Issue #64: Monday, April 20, 2009

(And Grab More Winning Forex Trades)

By Sean Hyman You know, you would think that your FX dealer would want you to prosper in the Forex market. After all, retail traders who grab more winners will obviously be more satisfied with Forex trading and keep coming back for more.

But unfortunately, that’s simply not the case. Most Forex dealers couldn’t care less whether you win or lose as long as you keep placing trades (and they keep collecting fees).

It’s not that they don’t care about you as clients – it’s just not their concern whether you’re particularly adept in the Forex market or not.

Don’t Bother Fighting the Trend…

In fact, a few FX dealers have actually set up a system that ensures the FX dealer itself wins when you lose. It’s called a “dealing desk” FX dealer. They actually have a desk designed to bet against all their retail clients. This means they win when you lose, and vice versa.

This is profitable for FX dealers because most novice traders aren’t adept enough in the markets to consistently choose winning trades. So you’re actually making your dealing desk FX dealer money when you lose.

But there are a few ways you can frustrate this whole system and turn the odds in your favor…

Trade With the Fundamentals…Not Against Them!

Firstly, you need to trade on the side of the fundamentals and never against it. Pay attention to what central bankers are saying about their economies (especially now that so many central banks are engaging in competitive devaluation!)

This is important. They may not always give you all the facts, but you can usually get at least an idea of what they will do next from their statements.

Central bankers will give you their thoughts on their respective economies. And if they don’t tell you outright, you can tell by their actions. For example, when central bankers cut rates, it means they’re sacrificing their currency’s value to boost their economy. That’s a bad sign for the country’s currency. And when all central banks are cutting at the same time (as they are now), look for the central bank that still maintains the most bullish statements.

If the economy is growing (according to its GDP numbers), then that’s another plus for a country and its currency. On the other hand, a falling GDP either means a country is slowing or the economy is shrinking rather than expanding. Either way, that’s a bad thing for the currency.

So to find the perfect currency pair to trade, you need to play “matchmaker.” Match up the best-looking country with high inflation and rising interest rates to the ugliest country with the worst fundamentals (lower inflation and slashed interest rates). Once you have your “best-of” and “worst-of” currencies, simply trade the good country vs. the bad country. (Or lately, it’s been the “slightly better” vs. “the worst.”)

For example, let’s say you decided the euro was the “ugliest” currency in the world because the ECB continues to make noise about cutting rates again. You also decided that the dollar was the best-looking currency, as the “anti-euro” in this case. In this instance, you would sell the EUR/USD pair (which means you’re buying the dollar, selling the euro).

Your dealing desk broker doesn’t want you to trade with the proper fundamental direction. They’d prefer you “trade against the trend” of the economic fundamentals. These greedy brokers want you to “pick tops” and “pick bottoms” (and ultimately fail) because you’re fighting the trend. You do that, and your dealing-desk Forex broker wins.

Trade Less, Collect More Profits

The second secret is how much leverage to use. Trust me: Your dealing-desk broker would love you to pour on the leverage (a.k.a., trade more “lots” per trade).

Why? The bigger the lot size you use, the more fees you have to pay them in the short-term (because you pay the spread as your fee, and higher leverage means a greater number of lots which also means more spreads for them). On the other hand, if you use a smaller lot size, and use less leverage per trade, then you pay your broker fewer spreads, at least in the short-term.

So if you use a ton of lots and trade very, very frequently, then you’re actually helping out your broker (not necessarily yourself). Your dealing desk broker will love you because your over-trading is good for business. You’re also making a ton of money – only for your broker, not yourself. That’s why they’ll always encourage active trading.

However, you’ll build up your trading account over the long-term if you trade a lower number of lots in proportion to your account size. Also, if you trade less frequently and hold trades longer, you’ll help yourself and your trading account rather than your broker.

Bottom line: Trade less, and follow the trends. Those are the two easiest ways I know to help yourself and frustrate your FX dealer.

Sean Hyman, “Professor FX” and Long-Time Currency Analyst Explaining How You Can Succeed in the Currency Markets.
Sean Hyman spends his days teaching his fellow professionals in the industry how to trade the $4 TRILLION currency market. Now he brings his 15 years of financial experience to you. From long-term currency strategies, to quick FX-trading moves usually reserved for the professionals, Sean will tell you everything you need to know to succeed in the currency markets.