Original article on ForexBrace

Market analysis is one of the hot issues in Forex trading. Many people surf the internet, refer to the reports generated by their brokers, visit news websites, watch TV channels, or even pay money to professionals for the advice and knowing the direction of the market. The big question though is what kind of market analysis is useful.

Suppose I show you the following image taken from GBPUSD 4 Hour chart and suggest that since the price has dropped below the trend line you need to go short if it fails to reach the trend line in the next 4 hours.

(Click image to enlarge)

Is the information provided in the previous paragraph good enough to enter a new trade? The answer is No. You need more to enter a trade. Here are a few things to know to enter a trade.

  • The price range to enter
  • The direction of the trade (whether to go short or long)
  • Profit target (or how to exit the trade)
  • Stop loss (or when to close the trade if the price does not move in your favour)

It would also be beneficial if the analyst informs you about managing the open trades. For example about moving Stoploss to breakeven if the price moves in your favour to a certain level or the trailing stop settings. Now see the following image.

(Click image to enlarge)

In this image you clearly know at which price to enter the market and all necessary conditions to enter the trade, the direction of the trade and how to exit the trade. For those who are curious the next image shows that this analysis was quite profitable.

(Click image to enlarge)

Should We Take Advice from Others?

This is a broad question. The quick answer to this question is that it depends. The longer answer is that you need to consider a few things in order to decide whether to take others advice or not.

First of all I have to emphasize that nobody can predict the future. All analysis methods including fundamental, technical, or quantitative try to increase the likelihood of win. They cannot guarantee the results. Make sure to understand that. So even the best analysts fail to make money on every trade they make. Keep this in mind and make sure to accept this fact before entering any trade whether it is based on your analysis or others.

You need to know the system or at least the results that the system or the advisor has gained in the past. You may ask for their live account statement or their previous analysis. I also suggest reading the comments about their services and their results on third party websites and forums. Use your judgment to analyze the reliability of the source of information. Don't jump into conclusion that because this guy is in that position I can live my destiny in his hands.

Even when you feel quite comfortable with the source of information demo trade their suggestions for a while. Make sure that you feel comfortable and can handle what they suggest. Go live only when you feel comfortable with the source of information and also with the analysis itself.

Don't forget the importance of managing emotions. If you do not manage your emotions you cannot enter and exit trades correctly.

Take Position Sizing serious. Do not enter trades with large positions. Risk low amounts of your account per trade. For example risk 1 to 2% of your account balance in the first few trades and never go beyond 5%. What I am trying to suggest is that manage your risk correctly and wisely. Do not risk too much. This could potentially wipe out your account.

A trading system could exit the trade based on some indicators. For example when two moving averages cross you need to close the trade. Even when you are dealing with such trades make sure to add Stoploss and Take profit to your trades. They could be far enough from your open price to make sure they will not interrupt it but at least they can prevent large losses or missing potential profit. If you are concerned about your broker and you believe they hunt your stop-losses I suggest changing your broker. Do not work with somebody who you do not feel comfortable with them.

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