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Learning Forex By Making Mistakes

Learning Forex: Sometimes the Worst Move Is the Best Move
The steps it takes to learn forex can be some of the more exciting activities one encounters in the course of life. The reality that you are trading money on a 24-hour, $3 trillion-dollar-per-day, totally global market inhabited by sharks just as scary as Great White, can be a mind-blowing epiphany.

While you don't want to make enough mistakes to zero out your account, sometimes making currency trading mistakes is the only way to learn certain things about factors the FX markets such as forex signals and how to effectively use them to make trades.

For example, let’s review a situation that recently occurred in our offices with the EUR/USD and see how you can apply it to your trading life, whether you use the forex trading eToro platform or some other way to make trades.

Lots of News, Lots of Hype? Choppy Up Ahead
This situation took place during the week beginning December 14, 2009. The week ahead was ripe with impending news concerning the U.S. dollar--housing, interest rate guidance from Bernanke, and even Bernanke up for re-confirmation before the U.S. Congress.

You would think--at least we thought--that the EUR/USD, being in such a glaring spotlight, would be a main battleground for a “bulls versus bears” scenario. One group would overpower the other and push the EUR/USD steadily higher or lower.

That didn't happen. Yes, the currency pair moved a solid four percent over the first half of the week, and that was wonderful for forex traders who caught that move, but it was up and down, up and down. If your stop-losses were too narrow, you got stopped out.
That was us. We got caught in what some traders call a "whipsaw," where price action continually takes out stop-losses but then reverses course and moves higher.
Essentially, we were right that EUR/USD would be declining, but we made very little money from being right because we got stopped out of our trades.

The Real News Is the Price
What we learned in the course of this trade is that the price is the biggest news. All the time, every time. Unless there is some really, REALLY big news (such as terrorism, mass bank failures or the refusal of the U.S. government to backstop Casino Capitalism), the news that matter is price.

During this week, we focused too strongly on the news that was coming out: housing numbers were better than expected and unemployment figures were starting to show some signs of hope for the U.S. labor market.

Our time would have been better spent looking at the one-minute, 15-minute, and four-hour charts, which clearly showed that while the trend of the EUR/USD was to the downside, the pair was moving in a big enough range to prevent us from using conservative stop-loss orders.

Losing Money When You're Right: It Sucks
We could blame ourselves for screwing up the above trade, for not making any money even though our overall opinion that the EUR/USD was due for a drop was correct. We could sit around being angry that we screwed up, that the market moved taught us a lesson.

Far better, though, to sit around learning from a mistake.

What we learned through failing miserably to capitalize on a tremendously sound thesis--the EUR/USD would decline over the next week--is that when you're trading during a period of heavy news activity, be wary of getting stopped out prematurely, because prices will move.

If you take the time to learn from your currency trading mistakes, you will become a better trader. In this instance, the lesson learned is that when you set your stop losses too narrowly in the short-term, you can be stopped out of a promising intermediate-term trade.

In the long run, learning that lesson has proved more valuable than making a profitable EUR/USD trade during the week beginning December 14, 2009.

Important Forex Information

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Forex trading hasn't always been around; understanding how it came into being can help you succeed in trading this market. Read about the history of foreign exchange trading.  arrow