Page 94 - Ultimate Guide to Currency Trading

This is an excellent example of what to do if the market's fortune and your account's fortune
changes for the worse. If you have built it properly, your positions will be able to withstand quite a
beating. If this happens, stick it out, add to the position, and change direction for a while by going into
carry-trade mode.

Keeping your head and wits about you in bad times can add to your bottom line. Many
Forex traders take advantage of the worst of times. You, too, can use bad markets to
your advantage by using carry trades, adding to your positions, or being a contrarian
trader by going long on risk-loving currency pairs.

Consider Closing Losing Trades

Of course, if you have other trades on the books, and they are also losers, then you might consider
closing out some of your losing trades in order to redeploy the cash into a more attractive trade. For
example, if you are in a long AUD/USD, a long GBP/USD, and a short EUR/SEK, and they are all down
due to extreme risk aversion, then you might want to consider closing out some of your better losers
such as a closing out your GBP/USD and the EUR/SEK in order to go all out long in the AUD/USD, and
secondly to free up some much-needed margin if you are close to a margin call. A few bucks lost are
worth it if you are going to use the margin in a way that will gather returns very quickly when the
markets return in the future.

Additionally, the market might be much skewed in its analysis of its conditions at the time.
When this is the case, the money will flow back into the classics first. These would be the trades that
take the least amount of speculation to determine if they will recover. If the AUD/USD has performed
well over the years, then it will most likely perform well in the future. It is a classic trade, and you
should be thinking of the classic, uncomplicated trades in bad times. Most of the other traders will be
doing the same, and you will be able to capture the profits then.

The Herd Instinct and FX

When everyone is pushing the market and it has been riding high for a several days or weeks, then
there is a good chance that there will be a slowing or even a reversal of the markets. The currency
markets are tied to the idea of growth in economies, plain and simple. If one region is experiencing
rapid growth and another is experiencing slow or slowing growth, this has the makeup of a good
currency pair to invest in and trade.

This pairing is true because economies that are slowing are most likely to keep their interest
rates on hold, and economies that are growing are most likely to raise their interest rates to keep the
home economy from over-heating. This is the key to finding good currency pairs in FX.