Longwood Currency Trading





Current Picture Hi, I'm Peter Rose, Founder of Longwood Currency Trading, and welcome to LCT Blog Post 05/13/20 — Why I Think The FOREX Currency Market Is The Safest To Trade.

Why do I feel that the FOREX currency market is the safest financial market to trade?

It's very simple: because the currency markets dwarf all other markets as far as liquidity. For example, even in 2015 the whole NY Stock Exchange did $28 Billion Dollars of transactions a day, whereas the FOREX market did $6.6 TRILLION Dollars.

What this means is that I can exit my position immediately.

That's huge. I was a real estate investor for 40 years before retiring in 2015. During that period, I lost a $1,000,000 net worth. Twice.

I could see the economic danger each time as it swept over the country, but there was no way for me to sell one of those properties fast enough to preserve net equity.

I was stuck, and it took about 10 years each time to recover.

Oh, I had some stocks at the time as well. But because of the lengthy time invested in selecting a stock, and building your belief system around it for the long term, it's impossible to pick tops — or bottoms.

It's very difficult to make rational decisions about what to do other than what the brokers and financial advisors all say: "Buy for the long haul by averaging purchases over that long haul."

Terrific. Find somewhere in stock lore that talks about selling as opposed to all the analysis and hand wringing over buying....

Unless you're a trader, or very sophisticated investor, you only learn how to buy; never how or when to sell. That's why U.S. Securities Law mandates that you must start selling a certain percentage of your IRA holdings starting at (currently 2020) age 70 1/2.

What if there's a recession when you're forced to sell depreciated stocks thus vastly reducing the compounding of your remaining portfolio? How would you feel about that?

Just who's in charge then of your money and your future in these types of investment vehicles?

What is safety, anyway, and is there any real safety in anything?

Safety is having certain measures in place that will protect you in the event of danger.

You wear a seat belt in the event you get into a car accident, right?

I was wearing my seat belt in 1980 when I was broad sided by another car only moving about 5 mph coming off a stop. My head snapped against the window and took it out as the entire car was thrown over the opposite curb into a tree.

That was 40 years ago and I'm still having pain from that. But who knows how much worse I would have had it if I wouldn't have been wearing that seat belt....

Or, how about what happened just the other day 05/09/20 when we were caught in a massive winter snowstorm. This was rare even for New England! Here's a picture of my wife with our dog Beau heading out for a walk in the woods behind the house at the height of the storm.

Current Picture

Sue and Beau heading out despite the storm.

Sue is all bundled up for the biting cold and strong winds, and she strapped an orange "Don't Shoot Me: I'm An F'n DOG!!!" vest on Beau just in case some dumb-ass hunter was out in this. And note that she also has a red coat on for the same reason. All preparations to mitigate problems that might arise. Oh, and by the way, Sue knows those woods like you know the way to the bathroom at 2:00am....

Okay, so stop on red, close cover before striking, don't piss against the wind, and don't swing on Superman.

I got that. You got that....

The implication of the term safety then becomes not one of protection but rather limitation of damage.

There's no pure 'protection'.

Legendary speculator Jesse Livermore had this to say: "The only way you get a real education in the market is to invest cash, track your trades, and study your mistakes."

And isn't that the way we learn about anything? Mom says not to stick your finger in the light socket, and so you do. And you learn 2 very important facts of life:

  1. You learn best by taking the advice of someone more knowledgeable than yourself.
  2. You should look objectively at a risk, and formulate a protective rule to limit the effect of a bad decision.

The problem even there is that this only says what most folks would think is the important part: make a plan for when the tornado sirens blare out from the local fire station cupola.

But that's not the sort of approach a trader needs to be safe, or at least limit the damage from an adverse price move that's occurring currently.

As traders we need to formulate a stone hard rule, not a 'concept', or 'plan'.

It's got to be a rule.

And that rule — particularly suited for the FOREX currency market — is simply to:

Recognize that you've made a mistake, and then closethepositionimmediately.

How tough would that be to do?

Well, it's actually impossible for some folks. They just don't have the discipline or belief system in place to have the ability to do just that simple thing.

But taking that immediate loss is your seat belt.

Placing a stop doesn't 'protect' you from loss; rather it limits your loss.

And guess what?

It's you that gets to decide what that loss will be.

Not your mom.

Not your broker.

Not the U.S. Securities and Exchange Commission.

It's you that gets to decide what that loss will be.

The currency markets dwarf all other markets as far as liquidity. For example, even in 2015 the whole NY Stock Exchange did $28 Billion Dollars of transactions a day, whereas the FOREX market did $6.6 TRILLION Dollars.

And soooo, this means that:

When you determine that the position is going against you, it's you that gets to decide what that loss will be, and that FOREX market liquidity will enable you to do so right NOW.

It just doesn't get any better than that. Any-where.

And that's the major reason I feel that the FOREX currency market is the safest financial market to trade.

In financial trading there is the concept of reward to risk, i.e. when I place a trade this is my risk as a percentage of my perceived reward target.

If I feel that a trade is worth entering because my analysis indicates a profit target of 10 pips, and I am willing to take a 10 pip risk if it doesn't work out, then my reward to risk is 1 to 1. If my profit target is 20 pips with a 10 pip risk then my reward to risk is 2 to 1.

From a mathematical standpoint, if I win only 1 time out of three trades (a 33% win rate), and I always have a 2 to 1 reward to risk, then I'll never go broke.

Well, that's the theoretical calculation, anyway! In practice it's a little more complicated than that. For example, what if you only trade 10 times, but lose 6 times in a row at the start? Not so good....

The following excerpt comes from my post: FOREX Currency Trading To Win Instead Of How Not To Lose, which in turn is an abbreviated discussion of risk management from one of my trading courses: LCT Risk Reward Analysis.

Regardless, there are many ways that you can manage your risk:

Risk Management Methodologies
  • Stop Loss Placement
    • Pips
    • Dollar
    • Percentage
    • Technical Indicators
    • Price Action
  • Risk Management Ratios
    • Risk To Reward Analysis
    • Win to Loss Analysis

Keep your stop placement simple. If you're a long term trader then you'd use the structures that price action creates to identify how far price could go against you. You then determine how much of that risk you want to absorb based on how you view the potential profit of the trade.

If you're a short term trader, however — and particularly if you're like I am: scalping focused — then your stop should be based on a set number of pips.

In scalping, though the 'real' profit target may be 50 pips away, you're just running at it in short sprints, perhaps just 5 to 15 pips at a time.

Because of this, your stop might be just 8 pips — less than that, and there's just too much noise down on the short time frame charts, and the stop will just constantly get hit.

That discussion brings out another aspect of the potential safer trading environment the FOREX currency market can provide a knowledgeable trader: that of scalping rather than long term trading.

As a long term trader, you — unnecessarily, in my opinion — expose yourself to potential damaging events that may occur when you're sleeping, taking a bath, or having a beer with friends somewhere. Or.... over the weekend....

Look, if I'm going to be wrong, then I want to know that right away. If I'm trading on the long term charts — the daily for example — then my stop has got to be at least an ATR and a half. On a pair that moves 80 to 100 pips a day, that means a risk of potentially 150 pips.

Sure-sure... the profit target is 200 to 300 pips away, but geeeeeez... to take a 150 pip hit — $1,500 — on a full lot trade? Man, that's just a lot of dollars lost, regardless that the percentage loss might only be 1% or 2% of the account. $1,500 is $1,500 dollars. Some folks don't make that in a month — of very hard work.

Sure, scalping in and out of many trades seems like it would be far more risky than taking the longer term approach. And to folks who have six-figure trading accounts, they can take the long term view.

However, for probably 80% of the retail traders, account size is most likely around the $3,000 figure trading 3 mini lots at $3 per pip. To take a 150 pip loss is huge dollar-wise at $350.

I believe that this is one of the major reasons retail traders fail at that 90% level: they're playing short stacked by trading long term.

If instead of pie-in-the-sky profit targets of 300 pips, why not set the goal to 5 pips?

But that's only a $5 win on a $1,000 mini account when I coulda-shoulda made $300 on that 300 pip move the big guys are telling me I should shoot for.

Really? Let's look at this....

A $5 gain on a $1,000 account is a 0.5% win; just a half of a percent. Big time, yeah?

But look at it this way: how much easier is it to hit a 5 pip win as opposed to a 300 pip win?

If you're scalping on the 5 minute chart you have 12 times an hour to decide if you'll take a trade or not. If you take one and it starts to move against you: you're out with a static rule of 8 pips and your out. But when the trade works for you, you're shooting at a potential 20 pip target which if it turns against you, you'll exit with a 5 pip profit.

By using that simply methodology, not only are you able to go flat at the end of the day to protect yourself, but your win rate should be much, much better than 1 in 3.

The long and short of all of that is by scalping you should be able to make $5 per thousand bank per day. Do you see how that's possible?

Okay. So, let's say you are able to make that $5 only 3 days a week — either not trading or trading and losing the other days. And let's say that you only trade 40 weeks a year. That's a gain of $600 a year.

That's not life altering money, but it does represent a 60% simple return on your $1,000 bank. That's not huge: that's enormous!

Now, save as much money as you can. Sell your car, your old skies, your dog if you have to and somehow, some-how get a $100,000 bank together. Make that same crummy little 5 pips a day on 10 full lots, and that's $60,000 a year and more money than 90% of the world makes in a year, and in many cases in a lifetime.

And you achieve that safely by doing what all the experts say is the riskiest way to make money other than maybe logging or being a crab fisherman in the Bering Sea....

So, what's the recipe for making passive income safely?

Recipe For Making Passive Income Safely

Trade the FOREX currency market because it dwarfs all other markets as far as liquidity.

When you determine that the position is going against you, it's you that gets to decide what that loss will be, and that FOREX market liquidity will enable you to do so right NOW.

Scalp rather than trade long term to protect yourself by going flat at the end of the day.

Don't take a trade unless it offers you at least 20 pips.

Set a hard 8 pip stop.

It just doesn't get any better — or safer, in my opinion — than that.

But do not try to learn this on your own. Find a mentor you can trust to share the specifics of this to make it simple. Trust me on this: If you try to do it on your own, you'll just end up making it complex, lose your money, and become yet another valued member of The 90/90/90 Club.


Thanks for taking your time to read this post,
Peter

p.s. For more of my thoughts on trading in the FOREX foreign currency market, check out my YouTube channel for Longwood Currency Trading


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Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

Longwood Currency Trading is not an investment advisor and is not registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority. Further, owners, employees, agents or representatives of the Longwood Currency Trading are not acting as investment advisors and might not be registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory.

CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.