The Forex Markets: A Rare Glimpse Into The World of Forex Trading

by Dr. Scott Brown

The Forex Markets: A Rare Glimpse Into The World of Forex Trading

By Dr. Scott Brown, Education Director of Investment U

Saturday, July 19, 2009: Issue #1044

There's a lot of interest in the Forex markets right now.

But a big problem is that it's nearly impossible for you to get direct advice from veteran Forex traders since they rarely give interviews and most earn so much they don't care to teach anyone else.

They move vast sums of money and barely have time to train new MBA graduates - who may or may not succeed - let alone talk to novices trying a go of it over the Internet.

Yet despite the closed culture - the inter-bank foreign exchange market is a very small, tight-knit and elite group of top financial professionals - the Internet has opened these markets to the public for small and average investors.

Veteran inter-bank foreign exchange trader Thomas Fischer, MBA has granted us a rare glimpse into the arcane world of Forex trading he prospered in for 22 years.

Let's continue our interview...

Reminiscences of a Forex Market Trader

Scott Brown: Hi again Thomas. Can you highlight for us your biggest Forex trading gain and what that was like emotionally?

Thomas Fischer: "Hi Scott, one of my biggest daily gains as a trader was back in 1982. I was dealing USD/DEM (Dollar against German marks) for the bank and I made USD 250,000. Back in 1982 that was an awful lot of money and it made me, a 26-year-old trader, feel like the master of the Universe. I can still recall most of those trades today, 27 years later, so it did make a huge emotional impact. Privately as a retail trader, my biggest gain was USD 30,000 which I made over a weekend in an Australian Dollar (AUD) position. When I woke up Monday morning and saw the foreign exchange movement and the profit I had made I felt like Rocky Balboa when he stood at the top of the art museum steps in Philadelphia."

Scott Brown: What was your worst loss and what was it like?

Thomas Fischer: "As a trader my biggest daily loss was also in the USD/DEM and it was USD 100,000. I felt like a failure and was very upset and wanted to take revenge the next day. Instead I had a losing streak of two weeks because I lost my discipline and only wanted to take back what the market had taken from me. My personal biggest loss was USD 20,000 which I lost in a GBP/JPY (Sterling versus Yen) trade. When entering the trade I had a mental stop loss of USD 5,000 but I did not want to take my loss and admit my bad trade and thus lost four-fold since I did not stick to my own rules. I have since learned to keep those stop losses intact and as a matter of fact I have never traded that currency pair again."

Scott Brown: Could you elaborate on what you mean by, "Get a feel for the movements and use tight stop losses?"

Thomas Fischer: "When you study a currency pair you will begin to see a trading pattern and often recurring movements. This is why I always recommend concentrating your trading efforts on a few (or a single) currency pair. As an example, we have during the first 10 days of June seen the EUR/USD move from 1.3800 to 1.4100 and then back to 1.3800 again several times. As a trader you could thus have bought the pair at 1.3800 with a [50 pip] stop at 1.3750 in case it broke its pattern. As the EUR/USD moved towards 1.4100 you could then move the stop along with the movement locking in more and more profits. In this case the pair broke 1.4100 and continued to say 1.4500. You would still be long the pair (short the USD) and thus on par for a nice juicy profit which could pay for some future stop losses."

Forex Market Trading and Trailing Stops

Scott Brown: Let's get a little more detailed about trailing stops and how a beginner can make sure they aren't overextending themselves.

If a trader trades mini-contracts where the contract size is $10,000 in EUR/USD pair value with a $50 margin and $3 commission what is (1) the minimum amount of margin they should fund their account with and (2) what is the maximum ratio of contracts: account-value for "money management"purposes? What would be a good trailing stop distance in the scenario above - where one pip = $1 change in trading account value since the mini-contract controls $10,000 of foreign exchange?

Thomas Fischer: "I have never really dealt with an account that small for margin - options/futures - myself and just need to clarify a few things before answering. However the answer may be quite simple, i.e. if you control USD 10,000 with a contract margin of USD 50 you have 200:1 leverage. With a USD 10,000 position you win or lose USD 100 with every big figure movement [trader jargon for 100 pips]. If you only have USD 50 in the account you are required to fund after a movement in the wrong direction of 50 pips. I think thus it would make sense to have USD 100 in margin and have a 100 pip stop loss!"

--- End of Part 2 of 3 ---

So let's quickly summarize some of the most important points Thomas touched on. Some of the things we can take away are universal and work for investments of all kinds.

  • Never trade emotionally, or try to "win it back." Usually you'll only succeed in losing more.

  • Never lose your discipline. Don't ignore your trailing stops - remember that they prevent small losses from becoming big losses.

In the last part of this interview, Thomas will talk with us about how professional interbank Forex traders blend fundamental and technical analysis to forecast their trades.

So stay tuned for third and final part session with Veteran inter-bank foreign exchange trader Thomas Fischer.

It all starts with education,

Dr. Scott Brown

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