A nation that is importing considerably more than it is exporting will tend to have a weak currency. One needs to look no further than the current trend of the US Dollar to see how this principal works in the real world.

Currency risks for companies involved in international trade necessitate pro-active management, which in turn requires a certain level of expertise. Currency movements are not correlated to investments such as equities and bonds. Investment portfolios are thus valuable diversified by the addition of a foreign exchange component. Currency movements are momentum based. Rather than responding to standard fundamentals, a currency’s value is in itself one of the most important fundamentals.

Foreign currency ETFs are bought and sold just like regular ETFs, throughout the day. Foreign exchange (forex) markets form the core of the global financial market, a seamless twenty-four hour structure dominated by sophisticated professional players – commercial banks, central banks, hedge funds and forex brokers – and often extremely volatile. Many investors, particularly American ones, tend to ignore currency movements, and few financial analysts are trained to analyze the details of forex markets.

Countries are trading more goods and services, an increasing number of firms now operate across national borders, and savers and borrowers have greater access than ever before to global financial markets. Over the past decade, world trade has grown twice as fast as world output, foreign direct investment three times as fast, and both currency trading and share trading about ten times as fast. This means that huge amounts of currencies are now being traded every business day. Up to three trillion dollars a day is the current estimate.

This heavy volume of trading means that no one entity, central banks included, can control the currency market. The currency market will punish those nations that manage their financial affairs poorly and it is beyond the power of the central bankers to reverse long term trends without a change in policy. Generally, under such conditions countries that are heavy users of energy and have to import a large percentage of their energy needs would experience problems in maintaining a stable currency. Market forces will overpower the limited power of the central bank and take their currency lower.

Exchange rate movements will favor surplus energy producing countries, like Russia and Canada, over energy deficit countries like the United States. You would expect a rise in the currency of the energy producing country and a decline in the currency of the energy importing country. This is a long term negative influence on the value of the US Dollar as the US is now paying through the nose for it’s oil imports.

Fundamental analysis yields very little benefit when a market is in such a state. By definition, all that can be known is known, and is already reflected in prices. Fundamental analysis is based on the belief that there are cause-and-effect relationships that need to be understood in order for pricing anomalies to be sensibly identified and acted upon. Technical analysis is based on the assumption that past price relationships are indicative of future price relationships. Fundamental analysis is concerned with the reasons or causes for currency movements. Many Forex traders who rely on fundamental analysis plan their trading strategies around a number of key U.S. economic indicators.

Fundamentally, the US now lacks the industrial base to correct its trade imbalance. According to the Bureau of Census, roughly 25,000 manufacturing plants have been shuttered since 1998, and in recent years, because of weak market conditions, manufacturing companies have cut back on plant and equipment spending.

This does not bode well for the strength of the US Dollar no matter how many rabbits Fed Chairman Ben Bernanke tries to pull out of his magic hat.

Keep it Simple!

Clever people tend to like to show how clever they are and construct clever, complicated forex trading strategies which don’t work in reality, because they are not robust and break. A trader with a simple trading system, has a tool which is more robust, with fewer elements to break.

Simple forex trading strategies work best and always have.

You Need to Look Stupid

This is a fact of life in forex trading. You can think your market timing is great and execute your trading signal and the market hits you hard – not your fault, that’s just the way it is. Clever people tend to have ego’s and it bruises them, they can’t take it and revenge trade or get frustrated – welcome to the real world of trading.

You see the market moves when it wants and in what direction it wants and you can only be wrong. It’s always right.

Now if you accept that and don’t take it personally, you can cheerfully accept your losses and know if you have a robust trading system that your profits will take care of these losses and give you an overall profit.

Perfection

Is not possible in the forex markets but some clever people think – if they work hard enough, they will gain perfection but their wasting their time. It’s an imperfect world and sure, you can make money but its no place to take on the all powerful market and try and beat it.

I have trained thousands of traders and can tell you one thing from experience, the clever college kid or mathematics wiz kid, has been no match for house wives, a sheep farmer and a long distance truck driver to name a few.

Sure some clever people don’t come with egos but most I have seen do and most lose.

On the other hand, the humble trader who gets a simple trading system, accepts it’s not perfect – but knows it can make money if applied with discipline, ends up smiling at the end of the day, with a big healthy positive account balance.

If you want to win at forex trading, forget effort making you rich it doesn’t. Forex trading is all about working smart furthermore, forget about trying to beat the market, as soon as have this mentality, the market will take your account balance in full and destroy you.

So be humble, be smart, get the right forex education and play to win and not to stoke your ego and you can enjoy forex trading success.

So how useful are computers in forex trading?

The role of computers is very often misunderstood by forex traders.

Computers have enhanced our lives in many areas and help us solve complicated problems there is the belief forex trading systems can be created to trade forex markets automatically.

There are a number of forex trading systems for sale that promise to do just that – and most of them fail.

There are two reasons for this failure:

1. The System is to Complicated

Its tempting to make a system complicated and many traders do they figure the more elements it contains the better its chances of success however the complete reverse is true.

The more rules and parameters you cram into a trading system the more elements there are to break in the brutal ever changing markets – it’s a fact simple systems work best as they are more robust and this has always been so.

2. Curve fitting

Many systems that fail in real time trading actually work in hindsight when their tested on data and the reason for this is curve fitting. Curve fitting is simply bending the rules of the trading system to fit the data. When the first rules don’t work the trader simply bends them until they do. This is a bit like shooting at door with a shotgun and then after the event, drawing a chalk circle around each one to make it a bulls-eye!

Keep in mind that any segment of data is going to be different as the markets are not scientific in terms of their movement so the appliance of science is of limited use.

The above mistakes are often made in tandem and complexity or trying to be clever testing data and bending a system won’t help you make money.

Here is another startling fact:

50 years ago 95% of traders lost and today the ratio remains the same – this is despite all the advances in computers forecasting and market data retrieval. It’s pretty clear that the application of computers has made no real difference to the success of traders.

Many traders think the application of science and computers can help in all areas of life and in many they can but in forex markets this is not so.

Computers make your life easier but they cannot be relied upon to give you success.

Just as in the past a simple system will beat a complicated one and that is never going to change as forex is a game of odds not certainties.

Yes computers are helpful but the real key to trading is finding a simple forex trading system, understanding it and applying it with discipline.

Many modern trend following systems, such as the Turtle Trading system, are based on his work and legendary trader Richard Dennis was a huge fan and Ed Seykota used him as an inspiration.

Richard Donchian didn’t begin trading his successful trend following system until the age of 65. He started making large returns after that and continued to trade until into his 90s – showing your never to old to trade. While he operated mostly in the field of commodities his technical analysis is applicable to any market.

His 4 week trading rule system has been at the heart of many successful trading systems and is one of the simplest, easiest and most profitable ways to trade trending markets.

People tend to think complicated is better but the 4 week rule is simplistic but will get you on the right side of every profitable trend and help you make money.

Apart from the 4 week rule he did a lot of work with a five and twenty day moving average crossover signal system and used buy and sell rules using a weekly time period.

The following trading guidelines were first published in 1934 and there are applicable today as they ever were and are re-produced in their original format below:

General Guides

1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move.

2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.

3. Limit losses and ride profits, irrespective of all other rules.

4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing.

5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.

6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation to the chart formation.

7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons – a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%

8. In taking a position, price orders are allowable. In closing a position, use market orders.”

9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules.

10. Moves in which rails lead or participate strongly are usually more worth following than moves in which rails lag.

11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.

Technical Guides

1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move. Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected.

2. Reversal or resistance to a move is likely to be encountered:

- 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range

- On approaching highs or lows

3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently.

4. Watch for “crawling along” or repeated bumping of minor or major trend lines and prepare to see such trend lines broken.

5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places.

6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side.

7. Watch for volume climax, especially after a long move.

8. Don’t count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps.

9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.

His work has stood the test of time and you can still trade using the above rules as you could 100 years ago markets still move to the influence of greed and fear as they did 100 years ago and the above guidelines will never go out of date.

Richard Donchian may not be that well known but when a man can influence some of the greatest traders of all time like Richard Dennis, you know that he has something worth saying, he was a true market legend who traders everywhere can learn from.