The "Duck-And-Jab" Approach To Forex

by David Hunt

Wouldn't it be great to increase the probability that your trade will be successful while simultaneously spending less time analyzing chart patterns? By putting the forex market in perspective and realizing your role as an individual trader, it is possible.

Most traders don't realize that the money they contribute to the spot market has virtually no impact on price movement, so playing by the same rules as the "big players" may not be your most profitable option. When you jump in and out of the market quickly on a calculated and highly economic regimen - a strategy called fundamental speed - you can make an impact on your own investments.

Who are the "big players"?

Banks and governments are the big players that make the forex market move.

* Banks transfer money to and from global institutions and stock reserves of every major currency. (The policies of these banks affect the currency market in a big way. See what makes them tick in Get To Know The Major Central Banks.)
* Governments set the interest rate that determines bank lending power and have the ability to sway the market by releasing key economic information.

The role of a forex trader is not to trade to move the market, but to realize the relatively undecipherable impact their trades make. Keeping this in perspective, a trader can profit through the timing of their trades - the fundamental speed process.

Fundamental Speed: The What and the How

Fundamental speed is the process of keeping an eye on key economic indicators that impact the currencies you trade, placing your trade and then exiting in a systematic way. Here is a rundown on how the process works:

1. Pick high-impact economic releases only.

Each day dozens of economic releases are made globally but only a few - if any - are worth trading. Currencies tend to make big movements when an economic release is tied directly to their rate of transfer in relation to another country's currency (Central banks' rate changes are one of the biggest influences on the forex market, see Interest Rates Matter For Forex Traders)
Here are a few releases you should keep an eye on:

* CPI
* Trade balance
* Interest rate statement
* Retail sales
* Home sales
* Consumer confidence
* Unemployment claims

Most economic calendars online show the high-impact releases in red, with a basic explanation of how they move the market. This can be a handy tool when deciding which releases to trade.


2. Set a time limit to move in and out of the market.

Realizing that the money you put in the foreign-exchange market will not make a substantial impact, you should have an exit strategy that is based on a system, not emotion.

After an economic release, a reliable price movement occurs for one to two minutes. Depending on whether the release is hawkish or dovish you will see that the price typically goes in the expected direction - but many times it spirals out in what seems to be a random direction after the first 60 to 120 seconds.

This is not so much a random movement as it is a government trying to steady their currency or a bank pushing money through to get the best transfer rate - things that are out of your control. If the release points in the direction of the daily moving average you may feel comfortable staying on the trade for up to five minutes. Treat this on a trade-by-trade basis however.

3. Do nothing in a neutral situation.

If the predicted or forecasted figure is accurate to the actual don't jump in to a trade just to put money down. Trading the fundamental speed process only gives you a few trade options on any given day (less if you trade specific currencies) and there is a temptation to risk money in a neutral situation. It is important to keep your emotions in check.

More Probable, More Profits

As a trader it is important to emphasize increasing the probability of a successful trade. The higher percentage of profitable trades you make typically gives you a higher rate of overall return - that is, more cash in your pocket. By sticking to a system you will be trading in a fashion that allows you to track the probability of your trades and to gauge which ones are profitable and which ones are not. A few more benefits of the fundamental speed process include:

* Less time analyzing charts: Technical trading can be a complex arena for beginning traders and, although it is systematic, it can be difficult to use successfully. As you grow as a trader you can merge technical trading with fundamental speed to maximize your exit strategy. But if you are just starting out, you can avoid charts altogether by focusing on the fundamentals, which are black and white.

* The ability to set a forex schedule: The forex market is a 24-hour-a-day operation, but obviously you cannot expect to trade nonstop. For many traders the most difficult part of trading is figuring out the best time to trade. Some traders work day jobs and must trade after-hours; others are full-time traders but realize the importance of sticking to a regimen. By using the fundamental speed process you know the exact times you need to trade.


The Bottom Line

Many traders learn forex through instruction manuals that treat individual traders like the "big players". Individuals trade with limited capital, meaning their impact reaches far less than the governments and banks that run the market. By harnessing this knowledge and trading in a way that uses it effectively, a trader can maximize his or her potential.