Well we had another great day on Friday forecast wise, yet it was a day that you could have lost IF you put a stop at the wrong place. It is not beyond reason for the forecasts to hit both the high and the low.

So how do we interpret the forecasts to have a better understanding of where to put our stops?

The "First Law of Stop" states:

1. place your stop
2. watch your stop hit and cash you out
3. watch your currency pair reverse to profit
4. watch the steam come out of your ears as your trade what you thought was a winner, gets stopped out then makes huge amount of coin

There are the conspiracy theorists that believe that retail forex brokers hunt stops by widening their spreads to jam out stops. A broker can easily know where the heard is placing their stops, they just have to look at your account and spike you out!

There are many logical places to put stops, and this herd mentality makes it very easy to figure out where these stops are. People use zero's (1.900, 1.8500) to cluster their stops. They use Fibonacci levels. They use all sorts of technical analysis. And they all come up with the same area to place the stop. So all of a sudden there is a run at a particular number which accelerates the spiral, knocks you out, the logic comes back and the buyers come back and drive the prices the other way.

Then you have "the players". The Big Money boys! They squeeze you out, buy at a bargain and then drive the prices. I can't tell you how many times my news feed says something like "Russian Players have driven though the stops."

There is great scene at the beginning of the movie "A Good Year" with Russell Crowe. He coordinates a huge sell on the British Gilt, and as there is panic selling on the street, he calmly buys back and makes huge profits for his firm in a matter of minutes. These are the guys we are up against.

So what are we to do? You will notice with the forecasts, I do not have a column for "Stops". Why is that? Because I hate using them! That is not to say that I do not "protect" my money. And I would never tell anyone not to "protect themselves" in a bad trade. But placing stops in the wrong place can WIPE YOU OUT as easily as a catastrophic event can wipe out an unprotected position.

I believe in support and resistance, AND having an understanding of the movements of the currency I am trading. Lets looks at the gbp/usd.

The gbp/usd opened at 2.0068, had a high of 2.0145 and a low of 1.9988. Our forecast was for a high of 2.0131 and a low of 1.9974. Conventional wisdom has formulas for risk/reward based simply on "What amount are you prepared to risk to get x amount"? Maybe it is 1:1. So maybe conventional wisdom is prepared to risk 50 pips to make 50 pips. You buy at 2.0068, and with that wisdom, even though the trade wins at the end, you have lost 50 pips because the currency dropped before it went up.

I prefer to look at the forecasts and take a trade based on "What am I prepared to lose IF there is a catastrophic event and the floor gives way" and understanding that currencies move 90% of the time in a series of steps both up and down in the trading day.

I trade with the understanding of support and resistance. That if support is broken I need to worry and be prepared to lose, and if resistance breaks and holds, that resistance level becomes my new support and I can push for further profit. I would have put a stop 10 or so pips below the forecasted low of the gbp/usd and I would have had a winning trade.

The exception to my rule is trading the gbp/jpy. You have to have deep pockets, and guts to trade this pair. You can sometimes see your trade be 300 pips in the hole before it rockets back into profit. So putting a stop a few pips above or below the forecast probably won't work out that well. And 50 pip stop loss trading this pair will wipe you out in no time.

So, stick to the majors with my guidelines above. Keep track of the movements of the pair you wish to trade. Keep a journal. Print out the forecast and highlight if the currency pair hit its direction. Every week see how many times it was bang on or came close. Remember that you will lose.

Practice proper money management and DO NOT OVERTRADE. Ask yourself based on your journal "How many losing trades in a row can I have before I am wiped out." Then trade accordingly.