FOREX LESSONS FROM SHANGHAI BC
(Selected Shanghai BC* Posts from the Archives
of the Global-View.com Forex Forum)
(*Shanghai BC is a highly respected member of the Global-View.com
TRADING: A MIND GAME
You must change your mental attitude first from a normal person to that
of a speculator. Almost all traders I have met, except a few successful ones
who really made millions and billions trading in the market, simply waste
all their time trying to learn the easiest part in perfection, like about
how to read data and charts, and trying to perfect entry and exit skills,
etc. Trading is a mind game and without having a right frame of mind, it is
a losing game even before it starts. Training a trader’s mind is the first
step for any successful trader but almost all new traders neglect that part
and that explains why more than 95% of traders are a failure in the long run.
Acquiring the knowledge of the market is not difficult for anyone with
average intelligence after a few years of hard study in the market. But it
is neither the level of intelligence nor the knowledge that decides the outcome
of the market operations of a trader. It is the decision making process that
is so hard for most traders to overcome and that is the main reason for a
success or a failure for all the traders. Some find it easy to make decisions
and stick to it and most find it so hard to make decisions and stick to it.
Unfortunately, any decision making process in trading is a pain-taking process
and humans tend to avoid pains and go for pleasures even if for temporary
ones. Assuming one has acquired enough market knowledge and acquired one’s
proven trading system (this is the second most important element of success
in trading, in fact. An edge in any system is based on the quality of info
one has, charts being only an info of secondary quality not the best one)
Through studies and research, a trader faces the task of making decisions
to put this knowledge and system into practice. Then, how many traders can
honestly say they can commit their ranch when the trade is suggested by their
own system (given that trading is just a chance game) and let the profit run
for weeks and months when their system tells them, and how many can manage
to cut the loss as a routine process when the situation arise. It all sounds
so easy when saying it but so difficult when doing it affecting real money
in the market. I still do not sleep well when I am running position because
even if the profits are running into a few hundred dollars and the system
is telling you to carry on, there is no guarantee that the profit will turn
into a yard or two in a month time, and it may even turn into a loss in a
day or two when something unexpected happens. A painstaking process in real
sense. The pain is not knowing what will happen in the future and in fear
of losing. So at the end of the day, assuming one has decent trading system
and market knowledge and decent info, it is ultimately how disciplined and
how well that trader can take the pain of making right decisions at the right
time that decides the outcome of the trades. Hence I call trading a mind game.
When I interview prospective young traders, I always look for disciplined
and strong-willed person as my first priority as long as one has decent education,
but strangely in many cases, it is some kind of genius or half-genius with
lots of brains with no disciplines who turn up for an interview thinking only
bright people can make good traders.
In fact, I always try to pyramid while position trading medium-term once
I am convinced of a new medium-term trend emerging. Like in USD/JPY position
trading 135-132 as an initial position, adding in 132 and 129 areas. Same
for AUD/USD and EUR/USD with similar strategies. But sitting on positions
and watching the counter-rallies costing truck load of money is not easy job
to do and causes lots of pain all the time. Most traders even among experienced
ones cannot bear that pain and give up too early. But there is no other
way to make a big money and we have to bite the bullet and "sit and accumulate"
as long as the medium-term trend is intact. That is why I always believe
psychological aspects of trading is far more important than anything else
in successful trading. A mind game like those bluffing game of poker.
Entries and exits can never be "irrelevant" for any trader for any purpose.
It is just that psychological aspects of trading are much more important than
entries and exits, and decisive for the success or failure of a trader in
the long run. Perhaps exits are more important than entries because any perfect
or near-perfect entries are possible only in hindsight.
BC’s WORDS OF WISDOM
Any market, be it real estate market or forex market, is all about
transferring money from the masses to a few lucky ones in the long run. In
most real property speculation cases, the masses make money ,a lot of money,
but the money stays as paper profit and evaporate before they realize their
paper profit into real hard cash. In most forex speculation cases, the masses
barely survive a few years thanks to lack of knowledge of the market and the
deadly leverage. But both types of speculators all serve their useful purposes
in investment food chain contributing their hard earned money to the market
in exchange for a dream.
For any prospective traders, hope this is not in anyway a discouragement.
Trading is a hard mind game and not everyone is suitable to be engaged in
such a hard game. Most have neither frame of mind nor mental fortitude to
survive in this hard game. Mastering TAs or numbers or options business are
at best a first tentative step into the right direction with no guarantee
to any success. Training a right frame of mind is the most difficult but absolutely
necessary part for success and most are simply not ready to go through that
hard stage of the learning process because it is a very painful process. Trading
is essentially about pain-taking-process in the end although most do not realize
it. The process of overcoming fear, greed and mastering tranquility of mind
in this hard school of speculation. Fwiw.
Every trader should find his/her method/system which suits his/her own
situation and personality. And that system/method must be the one that has
proven to be able to make some money through trials. So, if Tom, the medium-term
trader, revealed his money making method of last three decades, it may not
have the same effect for Dick and Harry, the day traders, and vice versa.
Agree that most fail for lack of system/method and/or lack of discipline to
Trading success is all about making as much as one can when one is right
and losing as little as possible when one is wrong. That is the essence of
this business. So, any theory or system which looks after the above is a good
System is a weapon of a soldier in this market. You must have one as soon
as possible. Otherwise, it will be like fighting well-armed Forex robbers
with a handbag. Best one is a self-made one because you can never feel comfy
in borrowed shoes although borrowing good ideas from others is a good idea.
One cannot make a dime unless follow the herd or trend most of the time.
It is just that one has to be cautious when overbought/oversold region is
approaching and know how to turn at inflection point for the opposite trend.
Following herd needs average intelligence and courage but identifying inflection
points and taking a necessary action needs not only intelligence but also
a lot of courage. Again, fortune favors the brave.
Money management is where most traders go wrong in almost all cases leaving
only a few as the winner at the end of the day. Money management and discipline
of mind is what makes or brakes a trader at the end of the day, not the elementary
entry and exit method.
Forex/Currency Trading: It is a sentiment game w/ a crowd mentality where
even the best players w/ the best forecasts are tricked out of good positions
by the magic of price action.
TREND TRADING: Accumulation
Forex market like any other market works in a very simple way. It accumulates
in a certain area for awhile, and once the accumulation is over, it advances
to a certain distance until distribution starts, and accumulation happens
again and advances to a certain distance again, and repeat and repeat. Day
trading may not yield the best results while the accumulation and distribution
work out itself, being double-murdered by zig-zag moves, while the market
starts advancing out of accumulation area, day trading is a sure way of cutting
profit short. In general, day trading is not the best form of yielding the
most profits in my experience contrary to what some writers who never made
real money in this game try to say.
The safe and better way in making some money must be wait for "accumulation"
to be over and ride the whole length of advance until "distribution" starts
and reverse as the market dictates as a short-term trade for 2-10 days, as
the case may be.
Please study 8 hour or 4 hour line charts or candle charts, especially
the patterns and 20 MA inside the charts for a few months everyday, and you
will discover what I mean by accumulation and distribution for short-term
trades in Forex market. Forex market always needs this process, so you can
decide what tactics you will use at a given stage. Imho. Good luck.
TECHNICALS and CHARTING
Why day trade once you get a good seat and the market is going your
way. It is always more profitable to ride even the short wave for 2-10 days
by adding up. In general, you must day trade only when you are losing. To
find a buy entry seat for short-term trades, you can study the "accumulation
and distribution patterns and 20 MA" in 8, 4 hourlies or 30 min "Line Charts"
(or Candle Charts), together with MACD "overbought and oversold indicators"
with its Patterns. If you study them for awhile you will understand when it
the best entry point. The remainder is for money management and discipline
and of course, experience. Good trades…
On technical side of the trading, the first thing to do is to find out
the trend in one’s trading time frame and the proper trading strategy for
that trend. Some ride positions for months, while some ride positions for
less than an hour or a day and their views of the trend obviously differ.
For a trader who is running a position for months, a daily fluctuation may
be just a meaningless noise while for a daytrader or an hour trader, a daily
fluctuation could be a monstrous tsunami. Having a precise definition and
a technique of identifying a trend and the turn of a trend in a trader’s time
frame, and adopting the right strategies for that trend is the first elementary
step in a hard school of trading. Imho.
I keep my technical side on any pair as simple as possible largely relying
on other’s moves to see how I can take advantage of the situation. So for
me the strategy is to "range trade". Please always give stop order per your
risk profile when you open any new position. Medium-term reversals can be
confirmed only in monthly, weekly and daily charts. Chart reading is not
to predict the tops or bottoms of any move, but to confirm the change of trend
as soon as they are made and adopt right strategies in that new trend.
Each cycle is different from the last one and that is the beauty of the
market. It is extremely important to look at the big picture from the distance
rather than studying the minute and hourly charts with a microscope. And repeat
the whole show again and again ‘til it shows the sign of turning in daily
or weekly chart. And flip. Good trades to you.
I use very primitive charting methods. Please read 8 hour charts of EUR/GBP
with 20 and 40 MA, and read round figures and breakout (from consolidations,
then you will realize the method cannot be more primitive than that, but still
deadly effective). Buy on dips towards the support and add up on breakout
of that consolidation treating the two as one trade with same stop loss and
"keep them" as long as the market moves in your way. Good trades.
As a rule of thumb, 20 MAs in 8 hour, day, week and month are useful for
its directional tendency and as a resistance and support point. Not sure how
much it is useful in daytrading though.
Please have a look at Eur/Usd and Usd/Jpy weekly 10 RSI and Aud/Usd monthly
10 RSI "patterns", not levels. Then you will find out primitive things work
better when coupled with even simpler MAs. And RSI is useful "only in these
weekly and monthly time scale" as far as I can see. You can ignore RSI in
short-term scales as the inventor of RSI, Wilder, told us long ago.
Good afternoon. Agree with your observation. Once Soros of Quantum Fund
hit the nail on the head with his theory of reflexivity in the market and
that is exactly how these players work in the market. That rather romantic
tool of daily candlestick chart is useful because whenever some players
start positioning to start or stop short-term moves in Yen market, say several
hundred pips, for whatever reasons, it reveals their intention to the market,
more often than not. It sounds so weird to say tens of yards are spent relying
on indicators so primitive like hand-drawn candlestick charts, but that is
the truth in Yen market. Same as millions of soldiers risking their lives
depending on how their generals draw up the battle plan with their cheap red
and blue pencils in their operation room desk. Crazy world, I would say, but
that is the fact. And as you say, battle is a battle and those ones who make
their first move with their candlestick may not always win either. I happen
to believe if a child can learn to trade with some simple signals he will
do better than most traders, most of the time, making a good living. But then
again, movin market is more than just following the signals. Good trades to
I guess if you are a daytrader, 30 minute and 15 minute candle charts
and line charts in combination with MACD and MA could be more useful than
hourly charts or even daily charts. Especially watch out for the down-sign
and up-sign with long tails in candle charts and confirmation of the change
of short-term trend in line charts breaking accumulation area in these charts.
If you are a nimble trader, even a candle-sign is enough to start moving in
with stops above or below the long tail end. For dollar/yen trade, read swiss/yen,
pound/yen and euro/yen together to confirm the top or bottom. For Eurodollar
or dollar/swiss trade, read pound/swiss and euro/pound together to confirm
the same. If you are a daytrader, what matters is the flow of that particular
day, not the bull or bear bias, so, 30 Min and 15 Min Candle Charts and Line
charts are not bad tools to follow these flows. Good trades.
USING CROSSES AND GOLD
EUR/GBP and GBP/JPY have a value as the leading indicators of EUR/USD
and USD/JPY moves. EUR/CHF is similar to EUR/GBP in forecasting value but
stopped trading and looking at it a long ago after experiencing difficulties
in running good sized positions there.
In short, EUR/GBP and GBP/CHF are leading indicators for EUR/USD and USD/CHF,
and GBP/JPY, EUR/JPY and CHF/JPY are leading indicators for USD/JPY. EUR/JPY
plays a very important role in EUR/JPY direction too, while GBP/JPY plays
the same role for GBP/USD. For example, yesterday’s EUR/USD weakness largely
started from EUR/JPY sales keeping EUR/USD and USD/JPY downwards. As a rule
of thumb, if EUR/USD does not move but EUR/GBP moves first, it is a good indicator
that someone is maneuvering in EUR/USD front in the same direction later,
and when EUR/USD moves but EUR/GBP does not move first or in tandem, then
it is highly likely EUR/USD move is countered by its opponent and the opposite
move is highly likely soon. Same applies in USD/JPY and EUR/JPY, GBP/JPY front
in the same fashion. Imho. Good trades.
Good morning. EUR/USD, EUR/GBP, EUR/JPY and GBP/CHF all have correlation
to a certain degree affecting each other. It simply shows how the money moves
around in these pairs. For daily candle studies, it is more accurate to read
them all to see where the flow is going, and same for 4 hourly or hourly or
even 10 minute charts. In fact, GBP/CHF and EUR/GBP in many cases move a day
or two before EUR/USD. Even by watching GBP/CHF and EUR/GBP charts, short
term or long-term as above, you can manage to move in front of EUR/USD moves
in many cases. Same goes for GBP/JPY and EUR/JPY charts for USD/JPY moves.
More study on these pairs moves will reveal some more interesting things too.
I have been using USD index and Eur/Gbp (or Gbp/Chf) as my guide dogs since
late 70’s with reasonable accuracy for medium-term trend. Never lost money
on medium-term bet relying on those guide dogs in fact. But that cross does
not work when Pound is deliberately devalued.
AUD/JPY is one of the important pairs influencing AUD after Dollar, Euro
and Pound. Usually falling AUD/JPY is good for Yen Bulls as well.
Good evening. Gold is the mirror of Dollar for hedging purposes and the
co-relation is excellent. Sometimes, when I am tired of double checking too
many "inside infos" rushing in every hour, I just watch Gold to confirm and
go ahead with the moves. Gold chart is one of the top charts you must always
watch in forex trading. Eur/Gbp chart, along with the Eur/Jpy chart, is an
excellent mirror for Eur/Usd directions most of the time too. Gold, Eur/Gbp
and Eur/Jpy charts will tell most of the market story most of the time with
Gold and Eur/Gbp leading Forex world most of the time. Good luck.
Please always give stop order per your risk profile when you open
any new position. Medium-term reversals can be confirmed only in monthly,
weekly and daily charts. Chart reading is not to predict the tops or bottoms
of any move, but to confirm the change of trend as soon as they are made and
adopt right strategies in that new trend. Good trades.
For position traders, the basic bias of the market in his trading time
frame, the liquidity situation of the market in that time frame, and the size
of trading positions must be all taken into account when exercising stops,
be it based on tech levels or a certain sum of money or a percentage of a
total equity. It is a must but also it is form of art like trading itself.
And every trader must develop his own unique style of using stops. But unfortunately,
all this can be learned only by paying a certain amount of tuition fee to
Yes, but as a position trader I never use tight stops. Same goes for trailing
stops. All very far away from the market not to be taken out by meaningless
market noises. Initial stop is always 1% of my total equity, and never commit
the whole position at a go but always scale in and scale out.
Good morning. You can avoid your problem in most cases by leaving the market
always by trailing stops, i.e., do not set the profit target. So, any winning
trade must be held as long as market does not tell you to leave by hitting
your trailing stops. When you enter the market by market signals and leave
by stops or trailing stops, it solves the most difficult part of decision
making process rather easier for traders. Good trades.
One of the silly rules of thumb in USD/JPY trading is it rarely moves
700-800 pips in a row without 200 pips or more correction in the middle and
it almost always retraces back to 350 pips advance point from the start of
its 700-800 pips move. All because of liquidity problem in Yen market.
The real battle of bulls and bears for medium-term trend is always around
20 day MA line in Yen market. Daily option activities here and there are of
no relevance as far as medium-term trend is concerned.
Yen position traders sit on their positions gunning for several hundred
pips at one go. For day trades, much more nimble approach is required. As
Yen position trader, please never buy anything below falling daily 20 MA and
never sell anything above rising daily 20 MA, no matter how attractive they
look. So start buying only when daily 20 MA starts rising, from whatever level,
is not only safe but also proven way of making money although it sounds so
simple. Imho. Good trades.
You can read how Yen traders make intraday moves by watching 30 min USD/JPY
candlestick chart or line chart if you are not familiar with candle nuance.
4, 8 hourlies are for positional moves. Good trades.
The Tokyo Fix is where the FX rate is established for the day by the banks
for their customers. So even though the FX rate may change during the day
the customer gets the rate at the time of the fix. There is a fix in Tokyo,
London and Toronto (more I am sure). Importers generally settle their accounts
on the 5th, 10th, 15th, etc, of the month before and up until the fix
():50 GMT). Sometimes, if there is an "excess" dollar demand $/JPY will continue
to climb slightly after the fix. $Bulls will also use this as a staging for
extending a rally. $Bears (Yen Bulls) will use this to establish better shorts.
REACTING TO NEWS
News or data are always read by the market along the prevailing market
bias. Data can provide a good reading for the state of the market. If the
data is bad but the price is still rising or not affected, it must be a bull
market which means buy on dip strategy is a better one. Conversely, if the
data is good but the price is not rising or even falling, it must be a bear
market which means sell on bounce strategy is a better one. The inflexion
point must be when bad news or good news. no longer affect the prices as they
have done before. Medium/long-term bias changes are usually accompanied by
such reactions to the news. Fwiw.
It is not the numbers that counts but how the market reacts to the numbers
that counts. That gives some comfort to those who are not privy to the numbers
Good evening. The concept of fair value in any currency is largely
that of CBers and economists and not much about trading ..Almost always currencies
overshoot from the fair value areas some 20-30% in their medium-term trend
and what makes all hard currencies range in reasonable areas overtime since
we had this floating regime in 1971 must the ability of relevant CBs to control
the currency ranges and their real economy's weakness or strength to support
those ranges. ECB folks were not joking when they said Eur/usd was some 25%
undervalued from the fair value when Eur/Usd was below parity levels two years
ago. Same goes for BOJ when they were saying Yen was some 10-20% overvalued
when it was trading around 100 some three years ago too. That is how these
folks view the markets and try to guide the market. Of course, when US Treasury
folks say "Dollar is still strong" when it is falling, they are begging the
market to sell more Dollars.
The first hour after opening in Tokyo tend to provide the best liquidity
of the day and that is when most heavyweight players try to position their
way without having much difficulty for the day. Sydney open is more often
used as an ambush hour by certain players using the time window till Tokyo
open. One rule of thumb is when Yen jumps at Tokyo open the chances are it
will continue throughout the day and a few more days. On different point,
learn to position trade Yen or any other currency if one is really going to
make a big money one day. Fwiw.
One hour from Tokyo open, London open and NY open are the times where most
liquidity of the market exist. And that is where market makers are busy setting
the trend for the session or even the day. Your observation has a merit because
most of the session or daily moves are started either in London open or Tokyo
open or NY open. Especially London Open. Other markets are too thin for any
good sized traders to make their market views felt. Good luck.
London is just a market place where all sorts of Forex folks flock to buy
and sell. It does not have to be London folks. It could be anyone from anywhere
in the world with deep pockets who start setting the market direction on a
given day. Same goes for NY and Tokyo sessions markets. In any case, Tokyo
and NY still relatively small markets when compared to London as far as Forex
A WORD FOR NEW TRADERS
Traders that try to pick the tops and bottoms of the market throughout
the day end up with mostly misery because inexperienced fellows in Forex departments
even in first division clubs try to pick the tops and bottoms believing that
is where the real big money is. And ego demonstration and bonus consideration
comes into play too for smart college graduates. The first thing I do when
facing new recruits is, do my best to destroy their ego and fear in the market
first. Once their ego and fear are reasonably cured, they become dutiful followers
of the market like Pavolv’s hounds and they can survive. And once they can
survive, they can be taught on how to put temporary tops and bottoms to the
market at much higher level of speculation school. Then, that may take at
least a decade of training too.
QUIPS FROM BC
Forex is all about how to hit the next ball correctly rather than worrying
about something of a distant future. The next ball may be for 2 pips or 20
pips or 200 pips or 500 pips depending on a trader’s style.
Anything is possible in Forex.
I am useless as a daytrader. Corrections may take days or longer to complete.
Good quality info is everything in this game.
Bottom picking in the Usd/Jpy is the Mother of all risky trades.
We learn how to trade till we stop trading and we learn from each other
everyday. That is the beauty of trading and life in general.
Do not worry about what market will do. Just worry about what you will
do when market reaches your "pain point" or "happy point". You will have an
easier life as a trader that way.
Forex players can operate quietly, but they cannot hide their moves in
Good morning. Yes, no liquidity and no conviction by players make the market
look like a vagrant loitering in his usual area. Good forecasts and trades.
Good sleep is essential for good trading but most of the traders I know
of seem to sleep with one eye open.