Forex Strategies #6 – Investing Versus Trading
This is a 7-part series on Forex Trading Strategies. Click here for my Strategy #5 – Market Psychology
One of the most important yet often ignored questions that all Forex traders should ask themselves, especially retail traders, is “what’s my goal?” or “what’s my endgame?”
It may seem absurd to bring this up at this stage of my 7-part series, but how many traders examine what they want from Forex? Now, we are not talking about fantasy land here, but something realistic and achievable… and after you thought through it, I think it comes down to either income replacement or income supplement…
Of course, some always want to strike it rich overnight. Still, you probably have a better chance at playing the lottery because it takes just one combination of winning numbers to win millions of dollars versus having a series of winning trades, excellent mental discipline, and perfect timing to achieve your goal.
The odds are astronomical, so yes, you’d have better odds at playing the lottery than trading Forex starting with a $500 investment and the explicit goal of turning it into $1 million.
Now that we get the myth out of the way let’s understand the difference between Trading and Investing.
Trading
According to Investorword: it is the buying and selling of securities or commodities on a short-term basis, hoping to make quick profits.
The key focus is “short-term,” as traders often enter and exit trades within minutes or hours but seldom days. News trading, straddling, and scalping all describe different types of trading with a short-term focus; most traders, especially the novice ones, tend to focus on this type of Trading or in and out of the market on a short-term basis.
Investing
On the other hand, it is defined by Google as:
- Expend money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property or by using it to develop a commercial venture.
- Devote (one’s time, effort, or energy) to a particular undertaking expecting a worthwhile result.
Investing is not short-term, but rather longer-term ventures with goals of achieving worthwhile profits.
If your goal in Forex is income replacement or supplement, I’ll show you a way through investing to build up your portfolio. If your goal is to gamble your account with expectations of huge returns, then the following may not interest you; however, you are welcome to follow along because what you are about to read could change your Forex Trading forever.
Unless you are already a successful Forex trader, you may still make the same mistake: Closing profitable trades early while letting losing trades run… This is human nature, and it is as true as gravity because your brain is programmed to go to the path of least resistance.
A normal trader usually feels that making a small profit is easier than making a small loss… In a study into positive/negative framing, traders are usually biased against taking losses, even when logic states otherwise. I’ll get into details in the final chapter of Forex Trading Strategies, but for now, know that if you give a choice to 100 traders to take a loss of $3000 now, or $5000 later, but with a 10% of probability that market could come back to break even, 85% of traders would choose the $5000 or no loss scenario, when in fact the $3000 loss is the right choice mathematically.
The same applies to winning trades, and if we were to change the context, let’s say to either take profit on $3000 now or $5000 later. Still, with a 10% chance of making nothing, 85% of traders would take the $3000 scenario, leaving money on the table because of the fear of losing what you already have.
And to transform your thinking from trading to investing, we need to learn to do what’s hard because if you are doing what 85% of traders are doing, you’ll end up with the same results as what 85% of traders are getting, and that’s losing…
Long-Term Trades: Currency Investment
And that brings us to the concept of Long Term Trades, or what I call: Currency Investment, or leaving your winning trades run. The idea behind long-term trade is simple, trade is based on major market developments, and once you are in the trade, stay in it until you have reasons to get out. Start with a very small percentage of your account, preferably taking positions in the pair that will give you positive daily swaps, and then add more positions as the market goes in your direction. Here are the specifics:
- Study the market and wait for major breaking news that could change the entire market. News like the Lehman Brothers, ECB Press Conference, Japan’s PM Abe’s snap election… all of these news releases change the overall sentiments of the market and affect one or several currencies.
- Choose a currency pair in the direction of the news that would yield positive daily swaps or cost you fewer daily swaps. If the swaps are mostly the same, choose the pair with the most liquidity (less spread), as it’ll cost you less.
- Follow the market and start with a very small position, no more than 2x to 3x leverage. Something that you can afford to leave running without losing sleep. If 2x leverage is still too much, take half of that. (2x leverage is twice your available balance. If your available balance to trade is $10,000, then 2x leverage would be $20,000, or 2 mini lots.)
- Once you are up 100 pips or so, move your stop loss to break even, wait for the inevitable market retracement and add another 2x leverage position. Note: As a rule, wait for the market to retrace at least 100 pips from the high, then plan your entry. Use previous Forex Trading Strategies such as Support/Resistance and Market Timing as your entry guides.
- Repeat steps 2, 3, and 4, and add more small positions until you have reasons to get out of the trade. Usually, when a move like this happens, it is possible to see the trend last three months to 18 months.
These small positions could amount to huge profits in the long run. I have accumulated 30+ positions on a trade, with the first position giving me over 1500+ pips of gain, and I have seen people with 10,000 pips of gain on one trade shorting GBPJPY from 250.00 down to 150.00.
Even if you enter half of that, you will at least double your account with very little risk… Remember, Rome is not built in one day, nor is your Forex portfolio.
Last, let me share what kind of news you should pay close attention to… The kind that moves the market! At the time of writing this strategy, the market is particularly sensitive to whatever has to do with QE or Quantitative Easing. The market is expecting the ultra-easy policy to continue, so the next sharp move would occur when central banks stop QE, which would signal potential concerns for inflation, leading to rate hikes. So the first major central bank, ECB, Federal Reserve, Bank of Japan, or PBoC to talk about ending QE and hiking rates, we should see the market move strongly and steadily…
Of course, you should frequent my Fundamental Analysis section, as I have a track record of pointing out these moves when they happen. (JPY weakness, EUR strength).
As of January 2013, the real mover is with further weakness in the JPY. Unless you have been hiding under a rock somewhere, you must have read my articles on SHORTING yen crosses. I hope you did listen because this is a new position that I am building up, and so far, I’ve got over 18 trades, with the first entry netting me 1500 pips, and I believe we are only halfway through this trade.
Henry, thank you for this article.
It was very helpful. In fact I wish I had known this strategy several months ago.
One question about the entry and stop loss.
You wrote:
“Follow the market and start with a very small position, no more than 2x to 3x leverage. Something that you can afford to leave running without losing sleep. If 2x leverage is still too much, take half of that. (2x leverage is basically twice of your available balance. If your available balance to trade is $10,000 USD, then 2x leverage would be $20,000 USD, or 2 mini lots.)
Once you are up 100 pips or so, move your stop loss to break even, and wait for the inevitable market retracement and add another 2x leverage position.”
Do you put a stop loss before it gets to 100 pips?
In the example of the jpy weakness during the last few months, if we’re taking a small position of 2x or 3x leverage on EUR/JPY or GBP/JPY would you put a stop loss or (would you be without a stop loss) just leave it open as you say – something that you can afford to leave running without losing sleep. What did you do personally?
I know you say when we`re up 100 pips put a stop loss at break even. Did you personally in your own trades put stop losses before it got to 100 piips, or just leave it open with full confidence that the trend was going toward JPY weakness.
If you did put stop losses, how many pips below your entries did you set them on average for this jpy run?
My own thinking was that if we really trust the fundamental, and have confidence it’s going in the upward direction for EUR/JPY,or GBP/JPY we might consider not putting a stop loss, so even if it goes down 100 – 200 pips below entry, we’re not concerned too much because if we are correct about the trend it will come back up. And since our amount is only 2x 3x leverage, we’re not overleveraged and don’t lose sleep?
You thoughts on this ?
Thanks once again for a very informative and practical article that hits home for me.
Jason
Jason, thank you for your well-thought out question, I think ultimately it has to be with your own personal risk tolerance. The debate on stop losses could go in either direction, depending on positive or negative prospecting effects. I think the important thing not to lose sight of is the fact that the correction (or strengthening) of YEN was a result of the comments by a few members of the newly formed government, which does not represent the official stance. When we take a closer look into the series of events, other members (as stated in the JPY Strength – Blessing In Disguise article) including the Prime Minister Abe don’t share the same view. This means that the correction is due to market panicking, thus even at the height of Yen Strength, I see plenty of reasons to sell, and sell some more.
Not having a stoploss, on the other hand, is a caveat as you must trust yourself making the right decision when the fundamental changes. So I would still recommend keeping a stop loss. Although I must confess that due to the extend of market correction, I did stay in the market without a stop loss, but the difference is that I know fully that if and when Japan changes its tone, I would close all of my trades in a heartbeat. Of course, you could keep a tight stop/loss and re-enter the market again, and again, knowing fully that you’ve minimized your loss but at the same time, you didn’t miss the trade. And read the timing and support/resistance strategies for guidelines on re-entering the trade.
Hi Henry,
I wanted to update you on my situation since using this strategy.
As I said above I wish I would have known it earlier when you started telling us to go long on Yen Crosses.
Before reading this, I was leveraging way to much in my trading. Even though I was buying the yen crosses and trading in the right directions (ex Buy Usdjpy, or buy eurjpy or buy gbpjpy) sometimes the market would take a short term drop of 100 pips or more and it would be too much for me. Because I was overleveraged I would have to close out my positions or take some smaller stop losses.
But after reading this I tried it out using small 1-3xleverage positions. And it was so much easier, I could sleep at night if the market headed down 100 or more pips because I used small amounts.
At the time the Usd.jpy was around 92. I thought I may have missed the boat. But you’re emails predicted it was only half way up its rise, and you said it would eventually reach 100. This and by following the news on the yen, encouraged me and gave me a strong level of confidence that it would eventually go and I can use this as an investment trade. I started taking positions.
I started taking positions with USDJPY around 92, 93 and even got a big position 3x leverage when it dipped to around 91. I built up many positions in the last 3 months. And today closed out near 102 and have gained a lot.
To be honest, this has been huge for me. It has nearly doubled my account.
Personally since I was confident about the direction and usdjpy was the least volatile of the yen crosses and the one I had most confidence in, and because my positions were small, I did not put in stop losses when they went down because I had strong confidence it would eventually come back up if I just waited.
The exception was when they went far up over 100-200 pips above my entry, I did put some stop losses at my entry points to cover in case things went down again.
I used to be in your trading room but had to leave.
There are many pieces of advice that I have found to be of value in your tips, videos and courses, but this one for me has by far been the most valuable to me personally. I feel comfortable with this type of trading (investing) and with the small positions I feel significantly less stress or mental worry if things goes up or down. I sleep easier.
The main thing is to get the long term direction right. And I’ll only apply this technique if there are strong fundamental reasons giving me confidence in that long term directions (as in the JPY trades).
Thank you very much for this technique. It has put me in a much better position financially after applying it since January 2013. Wish I would have started sooner.
When I left the trade room I told you I’d be back.
I am back now. We’ll see you in the trade room in the next days.
Thanks again for all the help!
Jason
I love your article but can it be presented on a chart. to show the above mentioned wonderful results?
Based on the date/time and entry levels, I’d assume it is easy to plot them on a chart. Time is based on GMT+0. Thanks.
I’m a beginner in forex and I know that “Shorting” means selling.toward the end of your article,you said something about shorting the yen crosses but all the trade you took were buying.does it mean that shorting yen crosses mean buying the like EURJPY,USDJPY etc?
Yes, please watch my currency pair video for more information. https://www.currencynewstrading.com/191/what-is-a-currency-pair/
Shorting means selling that currency. Since JPY is the base currency on the currency pairs, to short JPY it means to BUY EURJPY, USDJPY, GBP/JPY, etc…
Thanks
In addition……
Studies i conducted using Technical Approach on some pairs had trades which lasted for weeks (1hr – 4hr charts), months and years on daily charts. However i never put into consideration swap rates and other things mentioned here. I was more after the outcome of turnover, which was also fantastic.
Glad you like the article. I mean let’s face it, only traders ignore the “swap” factor, but the real market is heavily driven by the differences in Interest Rates, especially the big money movers who are shooting for a 10% return per year. They move tremendous amount of currencies, and they are definitely driving the overall trend when it comes to the daily swaps.
Thanks for the article.
I have a similar approach to long term investment but through Technical Means using Moving Average combination using a wide SMA cross to determine a major breakout. In theory the results are amazing if all conditions are met. But i’ve not been able to put it into constant practice. However the fundamental approach you’ve explained has added more light.
Yes, I believe most institutional traders look at major developments in the markets, namely fundamentals.