Brian Dolan

Cheat Sheet / Updated 10-15-2021

Foreign exchange (or forex) markets are one of the fastest and most volatile financial markets to trade. Money can be made or lost in a matter of seconds; at the same time, currencies can display significant trends lasting several days, weeks, even years. Most importantly, forex markets are always moving, providing an accessible and target-rich trading environment.

Article / Updated 06-29-2021

When it comes to trading options, knowing how to look for breaks is key. For more details on a zoomed-out look at this, read How to Find a Breakout in Trading. One way to trade a breakout is after the break has occurred. You may not have noticed the significance of a particular technical level, or you may not have left orders in overnight to exploit a break. You turn on your computer the next morning to discover that prices have jumped higher overnight and feel like you’ve missed the boat. But you may still get a chance to trade the breakout if prices return to retest the breakout level. A retest refers to prices reversing direction after a break and returning to the breakout level to see if it will hold. In the case of a break to the upside, for example, after the initial wave of buying has run its course, prices may stall and trigger very short-term profit-taking selling. The tendency is for prices to return to the breakout level, which should now act as support and attract buying interest. You can use these retests to establish a position in the direction of the breakout, in this case getting long on the pullback. The figure shows where you could have bought on the retest of the break higher in AUD/USD. Credit: Source: eSignal Note that prices did not make it exactly back to the breakout level. When trying to get in on a retest, you may consider allowing for a margin of error in case the exact level is not retested. You could also consider using a strategy of averaging into a position to establish a position on any pullbacks following a breakout. Here the averaging range would be between current prices and the break level. You may get the chance to buy/sell a retest of a breakout level. The reason is that not every breakout sees prices return to retest the break level. Some retests may retrace only a portion of the breakout move, stopping short of retesting the exact break level, which is typically a good sign that the break is for real and will continue. Other breakouts never look back and just keep going. But to the extent that it’s a common-enough phenomenon, you still need to be aware of and anticipate that prices may return to the breakout level. From a technical perspective, if prices do retest the breakout level, and the level holds, it’s a strong sign that the breakout is valid, because market interest is entering there in the direction of the break.

Article / Updated 03-26-2016

Online currency trading is offered by dozens of different retail trading brokerage firms operating from all over the world, so you have many options to choose from. Here are some key questions to ask when you’re choosing a broker: How good are trading executions? The key to evaluating any brokers is the speed and reliability of your trade executions. Are you consistently able to trade at the price you’re trying for? If you’re trying to sell, and your trade request fails, and you’re offered a lower price, you’re probably being requoted. (Requoting effectively means you’re trading on a wider spread than you bargained for.) Does your broker offer price improvement on limit orders? For stop-loss orders, the brokerage’s execution quality comes down to the amount of slippage experienced when prices gap following data or news announcements. You should expect some slippage on stop-loss order executions — the question is, “How much?” How are orders filled? Find out exactly how your stop-loss or take-profit orders are filled. Is a stop-loss sell order filled when the bid price matches the stop price, such as a selling stop at 10 triggered by a price quote of 10/13? Are stops guaranteed? If so, are there any exceptions to such guarantees? What’s the policy for filling limit orders? Does the market bid price need to match the price of the limit order to sell, for example? A reputable broker will have clearly defined order execution policies on their website. Are dealing spreads stable in all market conditions? Most forex brokers offer variable spreads these days. When market liquidity is high, the spreads will be tightest. During volatile market conditions and around major news events, spreads will naturally widen. However, the amount of variability can really differ among brokers, so make sure you understand how wide spreads can go when the market’s really moving. Look on a broker’s website to see if they publish their execution statistics, which can give you more insight into their execution quality — including speed, the percent of trade requests that are successfully executed, and the opportunity for price improvement. Remember: Tight spreads are only as good as the execution that goes along with them. What is the commission structure? Most online forex brokerages provide trade executions without charging trade commissions. Instead, the broker is compensated by the price spread between the bid and the offer. A few brokers offer a commission-based pricing structure coupled with narrower trading spreads. If the brokerage charges a per-trade commission, you need to factor that cost into your calculations to see if it’s really a better deal than a spread-based commission. How much leverage does the firm offer? Too much of a good thing? In the case of leverage, yes. Over the past several years, the maximum leverage available to retail traders has been reduced by regulators. For example, in the United States, the maximum available leverage is 50:1. In some markets outside the United States, such as the United Kingdom and Australia, 200:1 leverage is available. Generally speaking, firms offering excessively high leverage (higher than 200:1) are not looking out for the best interest of their customers and, more often than not, are not registered with a major regulatory body. What trading resources are available? Evaluate all the tools and resources offered by the firm. Is the trading platform intuitive and easy to use? What charting tools are available? What newsfeeds are available? Do they provide live market commentary on a regular basis? What type of research does the firm provide? Do they offer mobile trading? Are you able to receive rate alerts via e-mail, text message, or Twitter? Are there iPhone/iPad apps? Does the firm support automated trading? Does the platform offer robust reporting capabilities, including transaction detail, monthly statements, profit-and-loss (P&L) reports, and so on? Is 24-hour customer support available? Forex is a 24-hour market, so 24-hour support is a must. Can you access customer service firm by phone, e-mail, and chat? Are the firm’s representatives licensed? Knowledgeable? The quality of support can vary drastically from firm to firm, so be sure to experience it firsthand before opening an account. Is the firm regulated, with solid financials? In the United States, online currency brokerages are regulated by the National Futures Association (NFA), which is the self-regulatory body subject to Commodity Futures Trading Commission (CFTC) oversight. Other geographies with solid regulatory frameworks include the United Kingdom/Europe, Australia, Japan, Hong Kong, and Singapore — ideally you should trade with a broker that is regulated by at least one of these regulatory agencies. Who runs the firm? Management expertise is a key factor, because a trader’s end-user experience is dictated from the top and will be reflected in the firm’s dealing practices, execution quality, and so on. Review staff bios to evaluate the level of management and trading experience at the firm. If the brokerage doesn’t tell you who is running the show, it may be for a reason.

Article / Updated 03-26-2016

Identifying trading opportunities and planning each trade from start to finish is essential to success in currency trading. When you trade currency as an investment tool, remember to: Maintain trading discipline by formulating — and sticking to — a complete trading plan: position size, entry and exit (stop loss and take profit) before you enter a trade. Always trade with a stop-loss order. Decide on the stop loss before you’re in the trade and don’t move it unless it’s to protect profits. Identify trade entry and exit levels in advance through technical analysis. Understand how each currency pair’s prices move and what drives the prices. Determine position size based on the trade setup and your financial risk-management plan. Be patient — currencies move around a lot. Wait for the market to allow you to enter your trade strategy. After you’ve invested your time, energy, and risk capital in a trade, your work has only just begun. Managing your trade while it’s active is just as important to a successful outcome. Stay alert, be flexible, but stick to your trading plan.

Article / Updated 03-26-2016

Knowing the fundamental drivers of currency rates is the foundation of understanding price movements. This is very important to understand if you want to trade currency as an investment. Here are some suggestions: Get to know the major economic data reports from all the major economies. Understand the importance of expectations versus actual outcomes. Anticipate alternative outcomes to better gauge how the market is really reacting. Stay aware of the pricing in and pricing out of market expectations that occurs in advance of data and events. Factor incoming data and news into the major fundamental themes of interest-rate expectations, economic-growth prospects, inflation, and structural developments. Be aware that technical and position-related themes can overwhelm the fundamentals.

Article / Updated 03-26-2016

Three things make you a good currency trader: platform, methodology, and psychology. Often traders have the first two covered, but they come up short in the psychology department. Do you ever think that trading is too hard? That you can't seem to make money or make a good decision? If so, that's good! It means you're a perfectly normal trader who shares the doubts and fears of traders all over the world. The key is to develop a strategy to manage those doubts and fears so that they don't get in the way of your being a good trader. Trading is hard on people — it makes them confront their fears around money, self-worth, and performance. In life, you spend most of your time somewhere in the middle, neither succeeding wildly nor failing miserably, but managing to muddle through. With trading, that isn't the case — you either make money or you don't, and you know how you performed immediately. Here are some of the Achilles heels that can negatively impact a trader's performance: Impatience: Many traders enter or exit a trade too quickly. They don't stick to their plans, lose, and then blame themselves for days afterward. This blame game leads to self-doubt, which can make you hate trading. If you're impatient, the key is to find out what triggers your impatience. Is it around major trading events like U.S. labor market data, when the market gets volatile for a few minutes? If so, don't trade during that time. Does it tend to occur if you've just had a losing trade? If so, instead of placing the first trade that comes into your head, write it down and leave it for an hour; then read it over and see if you want to place the trade. (You probably won't, but if you do, at least you'll know it wasn't because you were impatient.) Fear: Fear is an important reaction, but sometimes it causes traders to freeze. If you're new to trading, just remember that currency trading gets easier the more you do it and the fear eventually subsides. Also, put things in perspective: No one will die as a result of your putting on one trade. If you use the correct money-management skills, and if you use a sell-stop order, then you should know how much money you may lose on any trade, which can limit the fear factor. Pride: You know that feeling in your chest — the one that feels like everyone is watching and judging you if you fail. If you're worried about what other people will think of your performance, good news: Most people are too obsessed with their own lives to worry about yours. Plus, it's natural to make mistakes, so give it your best shot and don't let your pride get in the way of your learning and growing as a trader. Greed: Did you let a trade run for too long because you thought you could wring another dollar from it? If so, you aren't alone. Greed clouds the senses. You shouldn't be trading, at least initially, to make a fortune. Have realistic expectations, and treat your early trades as an experiment. Try not to think of all the things you'll be able to buy with your earnings. Trading can make you a lot of money, if you're good at it, but it takes time. The best traders are passionate about trading — they're not in it for the money. Expectations: You can easily let your expectations snowball. But if you reach for the moon too soon, you'll be disappointed, and that can lead to more mistakes. You won't become Warren Buffet overnight, or in six months, or with a $6,000 account. If you use the correct money-management skills, you should risk only 2 percent to 5 percent of your account balance on each trade. Anything else could lead you to risk too much of your account, which could wipe you out if the trade doesn't go your way. Don't expect to win all the time. Most successful traders with solid money-management systems in place may only win a little over 50 percent of the time. Nurturing your psychological health is extremely important to your success as a trader.

Article / Updated 03-26-2016

You may think that the $5-trillion-a-day forex market may be too big to get caught up in the movements of other, smaller asset classes, but that's not the case. The forex market doesn't move in isolation — what other asset classes do can have big implications for currency prices. Here's how: Equity markets: If an equity market is rallying, check the domestic currency — sometimes it can follow suit. The Bank for International Settlements (BIS) believes that there is a link between forex and equities. In its view, forex trading can be driven by equity investors who go overseas to get better returns. Investors need to trade forex for two reasons: To buy foreign assets To hedge their returns Between June 2013 and May 2014, a puzzling thing happened: The Eurozone economy was underperforming many other global economies, but the euro was rallying. Instead of being driven by fundamentals, the single currency was moving in line with the Euro Stoxx equity index, which rallied nearly 10 percent over that period. Commodities: This is one of the most talked about correlations because the vast majority of commodities are priced in U.S. dollars. So, when the U.S. dollar rallies, the prices of commodities can fall because you need fewer dollars to buy your commodity. The reverse is also true if the dollar falls in value. If you see a sudden change in the dollar's value, take a look at what gold and oil prices are doing. The commodity/forex correlation doesn't not end there. Some commodity currencies can also move with commodity prices. For example, Canada is the world's sixth-largest oil producer, so if the price of oil is rising, this can be good news for Canada's economic fundamentals, which can also be good news for the Canadian dollar, and vice versa if the oil price is falling. Bond yields: An economy that offers higher returns on its bonds can be an attractive place to buy currency for obvious reasons. So, countries with higher bond yields can see their currencies rise relative to countries with lower bond yields. But beware: Sometimes high bond yields can spell disaster. For example, during the financial crisis in 2008, Iceland's two-year bond yields surged to 13 percent, but the government had to pay that much to attract funds because the economy was on its knees. It required a bailout, and the Icelandic krona fell more than 100 percent between 2007 and 2010. USD/JPY and the Nikkei: This is a popular cross-asset correlation, but it may not move as you expect. Because the yen is considered a safe haven, investors tend to buy it during periods of market distress. When the Nikkei is falling, the yen can rise, which weighs on USD/JPY. The opposite can also be true, so when the yen is falling (USD/JPY rising), the Nikkei can be on a march higher. Multiple factors can drive forex markets. Correlations with other markets are just one factor, but they can be very effective. When you trade forex, keep in mind that currencies don't trade in isolation.

Article / Updated 03-26-2016

These "beginner" trading mistakes are made by everyone — from total newcomers to grizzled forex market veterans. No matter how long you've been trading, you're bound to experience lapses in trading discipline, whether they're brought on by unusual market developments or emotional extremes. The key is to develop an intuitive understanding of the major pitfalls of trading, so that you can recognize early on if you're letting your discipline slip. If you start to see any of the following errors in your own trading, it's probably a good idea to square up, step back from the market, and refocus your concentration and energies on the basic trading rules. Running losers, cutting winners: By far the most common trading mistake is holding on to losing positions for too long and taking profit on winning trades too soon. By cutting winners too early, you may not make as much — but then again, you literally can't go broke taking profit. That said, you will deplete your trading capital if you let losses run too long. The key to limiting losses is to follow a risk-aware trading plan that always has a stop-loss order and to stick to it. No one is right all the time, so the sooner you're able to accept small losses as part of everyday trading, the sooner you'll be able to refocus on spotting and trading winning strategies. Trading without a plan: Opening up a trade without a concrete plan is like asking the market to take your money. If the market moves against you, when will you cut your losses? If the market moves in your favor, when will you take profit? If you haven't determined these levels in advance, why would you suddenly come up with them when you're caught up in the emotions of a live position? Resist the urge to trade spontaneously based on your instincts alone without a clearly defined risk-management plan. If you have a strong view, go with it, but do the legwork in advance so you have a workable trading plan that specifies where to enter and where to exit — both stop-loss and take-profit. Be aware of the increased risk of trading around important news and data releases. Study economic and event calendars to identify future event risks, and factor them into your trading plan. That may mean stepping out of the market in advance of such events. Trading without a stop loss: Trading without a stop loss is a recipe for disaster. It's how small, manageable losses become devastating wipeouts. Trading without a stop loss is the same as saying, "I know I'm going to be right — it's just a matter of time." That may be so — but it may take a lot longer than your margin collateral can support. Using stop-loss orders is part of a well-conceived trading plan that has specific expectations based on your research and analysis. The stop loss is where your trade strategy is invalidated. Moving stop-loss orders: Moving your stop-loss order to avoid being stopped out is almost the same as trading without a stop loss in the first place. Worse, it reveals a lack of trading discipline and opens a slippery slope to major losses. If you don't want to take a relatively small loss based on your original stop loss, why would you want to take an even larger loss after you've moved your stop? If you're like most people, you won't — and you'll keep moving your stop to avoid taking an ever-larger loss until your margin runs out. Move your stop loss only in the direction of a winning trade to lock in profits, and never move your stop in the direction of a losing position. Overtrading: Overtrading comes in two main forms: Trading too often in the market: Trading too often in the market suggests that there is always something going on and that you always know what it is. If you always have a position open, you're constantly exposed to market risk. But the essence of disciplined trading is minimizing your exposure to unnecessary market risk. Instead, focus on trade opportunities where you think you've got an edge, and apply a disciplined trade strategy to them. Trading too many positions at once: Trading too many positions at once also suggests that you're able to spot multiple trade opportunities and exploit them simultaneously. More likely, you're throwing darts at the board, hoping something sticks. Trading too many positions also eats up your available margin collateral, reducing your cushion against adverse market movements. Be careful about trade duplication and overlapping positions — a long USD/CHF position can be the same as a short EUR/USD or GBP/USD (all long USD versus Europe), while a short EUR/USD and a long EUR/JPY position nets out to be the same as being long USD/JPY. Overleveraging: Overleveraging is trading too large a position size relative to your available margin. Even a small market move against you can be enough to cause an overleveraged position to be liquidated for insufficient margin. This common no-no is made more tempting by the generous leverage ratios available with some online forex brokers. Just because they offer you 100:1 or 200:1 leverage does not mean you have to use it all. Don't base your position size on your maximum available position. Instead, base your position size on trade-specific factors such as proximity to technical levels or your confidence in the trade setup/signal. Failing to adapt to changing market conditions: Market conditions are always changing, which means your trading approach needs to be flexible, too. Trends give way to consolidation ranges, and breakouts from ranges may lead to new trends. Stay flexible with your trading approach by first evaluating overall market conditions in terms of trends or ranges. If a trending move is under way, using a range-trading style won't work, just as a trend-following approach will fail in a range-bound market. Use technical analysis to highlight whether range or trending conditions prevail. Being unaware of news and data events: Even if you're a dyed-in-the-wool technical trader, you need to be aware of what's going on and what's coming up in the fundamental world. You may see a great trade setup in AUD/USD, for instance, but the Australian trade balance report in a few hours could blow it out of the water. Make data/event calendar reading a part of your daily and weekly trading routine. The market throws enough curveballs with unscheduled developments, so make sure you at least have a handle on what's coming up. A forward-looking mindset also allows you to anticipate potential data outcomes and market reactions and to factor them into your trading plan. Trading defensively: No trader wins all the time, and every trader has experienced losing streaks. After a series of losses, you may find yourself trading too defensively, focusing more on avoiding losses than spotting winning trades. At those times, it's best to step back from the market, look at what went wrong with your earlier trades, and refocus your energies until you feel confident enough to start spotting opportunities again. Keeping realistic expectations: Face it: You're not going to retire based on any single trade. The key is to hit singles and stay in the game. Be realistic when setting the parameters of your trading plans by looking at recent market reactions and average trading ranges. Avoid holding out for perfection — if the market has achieved 80 percent of your expected scenario, you can't go wrong locking in some profits, at the minimum.

Article / Updated 03-26-2016

The kind of trader you are will affect — or should affect — your trading strategy. It helps to know your trader type so you can trade effectively and in a way that feels right for you. To determine your trader type, take the following quiz. The quiz Which statement best describes you when you're competing? A. I'm aggressive, outgoing, and confident in my abilities whether I win or lose. B. I like to be perceived as wise and thoughtful, and I accept loss as part of the process. C. I'm calculating, and winning is extremely important to me. In your free time, what do you most enjoy doing? A. Action-packed activities with high-adrenaline energy and risk B. Activities planned in advance, and ideally ones that further my knowledge or experience in some way C. A wide variety of fun activities, depending on what opportunities emerge that day If you were given $250, which of the following would you do with the money? A. Gamble it on a good bet and try to win big. B. Spend it with a night on the town, shopping, and dinner. C. Save and invest the money for a rainy day. Your favorite sports team is significantly behind at the halfway point of the game, what should the coach do? A. Trust the team's preparation and original game plan, and the tide will turn in their favor in the second half. B. Draw up a new strategy to take advantage of a weakness observed in the first half. C. Take a risk by trashing the old strategy and shifting to a more aggressive attack mode to get back in the game. At work, if you completed a project well ahead of your scheduled deadline, what would you do with the extra free time? A. Submit the project and ask for another. B. Pore over the project even further to dissect it, making subtle tweaks, but keeping the project much the same; then turn it in on time. C. Do more research to see if you can add on to the project even further. In a party setting, which of the following descriptions is most like you? A. Energetic, rapidly flitting between conversations if you get bored B. Generally sitting with two or three close acquaintances, learning about what's new with them C. The center of attention, happy as long as you're surrounded by peers Which of the following workplace careers would you most like? A. A long, successful career as an average employee who does a good job, gets paid well, and retires comfortably, while never rocking the boat or ascending to a position of power. B. A successful worker who often rises to management positions but is labeled as a "job jumper" who has many stints at a variety of business ventures. C. A short stint as a CEO of a well-known company that was initially successful and enriching, but eventually succumbed to outsized expectations, followed by an average career thereafter How do you typically trade an event like nonfarm payrolls (NFP) in the United States? A. Form an opinion, place your trade, and hang on! B. Wait for the overzealous reactions directly after the announcement and trade the aftermath. C. Trade NFP? Are you nuts? The results Tally up the number of A's, B's, and C's in your responses. If you mostly answered A, you're a scalper. If you mostly answered B, you're a swing trader. If you mostly answered C, you're a position trader. Read on to learn more. The scalper: A scalper is a trader who looks for short, minimally profitable opportunities in the market that can add up over time. If you're a scalper, you don't have the patience to hold a position for a lengthy period and you grow bored easily when keeping trades active for too long. You're motivated by the excitement of seeing fast-moving markets, sometimes trading around major news events to realize the vast potential of a large move in a very short period of time. You aren't happy about placing a losing trade, but you're typically less impacted both financially and emotionally due to the small nature and frequency of trades that you place. The swing trader: A swing trader is someone who typically enjoys staying in a trade for as little as a few hours to potentially days. If you're a swing trader, you like the analysis aspect of trading — finding patterns that develop and exploiting them like a cunning strategist. Because you place fewer trades on a daily and weekly basis, losing trades could have more of an impact on your psyche, so keeping your longer-term goals in mind and sticking to the plan are imperative. The position trader: A position trader has a much longer time frame in mind than most other traders. If you're a position trader, you could be in a trade for months or even years if your conviction is strong enough. Usually based on a fundamental perspective of political, sentimental, or supply/demand reasoning, you brush off the fear of short-term movements. You're much more tolerant of drawdowns and could take losses for a very long time before finally admitting defeat.

Article / Updated 03-26-2016

Medium- and longer-term trade strategies typically benefit from averaging into a position. Averaging into a position refers to the practice of buying/selling at successively lower/higher prices to improve the average rate of the desired long/short position. The idea here is to allow larger market swings to unfold and use them to establish a larger position at better prices than current levels in anticipation that the market will eventually reverse course in line with your strategy. Take a look at a detailed example of averaging into a position to see how it works. Imagine that the USD/JPY is moving lower from 82.20 on a weak U.S. economic release, but you think USD/JPY is unlikely to decline below 81.00, where the 200-day moving average is located. One possible strategy would be to buy USD/JPY on the current weakness, spacing your buys so that you can buy as low as possible, but above 81.00 where you don’t expect it to trade. (The stop-loss exit in this example would be somewhere below 81.00.) Imagine that you buy one lot of USD/JPY at the market, now at 82.00, just so you have some piece of the position in case the market rebounds abruptly. You decide that 81.20 is another good level to buy at because it’s a margin of error above the key 81.00 level. If your order to buy at 81.20 is filled, you’ll be long two lots at an average price of 81.60 ([82.00 + 81.20] / 2 = 81.60). Take a look at what just happened there. To begin with, you were long one lot from 82.00. To add to the position at 81.20 means the market was trading lower, which also means you were looking at an unrealized loss of −80 pips on your initial position from 82.00. After you buy the second lot, your unrealized loss has not changed substantially (assuming that the market is still at 81.20 and excluding the spread, you’re still out −80 pips, now −40 pips on 2 lots), but your position size has just doubled, which means your risk has also just doubled. If the market rebounds from 81.20, your unrealized loss will be reduced. But if the market continues to decline, your losses are going to be twice what they were had you not added on to your position. If your strategy plays out and the market reverses higher, you now have a larger position from a better entry price than if you had entered the two lot position earlier at higher levels. The practice is referred to as pyramiding, and the advice is usually to avoid doing it (as in “Don’t pyramid into a losing position”). Sometimes “adding on” to winning positions is acceptable, such as after a technical level breaks in the direction of your trade. The result of adding on to winning positions, however, is a worse average rate for the overall position — a higher average long price or a lower average short price. If the market reverses after you add on, any gains in the overall trade can be quickly erased. So what’s the deal? Should you average into positions or not? As with most questions on trading tactics, the answer is a straightforward “It depends.” Before deciding whether to average into positions, consider the following: Time frame of the trade: Short-term trades seek to exploit the immediate direction of the market. If you’re wrong on the direction in the first place, adding to the position at better rates will likely only compound your losses. For medium- and longer-term trades, averaging into a position can make sense if the trade setup anticipates a market reversal. Account size: Depending on your account size, you may not have the capability to add to positions. You also need to keep in mind that adding to a position will further reduce your available margin, which reduces your cushion against adverse price movements, bringing you closer to liquidation due to insufficient margin. If that means trading smaller position sizes, such as 10,000 mini-lots, go with that. Volatility: If the overall market or the currency pair you’re trading is experiencing heightened volatility, averaging into trades is probably not a good idea. Increased volatility is usually symptomatic of uncertainty or fresh news hitting the market, both of which are prone to see more extreme directional price moves, in which case averaging is a losing proposition. In contrast, lower volatility conditions tend to favor range-trading environments, where averaging can be successful.