strong and the other is weak or both and that is the only reason. Technical indicators are attached to pairs, not individual currencies, which is a terrible flaw. You are trading currencies, not indicators.
How Currency Pairs Are Constructed
Most forex traders don’t know what cause pairs to move. If you buy the EUR/USD or NZD/USD or any other pair in an online trading account, all you have available to guide your trade is the useless forex trading technical indicators that come with your brokerage platform. Technical indicators may be okay for scalping a few pips but you will lose as often as you make pips, and even the traders that use these faulty indicators are never really sure. All of the other forex traders who use the same indicators use them differently. You can also lose a lot of money this way and almost all traders eventually do, or churn your account for a long period of time. Any list of good quality forex trading guidelines would exclude technical indicators.
Technical indicators do not tell you this and so traders fail continuously with no end in sight. Forex traders use the indicators that came with their brokerage platform so they presume that they work without questioning them. It’s time to question all standard technical indicators for forex trading. There are about 150 standard technical indicators and about 100 candlestick chart formations, and none of them work at all, because they are attached to pairs, not individual currencies. After you exchange currency in a cash transaction before leaving on a long trip overseas you don’t start looking at technical indicators, you look at the exchange rate between the two currencies you traded, that’s it. Any good list of forex trading guidelines would exclude technical indicators.
Currency traders fail because they do not understand the basic construction of a currency pair either. When a new currency trader looks at the EUR/USD for the first time they view it as a single unit and immediately start to install technical indicators on the pair. They do this because the indicators are on their brokerage platform and easy to access. This is absolutely, completely dead wrong and will kill your trading on day one.
The first thing any forex trader must realize is that the EUR/USD is not one single instrument but it is actually two separate individual currencies. The Euro and the US Dollar are two separate and distinct individual currencies each with its own fundamentals, characteristics, and sentiment or direction, and they act independently of each other. These two independent currencies form the pair that is the EUR/USD. It’s like one plus one equals two, you must know what is going on with the Euro all by itself and the USD all by itself to know how to properly assess the EUR/USD. Technical analysis indicators will never tell you this and they are worthless.
As simple as it seems forex traders have always looked at a currency pair as one single unit rather than two separate currencies. They know in the back of their minds that it is always about the strongest versus weakest but they then summarily ignore this fact. Everything about their trading begins to unravel and they can’t even demo trade anymore because the technical indicators like Fibonacci, RSI, envelopes, etc. take over.
Forex Trading Guidelines Number 3:
Not recognizing that there are two individual currencies in each pair, and the need to analyze each currency separately will automatically kill off almost every forex trader before they ever place their first demo trade.
urrency pairs are constructed with the base currency on the left and the cross or counter currency on the right. On the EUR/USD the EUR is the base currency and the USD is the cross currency. They are two separate things. It is so simple and obvious that traders must analyze both currencies separately and individually, but new traders never consider it, however this can be immediately fixed. A good analysis of the EUR/USD would be to analyze the EUR and USD separately, then combine each individual currency analysis into a singular analysis of the EUR/USD. This works for the EUR/USD or any other pair.
Example: To analyze the EUR (Euro) currency separately you would analyze the EUR/USD, EUR/JPY, EUR/CHF, EUR/GBP, EUR/CAD, EUR/NZD, EUR/AUD. If they are all going up or trending higher, you know the EUR is strong and that is the direction you want to trade. The EUR will go up faster against the weakest cross currency.
Each currency pair has two separate currencies that must be analyzed separately. You are buying one currency and selling the other when you make an online forex trade, just like a cash transaction. There is only one way to make a profitable trade. When you make a buy entry the base currency must rise or the cross currency must drop or both and you can make a profit, literally, on every trade. Doing so consistently starting in the first week you begin trading will put you on the right path. A great list of forex trading guidelines would include individual currency analysis concepts.