They really don’t. All those moving averages, stochastics, standard deviations, or whatever else you may be using don’t tell you anything about the future. Each and every one of these indicators has one thing in common: they are all based on past prices. What does this mean? It means that no matter how advanced or complicated your indicator is, the only think that it can tell you is what happened to the price. They don’t give you any other information beyond what you can see on a price chart.

Alright, maybe I have been a bit harsh. Indicators do have a use, but it is not what you may think. Someone cannot just use a special indicator and magically become a good trader. You must earn the right to use an indicator, by trading without them. This is because the one use that indicators have is as a shortcut.

The indicators are consolidating the information presented to you on the price chart so that you can access that information quickly. But without being in the market without those indicators, you will never know what to do with that information or even be able to see it.

Indicators are nice and fancy and give new traders a good sense of security in their trades. They like the scientific nature of dissecting data. But the truth is that without a solid grasp of the market basics, these indicators will inevitably lead you astray.

Go ahead and open up your EURUSD chart and take a look. EURUSD has been constantly ignoring 1.3500. Look back to the beginning of February and you will notice that the bottom of the range is 1.3440 with the top at 1.3840. So will EURUSD be breaking out of this range? I don’t think so. There just hasn’t been a strong enough fundamental catalyst to break it out of its current range.

I would much rather be in a EURUSD buy than sell at this point. The movement within the range however has not been that smooth. I wouldn’t want to hang onto EURUSD past 1.3650. Lately EURUSD has not been following the equities market too well, mainly because of the issues with Greece. They have affected the Euro much more than the US markets so there has been a strong disconnect as of late.

Have you ever wondered why it is so difficult for most people to be profitable in the Forex market? Surely it must be as easy to make money as it is to lose it, if you can be consistently wrong then all you have to do is the opposite and you will be consistently right. The problem: being unprofitable does not mean that you are consistently wrong.

Being profitable is not about being right is it about managing your trades right. In fact, the reason that most traders are not profitable is not that they are wrong more than they are right, but that they are wrong as often as they are right, in other words they are guessing. They slowly leak out the spread. It doesn’t matter if your trade is a winner or loser you always lose the spread.

So how do you stop guessing?

The remedy to this problem is to analyze your trades. You need to figure out what it is that you see when you make those good trades, and what you are overlooking when you make those bad trades. This is hard work and there is no short cut, but the process is greatly accelerated through the use of a trade journal. You need to be detailed in your journal; don’t just give the details of the trade, you need to record your thought process of the trade. Some questions to answer about each trade are:

Was it technically or fundamentally based?

Did you watch the trade unfold or did you let it run?

Did you close the trade before it hit your stop loss or take profit?

What was the expected duration of the trade?

Was there a news event surrounding your trade?

There are too many questions to ask about your trades, which makes self analysis the most difficult step to becoming a profitable trader. One other way to help in analyzing how you make successful trades is to ask for objective analysis from other traders. Sometimes it is difficult to be objective about ourselves so an outside voice can help.

The most important thing to remember is that this process takes time, so don’t give up and be sure to use proper money management (which you can read more about here) to keep yourself in the market long enough to learn to identify your winning trades.

Signup for a live trading account and you could receive our custom made trade journal for free.

You might not recognize the effect that spread has on your trading, and your broker likes it that way. If you are a scalper, you have no doubt already noticed that the spread can cut your winnings in half on a single trade. However the effect of spread on long term traders is not less drastic from a statistical point of view.

Your expected outcome from a random trading system is negative and equal to the spread (if anyone wants to see this I will post the explanation here). Of course you aren’t trading randomly, but the fact remains that the larger that your spread is the more you have working against your profitability. So I am going to assume that the reason you are reading this article is that you are not as profitable as you would like to be, so finding a broker that offers a lower spread would be helpful to your profitability.

Don’t be fooled, however, when you see a broker advertising spreads as low as half a pip, you will never get that price. This is their lowest possible spread. Yes, their spread has been that low before, but hardly long enough for you to receive the benefit of these spreads. The most important value to look for is what is called the typical spread. This is the spread value that is seen most of the time. The typical spread for EURUSD, the most traded pair, is usually around two pips, here at IntegrityFX we typically offer a spread of 1.9 on EURUSD.

See if currency trading with IntegrityFX is right for you.

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.

Have you ever blown an account? I’ve never met a trader that hasn’t. The scenario usually plays out like this. You have a few profitable trades under your belt and you get a bit of confidence, and you see what you believe is another good trade, but it begins to go against you. No problem, “It will come back”, you say to yourself.

It doesn’t come back.

But then you think, “This is just a better price”, so you put more on the trade as it continues to lose you more and more money. The larger trade just accelerates your losses until it hits you, the dreaded margin call. Your account is all but gone, all of your hard work and profits negated by a handful of trades. So what happened?

The key to surviving in the Forex market is minimizing your losses. The only way that you can really do this is by using stop losses. They allow you to manage your risk, without a stop loss your losses are essentially capped at whatever money is in your account. If you use a stop loss then your maximum losses are under your control. Small losses are easily recovered; large ones destroy your account.

Remember that it takes a 100% win to recover from a 50% loss, but a 1% loss is returned with a 1.01% win. One of the most common responses trades give to this statistic is “minimizing my risk minimizes my reward”, and my response it that you can’t make any money when your account is wiped out in a handful of trades.

Keep your losses small by using a stop loss, because the longer you can stay in the market the more chances you have to make money.

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.

Today EURUSD broke above its down trending highs that began in the middle of January. With the markets seemingly back on the risk trains, is this the beginning of a rally in the EUR? This could indeed be the beginning of a rally in both the EUR and equities, but it would be short lived.

The economic situation in Europe has not improved, in fact it has gotten worse, and we are still many months away before any central bank will begin to raise rates again. But for the short term EURUSD looks to be making a technical retrace fueled by record amounts of shorts in the EUR. This retrace could easily make its way to the 1.40 level in the EUR before coming back down to the 1.33 level.

Either of these moves can easily be played in the market. The upward move however, will faster and harder than the downward one which is usually smoother and longer lasting than a retrace.

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.

In the last part of my series on intermarket analysis I covered the relationship between Forex and equities, a market that is familiar to most people. In this part I will discuss the bond market, a market that is not familiar to most people.

One of the main reasons people avoid bonds is because they do not understand what they are or how they are priced. Bonds are simply loans granted to governments, and are easily understood if they are purchased direct from the government. It is in the secondary markets, however that they begin to get confusing.

There are two ways to value a bond in the secondary market: price and yield. Yield is the more common of the two. A bond’s yield represents how much you would earn if you kept the bond until it matured. Since you do not pay the same for a bond in the secondary markets this value is not the same as the original yield. If you pay more than the original price the yield will be less, but if you pay less for the bond the yield will be more. It is because of this fact that yield and price always move opposite of each other. The price is represented as percentages of the bonds face value in $1000. So, for example if a bond was priced at 98:00 you would pay $980 for each $1000 of face value you wanted.

In relation to the Forex market, the bond market is a thermometer of risk aversion. As opposed to the equity market, bonds are seen as a safe asset with limited room for growth. So, when investors are afraid and risk averse they tend to buy more bonds, so the price rises and their yield falls.

Bonds are also more closely tied to their local currencies than the local equity markets are. This is because bonds must be purchased with local currency and are used as tools of the central banks to help manipulate the money supply. The purchasing of bonds has two important effects on the currency. First, as bonds are purchased (replacing liquid assets with illiquid ones) the money supply falls, at the same time as more people want to buy bonds more of the local currency will be demanded. Money is just like any good, a fall in supply and an increase in demand results in an increase in price. Therefore, the demand and price of countries bonds can be used as a strong proxy for the international demand and price of its currency.

So, when a rapid increase in USD is seen at the same time as a decrease in bond yields (or an increase in bond price) then we know that the dollar strength is coming about by a flight to safety rather than an unwinding of trades.