You’ve done it. You traded your demo account profitably. Now you open up a live account, put your heard earned money into it and then, you lose. It doesn’t make sense does it? There is no difference between trading demo and live, it’s the same right? Obviously, it isn’t.

What is the difference between demo and live trading?  Ironically it is the fear of losing your money that ensures that you will lose it. Think to when you traded a demo account, sure you lost trades and you won some, but this never stopped you. Eventually you found what worked for you in the market and began to become profitable after time. But there was no fear, no matter what you could always open a new demo account.

It is different with a live account. Your money is at risk this time, and it scares you. There are ways to help eliminate the fear aspect that is keeping you from being successful.

1. Rules. At some point while demo trading you had to have formed rules for trading. Stick to them. If they helped your demo account grow, they will help your live account grow. Rules help keep emotions like fear from controlling your trades.

2. Start with a small account. If you find the thought of losing your money terrifying, then don’t trade that money. Instead open a real account, and trade micro lots. And remember never trade money you cannot afford to lose.

3. Your money is already gone. This goes along with the second point, treat your money as if you will never get it back. If you cannot stand not having this money, then do not trade it. A simple change in perspective can help eliminate fear in the market.

4. We learn more from losses then wins. Mistakes are how we learn, as long as you learn from a loss then you have gained something invaluable. Don’t be afraid to learn.

5. Go back to demo trading. Sure you can make money but do you know how? Understanding how you trade is one of the key elements to successful trading. So trade in your demo account paying close attention to how you decide which trades to enter. When you know how you make good trades there is nothing to fear.

Eliminating fear is one of the most pivotal steps you can take toward becoming a successful Forex trader. Just as in the rest of life, if we let fear take hold it is virtually impossible to make a correct decision.

In the final part of my guide to intermarket analysis, I will discuss the only market that even comes close to the global level of Forex: commodities. For the most part the relationship between the commodities and Forex markets can be seen by following oil and gold.

Gold is a great way to measure the long term inflation expectations, since gold is viewed as the quintessential store of value. As people begin to see their money devalue (i.e. inflation), they will buy more gold since its value is relatively stable.

When relating this information to the Forex market, it is key to understand what the market is expecting for inflation. The market likes a little inflation, since they will expect the central bank to increase interest rates to combat it. However, rampant, out of control inflation sends a wave of panic through the market. The gold market also gives useful information about the equities market. A rise in equity prices along with a rise in gold prices implies that the rise in equities in mainly inflation driven. While an increase in equities without a similar rise in gold implies that it is driven by growth.

Aside from being a proxy for market fear, gold has a strong relationship with the AUD. Australia has a large surplus of natural resources and are among its largest exports are metals. So, if gold begins to rise as a result of an increase in global demand, then this will increase the demand for Australian dollars and strengthen them.

The market loves growth, as long as the world economy is expanding then currencies are able to pay out consistent high interest. Oil is useful as a proxy for growth expectations. The larger that the world economy becomes the more energy that it will need, so as the demand for energy increases the price of oil will rise. The price of oil is generally positively related to the risk based currencies, since they pay the most interest.

In particular USDCAD is strongly correlated to oil since Canada is the top supplier of oil to the US. As oil becomes more expensive more Canadian dollars are need by American purchasers, which weakens the currency pair.

Commodities are most useful when taking a long term approach to your trades. While traders who keep a shorter time frame on their trades will find more useful information by watching the equity markets.

Every trader wants a systematic edge in the market, some way to make money simply by using certain parameters of a trade. One such parameter is the risk to reward ratio, the potential maximum gains divided by the potential maximum loss. There are those that believe that it should always be greater than one, in other words your wins are worth more than your losses. That way even if you lose more times than you win you still come out ahead since your wins are worth more. There is, however something overlooked in this logic: the effect that the risk to reward ratio has on your win percentage.

Intuitively, we know that the current price is more likely to change to a closer price than a further one, but it can be seen empirically as well. It can be seen, that the number of bullish candles is statistically equal to the number of bearish candles, on any time frame, and that the bullish or bearish outcome of a candle is independent of the previous candle. So we can assume that at any given time the market has an equal chance of going up or down. Therefore a stop loss and take profit that are equal distances apart from the current price are equally likely to be hit. However, if one of them, say the take profit, is further away then it is less likely to be reached by a factor of the quotient of the two. For example, a take profit that is twice as far away as the stop loss is half as likely to be reached. This being the case, the expected outcome of any trade with any risk to reward ratio is always the same: zero (actually it is slightly negative when spread is factored in).

Intuitively, we also know that the market is not completely random, it may seem random at times and displays many of the traits of randomness, but this is because events are transpiring that we cannot see. Through time and experience though a trader can train himself to pick up on what the market is saying, and see though the randomness to what is actually happening in the market. This trader is no longer guessing he is interpreting what the market is saying and is no longer bound to the probabilities. Without any experience, a trader is guessing and at that point is trading in a random market, from his perspective.

On its own, no risk to reward ratio is better than any other. It cannot increase your winnings. There is no right or wrong one. It is simply one piece of this whole successful trading puzzle. As long as the trader is no longer guessing, a solid risk to reward ratio can help hold on to winnings, and help ensure long term success. The correct risk to reward ratio is dependent on the trader and his own trading psychology. Look back on your own trades and find which ones were better trades. Did you fare better by letting your trades run or by cutting them short? This is why keeping a trade journal is so important. Learning from your past trades is key to trading well in the future.

So far, I have given reasons for why it is important to know not just what is going on in the Forex market, but in the other security markets as well. In this article I will discuss the importance of equity markets on currency values and how these two markets are related.

Equity markets, or the stock market, are where people are allowed to buy a piece of ownership in a company. There are equity markets all around the world and these markets are tracked in a single number by stock price averages. There are many averages around the world but there are a few important ones. In the US they are the Dow Jones Industrial Average (the dow) and the Standards and Poors 500 (the S&P 500). In the UK it is the Financial Times and Stock Exchange (the FTSE 100), and in Japan it is the Nikkei 225.

Just because each equity market is unique to a particular country that does not mean that they only affect that countries currency. Instead, they affect all currencies at different times of the day based on when they are actively being traded. For example, during the US session, while the US stock exchanges are being traded, the Dow and S&P 500 are influencing and being influenced by currency exchange rates. But while most Americans are sleeping, the UK exchange is open and the FTSE 100 has a strong relationship with currencies. Depending on what time of the day you trade, you would watch a different market average.

The attribute of the market that stock prices are showing is risk appetite. As investors become hungry for more risk they will buy more stock which will be seen as in increase in the stock averages. Likewise they will buy the currencies that are seen as risky currencies.

For the most part currencies and stock averages have a positive relationship. This means that they move in the same direction, as stock prices go up so does the strength of currencies. There are three major exceptions to this relationship: USD, JPY and CHF. These three currencies generally move in the opposite direction of stock prices. As stock prices go up these currencies become weaker, and as stock prices go down they strengthen.

While USD and CHF are seen as safe currencies, which strengthen in times of risk aversion since investors are concerned with reducing losses and not maximizing returns, the JPY weakens in times of risk appetite because it is a funding currency. The Japanese central bank holds a very low interest rate, which means that it is cheap to borrow yen and buy a riskier currency with it. So when investors no longer want to hold the risky currencies, due to risk aversion, they must buy back the yen they borrowed which will strengthen JPY.

Following the stock averages is most important when trading during their opening time. This is because the opening of these markets can cause violent swings in the Forex market. These moves appear to occur with no reason if you focus solely on the Forex market.

It is important to note that the equity markets move in tandem with the Forex market. So the reason to watch equities is to explain movements in the Forex market not to predict them. However, at times the equity markets are easier to follow than the Forex markets since there is generally more information about them, so you can trade the sentiment in an equity market by making a trade in the Forex market.

There is far more to successfully trading the Forex market then knowing the Forex market.  All the securities markets are interconnected there is no movement in one that is not met by a movement in the rest. It is impossible to fully understand the Forex market without understanding what is happening outside of it.

There are four major security market categories: Equity markets, Bond markets, Commodity markets, and the Forex market.  The equity market is where stocks are traded. They are different in each country: American stocks trade on American markets while Japanese stocks will trade on the Japanese market.  Bond markets differ from country to country as well, but all deal with essentially the same security: government debt.  While commodities are traded around the world, they all very closely follow each other, since oil in Europe is still oil in Australia. Finally, there is the Forex market, which you will hopefully already know something about, and it is the most global of the markets.

Since Equity and Bond differ by region, they are most useful in giving information at different times of the day.  Commodities, however, give more general information since they are traded all around the world.

Each market also gives a different piece of the puzzle. Equities are useful as a thermometer of risk appetite, and commodities explain the expectations for different aspects of the economy. Bonds show the most fundamental of fundamentals: the change in the money supply.

In the next three articles I will explain how each of the three other markets, Equity, Bonds, and Commodities are related to the Forex market.

Boxers or Briefs?

If you look anywhere on the internet, there are so many people that tell you how to trade. Whether it’s with indicators, trading naked, or using the positions of Jupiter and Sirius to determine the tidal flows of Neptune, you are constantly bombarded with articles or PDFs telling you how to trade. Some people make it seem easy; some people make it look hard. In this article, you will see that it isn’t necessarily hard to learn how to trade, but that the application of that knowledge is. This article will also deal specifically with mostly price action based trading. No astrology or chicken bones here. Most of the methods described here can be learned elsewhere, but that isn’t the point. The point is to show you in what order to learn these things. In order to describe the best way to learn how to trade, it’s time to look at a super awesome analogy: clothes.

In order to start getting dressed, there is one important set of garments you need to put on before the rest of your clothes. These are your undies. The cool trading method that underwear is supposed to represent is support and resistance. If you don’t get the whole connection between support and underwear, you need to talk to Michael Jordan. If you don’t get the lame underwear commercial reference there, I’m sorry. I give up.

Support and resistance levels are zones in the markets where price action occurs. These are places where the price either bounces or breaks depending on the strength of buyers and sellers in the market. A bounce occurs when the price reaches a level, touches it, and moves the opposite direction. A break occurs when the price reaches a level, touches it (tests it) a few times, and then continues in its original direction through the level. By the way, support is below the current price, resistance is above, or, support levels are near the valleys, resistance levels are near the peaks.

The reason these levels are so important in Forex is that all price action occurs along or around these levels. All of the moves in the market either start at a support or resistance point, or after consolidation, break through these points. A few things to note about support and resistance (from now on abbreviated as SR) are that these levels aren’t specific prices, they are more like zones, and that some SR levels are stronger or weaker than others, but that’s for a later day.

SR levels are one of the most important aspects of trading. Now that you know the market from your naked trading, you can start trading these SR levels. You know how the market reacts in certain conditions or certain times of day. Now, using that information, you can look for SR levels and try to base your trading around these zones. For example, you know from your naked days that during the shift from the Asian session into the Euro session, the EURJPY makes a big move either way. The current price is 130.05. You see a support level at 127.50 and a resistance level at 131.75. Once the shift occurs, the price starts moving down. There is no other support level except the one that you found before. There is a pretty good chance that EURJPY is going to move to your support level. Congrats! You are making demo money! That’s super fun, right?

So basically, SR trading is the means with which to apply the knowledge you gained from trading naked. Also, you will continue to learn how the market acts by looking at SR. These levels open up a whole new realm of market activity for you to explore and learn about.

To view POYTC Part 1, click here.