Forex Market

What Is the 70/20 Rule in Forex?

Experts believe that 70 percent of market movements occur only during 20 percent of all time. What does the trader need to know about this to maximize the performance of their trades? Have you ever noticed that sometimes when you open a position and enter the market, it seems to freeze? Or, for example, do you sometimes open your trading platform and note with frustration that the price does not move in the next few hours?

How Do I Catch the Big Market Moves? 

To answer this question, you must first know why these moves even happen. If you have ever asked this question the answer is found in the simple 70/20 Rule. According to experts, almost 70 percent of market movements are manifested in only 20 percent of the time. In other words, large movements do not occur all the time, only at very specific times. Therefore, the trader is not required to sit all day watching the market to take advantage of them. This principle has a very significant implication in Forex trading. Therefore, it is important for currency traders to be aware of how they can apply the 70/20 rule.

Observe the Market at a Specific Time

Take a little time and think about it. If 70 percent of the market movements in the FX occur only 20 percent of the time, then you don’t need to look at the graphs all day. This implies the following: in case a trader wants to capture the widest range of movements of a currency pair, he only needs to concentrate on the market for a specific period of time. That said, you will need to see the main sessions of the Forex market in case you want to do day trading. In fact, some of the sessions bring much more volatility. In addition, they are more likely to generate large market movements.

Price trends may change in different time frames. The first implication of Rule 70/20 is related to day trading operators. However, there is something about this rule that should be known to swing traders. By analyzing a price chart with a high time frame, swing traders can often spot a clear trend. However, a particular time frame trend does not imply that the price will continue to move in the same direction in lower time frames.

Only large movements take place 20 percent of the time in one direction. Because of that, the trader must make sure to enter the market at the right time. To do this in a proper way, you may want to use multiple time frame analysis. This can help you understand where the market is most likely to increase movements. In addition, it can help you capture those changes in the overall market outlook.

Entering the Market At the Right Time

However, the key here is to enter the market in the right place. For example, if we enter one of the limits of a price range, we may suffer an unpleasant surprise and get stuck on the wrong side of the start of a new trend. This is because instead of bouncing in the upper or lower limit of the range, the price can break that range in the opposite direction to our operation and initiate a trend movement. Although many times the breakdowns of ranks are false and the price ends up being returned, this is not always the case, hence one must be careful.

The 70/20 rule should decrease the pressure felt by many traders who believe they should be in front of a screen throughout the day. Well applied, it captures most of the market movements in a small period of time.

An important point is that the trader should make sure not to open a trade in a shorter time frame solely based on a trend in a longer time frame. The location of your entrance matters more than you think.

Forex Basics

Do You Ever Force Your Trades?

Throughout the career of a trader there will be days where the markets go against you or there isn’t much happening with all the markets moving sideways, the sensible thing to do in this situation is to sit it out and wait, but this can cause boredom, people can become addicted to the excitement of the markets and so they will decide to force some trades, but this is never a good idea.

Forcing trades basically means that you are taking trades outside of your usual strategy or risk management plan, they are often not planned for and carry a much higher level of risk when comparing them to your usual trades. This is often performed by someone who really wants to do something, even if the conditions are not right for it, it is a little like that toy we all had as a kid, trying to force the square piece through the circle hole, you may actually get it through, but if you do it will come out of the other side a little damaged.

Making these spur of the moment or forced trades can lead to a few psychological complications also, as they aren’t planned, they may be larger than usual or you may have more trades, increasing drawdowns or causing fear of loss as well as other anxieties about the unplanned trades.

So when the markets are dull, what can we do? These are the perfect times to plan, look at future potential trades, learn more about your strategy or even start looking at entirely new ones, these lulls in the markets are quite rare, so you should take advantage of them away from actually trading.

In order to avoid the habit of making forced trades, you should try and turn your strategies rules into habits themselves, so when you see that something is not matching up, you won’t take it. In order to do this, you need to find a set of trading rules that match your personality and needs, having one that stresses you out or doesn’t suit you can lead to additional forced trades either through frustration or boredom.

Don’t forget when trading that it is the market that leads you, you are simply reading what it is doing and going along with it if you try to force trades in markets that do not want to play, then the markets will eventually begin to move against you resulting in losses. Let it take the lead and follow its rhythm, do not force them.

This is far easier for people who have traded for a long period of time, they get into habits, as a new trader, it is your responsibility to build those habits into your own trading, focus on your strategy and the success that it brings and try not to think about what trades you could be made outside of that strategy, do not damage the progress and profits that you have already made by forcing some extra trades for no good reason.

Forex Psychology

Chicken Run – Fear of Missing Out On a Trade

Every forex trader will at some point have to face a particular set of fears that will sometimes mean they fail to pull the trigger on a trade. A lot of people talk about missing a trade as some significant moment in their trading activity. They look at the price movements of a currency pair and think it might go a certain way, they might even have an idea of the price it might reach, and they watch it and watch it and lo and behold it goes the way they thought but they didn’t enter a trade. They look at situations like that and hypothesize that they could have entered a trade at such and such a time and then if they had closed it at just the right time, they would have made x amount of profit. But the thing you have to realize is that while we all might fantasize about phantom trades like that from time to time, they are a non-event.

They are truly unimportant in the grand scheme of things because, in reality, nothing happened. You could spend your whole time dreaming up phantom trades like that. You could watch stocks and see potential trades you could have made, you could watch exotic currency pairs you’ve never traded before and see “opportunities” where you could potentially have made thousands, tens of thousands or hundreds of thousands of dollars on a single trade. It didn’t happen. It’s nothing for you to think about, much less worry about. You will miss trades like that literally while you’re sleeping. We all do. Let them go.

Mind Games

One particular reason you should let them go – apart from that way of thinking being completely useless to you – is that there are many more important psychological phenomena for you to worry about. When you ask them about forex trading, most people – and even plenty of traders – would probably tell you it’s all about understanding charts, learning tools and indicators from books, and understanding the theory. Indeed, it is all of those things. But it isn’t one of those processes where you can put in A and get out B every time.

We are, whether we like it or not, squishy ape-like animals that have evolved to be good at a lot of activities but being cold, unemotional machines is, unfortunately, not one of those things. As with anything else in life, our psychology is a big factor in how we perform. As a result, understanding your own psychological or emotional responses to different situations is a key step in being able to control them or curtail them when you need to and to stop them from inhibiting your efficacy. In fact, it often tends to be the traders who think of themselves as unemotional and unaffected by psychological ups and downs who turn out to be the ones who struggle most in certain situations.

Trading has a myriad of ways of drawing you into an emotional response – sometimes when you least expect it – so understanding those potential pitfalls and being aware of your emotional state enables you not only to learn about yourself but also to avoid making the same mistakes again and again. For example, you might be able to explain to a small child that it shouldn’t do something stupid, like touch the flame of a candle, but its only when it realizes it for itself that it will internalize that lesson.

Pulling the Trigger

The moment in a trader’s day that is most fraught with psychological turmoil is when they have to pull the trigger on a trade they’ve planned and for which they have a trade signal from the system they have built up. Not, as in the earlier example, when they think about a potential trade but make no moves towards it. For want of a better way of putting it, the really scary moment is when you have run the numbers, analyzed the price activity, found an entry point, established your target, zeroed in on your timeframe, and set up your stop/losses. Once you’ve run through your whole checklist and even gone as far as opening an order on your trading system, you’ve reached the moment of truth. Do you click the button?

Now, anyone who’s been trading for any significant amount of time will have, on occasion, been wracked by doubt and backed out at this point. Not to put too fine a point on it, they will have chickened out and missed their shot. The sheer tragedy of doing that can unfold very quickly if the price moves the way you expected it to and you watch what could have been a successful trade slip away. Quite apart from really bumming you out, a missed shot like that can have several other knock-on effects. It can slide itself into your subconscious mind and affect the way you think about future trades. Without knowing it, you might still be having lingering thoughts about that moment not just when you make your next trade, or your next couple of trades – it can persist well into your next month of trading, or even longer. The fear of missing an opportunity like that is no small thing and it really can cause issues for your future trading, which is why it is important to have some self-awareness about it and to try to understand what happened.

Being Your Own Shrink

So what are some of the psychological causes of chickening out? A side note here, if chickening out is a bit of a strong phrase and makes it a little harder for you to think clearly about the issue at hand, try thinking about it as failing to pull the trigger instead. One of the big causes, for most traders, is a fear of failure. You look at the trade you’re about to make and you just feel unsure about it. Of course, all your indicators might be screaming at you to trade right now but sometimes – and we all feel like this from time to time so it’s nothing to get too concerned about – sometimes it just doesn’t feel right for whatever reason. There are ways to overcome it and they are pretty fundamental to how you understand forex trading, so don’t worry, we’ll get to them.

In the meantime, another possible reason people don’t enter a trade, when they otherwise think they should, is over-analysis. This is a bit counter-intuitive since analyzing the technical parameters that lead to a trade is pretty much the bread and butter of most traders. That said, there is such a thing as overthinking it. Some of us love nothing more than to get deep into understanding what causes a given currency pair to move the way it does and, for the most part, that makes us stronger traders. But there’s a flip side to doing too much research because the deeper you get and the more information you try to include, the greater the likelihood that some of that information is going to start contradicting itself. Sometimes you’ll have filled your head with so much reading about news events and looked at so many indicators that some of that begins to cause you to doubt yourself. And not only will you begin to doubt yourself, but you will also – just through the sheer act of spending so much time thinking and analyzing one trade – become too invested in it emotionally.

Yet another form of this is becoming unsure about your analysis in the first place. On one hand, this can lead you to try to overanalyze but also it can simply introduce doubt and put pressure on yourself. Of course, this is one of the most natural responses of any trader. In fact, it’s the traders who tell you they’re 100% sure about the outcome of a trade that you should worry about. Put simply, until you get that crystal ball working, you will never know the outcome of any trade. That inability to see the future reduces every trade to a binary outcome. It will either go your way or it won’t. Little wonder then that this is a cause of stress. But this over-focus on the individual trade is what’s holding you back and therein lies the crux of the problem.

Fighting Back

The single most important thing to understand when trying to overcome all of these hurdles is how you approach individual trades and forex trading as a craft.
If you are focusing on and sweating over each individual trade, you’re doing it wrong. The only way to trade forex and be successful at it, rather than burn out quickly or fade over time, is to establish a system and a process. When you understand trades as part of a process, rather than as individual events on who’s success everything depends, you will free yourself of many of these fears. Once you begin to see trading as something that takes place over the long term, you will become a better trader. And once you have a system in place that means you are going to be right more often than you’re wrong, that you make more money than you lose, you will cease to rely on individual trades for your sense of wellbeing.

Approach each trade afresh. Free it of any losses that came before and understand it as one of the dozens, if not hundreds, of trades you are going to make over the coming year. Judge your success not on the outcome of individual trades but on sets of trades over a longer timeframe. Of course, there are some simple, practical solutions to certain issues too. If you are suffering from a crippling fear of failure over individual trades, you are likely committing too much to each trade. It might be time to reconsider your position size and work on your money management. If you are so unsure of your analysis you regularly find yourself failing to pull the trigger on trades your system is flagging up, you might need to go back to the drawing board.

Indeed, better than that, take your system for a spin on the testing circuit. Put the work in and power up a trading simulator or your demo account and test your system, your process, your checklists, and your whole approach. The great news is that thanks to technology, you can now do this more easily than ever. Assess how your system performs over a significant period – say a hundred trades. This will not only give you a greater sense of security but will also help you to see trades not as one-off events but as part of a process. A larger set of trades will really show you whether your system is working in a way that a single trade never can. Having substantiated confidence in the system you are working with is an enormously important aspect of trading that can help you overcome the smaller, short-term psychological hiccups.

Finally, once you have fully internalized the fact that trading is a process and have gained confidence in your system, you will be ready to overcome even the most dreaded of events for any trader: a losing streak. Psychologically this can be tricky even for the most experienced of traders. But the plain fact of the matter is that the more you trade the greater the statistical chance that you will encounter, through no fault of your own, a run of bad trades. The most dangerous thing you can do is start to mess with a strategy you have taken a long time to establish on the back of three or four losses. It’s a trap many fall into. The good news is that if you have managed to free yourself from over-focusing on single trades and if you have confidence in your system, you are perfectly placed to be able to see every new trade as a fresh start.

Beginners Forex Education Forex Basics

How to Avoid Missing Out on Great Trades

If you have been trading for any period of time, you would have come across the scenarios where you have looked at the markets, analyzed them and found a good trade, but you never took it, an hour later you are back looking at the markets and noticed that if you had taken that trade, it would have hit its take profit and more, so why didn’t you take it? You have no idea because you didn’t write it down. We have been told 1,000 times to write down everything about your trades, why you entered, whey it won or lost, but we are very rarely told to write down why we don’t make a trade, and this is often a great indicator as to why we are missing trades. It’s like the long-standing saying of “If it isn’t written down, it didn’t happen.”

It is important to understand that while you do not need to take every trade opportunity that is available, and some of them you may not be able to take for one or many reasons, but consistently missing good trade opportunities will only hurt you in the long run, both your account and your own psychology as a trader. It can lead to discrepancies between your actual trading and the backtesting that you have performed where most of the trades have been taken. There is also the law of averages if your strategy generally wins 60% of the time (and that is generally what is needed) and you miss out of 5 out of the next 20 trades, those 5 trades would have been winners, you are now getting towards a losing average which doesn’t mean your strategy is bad, it just means that something happened to cause you to miss trades.

So let’s take a little look at some of the reasons which could cause you to miss trades.

You lost your last trade

Losing a trade is never easy, it stays in your head and if you lose a few in a row it can be hugely demoralizing and may even make you want to give up. Don’t, you have a strategy, a strategy that works, so why stop? Every strategy has its winners and losers, in fact, every industry in the world has its ups and downs, if Universal Studios gave up after its first loss on a film, we would have some of the great films that came afterward. It is important to accept the loss as a loss, its part of the strategy, try to remove it from your mind and move on to the next one which as you just watched, was profitable, but you didn’t take it.

Use a journal

You should already be making a journal entry for the trades you make, but now you need to start making a journal for the ones you do not take. Why didn’t you take it? What hade you avoid it? What were you thinking? Was it still in line with your strategy? Asking questions like this will enable you to understand exactly why you didn’t take it, it is also a way to look back and reflect. It can help to identify some of the major reasons why you are missing trades and help you to overcome those obstacles in the future through planning.

Not enough margin

There isn’t much we can say on this one based on your psychology, this is down to your risk management or strategy as a whole, if your strategy is asking you to make more trades than your margin can take, then you may need to change it up, either by scaling down the lot sizes or changing criteria to produce fewer trade signals. Not having the capital to make a trade can cause negative thoughts in your mind, thinking that you need to make some larger trades or trades outside of your strategy so you can build up your capital to be able to afford the new trades, do not do this, instead adapt your own strategy to suit your current account balance.

No confidence

A loss can cause your confidence to take a knock, that is natural and it happens for anyone who has emotions. However, if you are suddenly feeling low and are not taking trades because you are no longer sure of your strategy. Do not skip the trades, simply lower your trade sizes, this will allow you to risk less per trade, reducing the risk can give you back a bit of your confidence that you won’t lose as much on a losing trade.

Not setting alerts and orders

Most trading platforms now come with some very handy features, they can allow you to set up alerts that get sent to your email, phone, or simply give off a message and alert tone. We know that you can’t always be right next to the computer 24/7, so the alerts allow you to get on with your life and as soon as a trade setup comes up, you will be alerted and can then make the trade. Not having these set up will cause you to miss those trade opportunities that come up while you are cooking the dinner or out at the shops.

Looking at individual trades instead of Forex as a whole

This is relevant to anything in life, if you look and concentrate on a single aspect of trading, then you will either be extremely happy or extremely down. You need to look at the big picture, look at your account, strategy and yourself as a whole, there will be losses that are part of trading, there will be winning, another part of trading. The ups and downs are what makes Forex exciting. Your strategy has been built to be profitable in the long run, so look at it like that, don’t get discouraged by a single loss or two.

Don’t shrug off a missed trade as something that you could have taken but didn’t, use it as a way to learn why you didn’t take it, this will help to benefit you in the future and will help to make your strategy far more profitable than it currently is.