How to Commence a Trading Day
  • How to Commence a Trading Day

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    Many retail traders start their trading day without proper and adequate preparation. They simply mount their computers and start trading randomly. No reference to the news for the day, no reference to the economic calendar and very little attention paid to market sentiment information. I was guilty of this in my early days and had to learn the hard way several times before I understood what needed to be done.

    STEP 1: UNDERSTANDING MARKET SENTIMENT
    No two forex trading days are the same. Even when the same fundamentals are at work, they are usually interpreted in different ways by major market players and they trade the currency pairs accordingly. That is why understanding the prevailing market sentiment for the day is very crucial.

    What is market sentiment? This is simply the biases and views that major market players have about a currency, which determine the direction, method and volume of trade. It is the views of major market players that is used to judge market sentiment because it is their money which moves the market. You cannot compare the impact on the market that a single investor who can put $300 million in a currency position will have, with 10,000 traders who can only muster $100 each in a trade. So when the major market players (central banks, commercial banks, finance houses, hedge funds and high net-worth single investors) assume a view on a currency, that will set the tone for the rest of the market because their money will drive the market in their desired direction. You just need to watch the crazy spikes in a typical news trade to see what effect the big players can have in the market.

    Where can such information about the market sentiment of these investors be obtained from? They can be seen on third party websites such as ActionForex, FXStreet, OilnGold, INO, and on financial TV stations such as Bloomberg and CNBC. Most of this information is published daily, or obtained from interviews with leading financial experts.

    Market sentiment can be obtained from the following:
    a) Action Insight Reports
    b) Daily Fundamental Analysis Reports

    a) Action Insight Reports
    With sites like DailyFX, INO or ActionForex, the trader can get a lot of insight as to how the market is likely to move.

    b) Daily Fundamental Analysis Reports
    Fundamental analysis is not just about trading news numbers. It is about understanding how the major market players interpret the numbers. On more than one occasion, a news release which should send a currency pair in one direction may end up sending the asset in the opposite direction.

    It is vital to study fundamental analysis especially on Bloomberg TV. Many market analysts have made negative comments about the analysis not being specific to buy or sells. This is totally unfounded. Forex news trading is not about buy or sell recommendations but on understanding the basic principles attached to this form of trading. I have personally made many successful trades from Bloomberg TV analyses, so this should be part of your trading arsenal.

    STEP 2: THE ORDER BOOK
    You can actually meet retail traders who have gone through the up-down cycle of forex trading without hearing of the FX Order Book. This is one tool that professional traders use to shave the heads of retail traders. It is like promising a bag of money to the first to make it to the door between a normal man and a visually challenged man, where the blind man is deliberately led into a ditch by the seeing man, who then claims everything.

    The Order Book is a list of orders on an electronic exchange that chronicles the number and volume of buying interests versus selling interests on a currency pair. In addition, the owners of such interests are supposed to be displayed, although dark pool operators usually obscure this information. How does this help a trader?

    Supposing you have 100,000 retail traders who are short on the EURUSD have all placed leveraged $1,000 trades on the asset (totaling a selling interest of $100 million), and you have 20 major commercial banks and ten high net-worth investors who have placed between $100 million and $1billion on long positions on the EURUSD, where do you think the flow of the EURUSD will go? Common sense dictates that the trader flows with the major players.

    Unless you are using an ECN broker for your fx trading venture, you will probably have to pay third party Order Book vendors to obtain this information. OrderBookFX is a good place to start. It is unimaginable in the year 2013 for a trader to set a trade in the spot forex market without first finding out from the Order Book if this trade will be countered by the sheer volume of the big dogs. $109 per month is all a trader needs to get access to the order book on OrderBookFX on unlimited currency pairs.

    So how does a retail trader start his trading day? It involves getting access to information, information and more information as has been described above.

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