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Morning Briefing

Driving and Forex

4th December 2000
Special Edition
1945 IST or 1415 GMT

Driving? What's that got to do with Forex Trading?

The other day, while driving to work, with my wife beside me, enjoying the mild winter sun and lost deep in thought, I suddenly remarked, "You know, driving is like forex trading." Startled, my wife said, "Driving? What's that got to do with forex trading? And besides, what do you know about driving anyway?"

The need to maintain professional dignity prevents me from narrating the rest of the conversation.

Many a times we can comprehend something better when we see it in the light of something else that we are already familiar with, well versed in. The metaphor of driving keeps recurring to me in connection with foreign exchange trading. We can feel more at ease with foreign exchange trading if we can see it in the light of driving, something most of us do everyday.

Foreign exchange trading is like driving a car. Some people are Formula One Grand Prix drivers, some drive in African and Himalayan Car Rallies while the majority of us are daily city motorists. Whatever be the road you drive on whatever your vehicle may be like, you need to keep your wits about you and follow the rules of the road.

The maximum number of rules apply to the City Motorist - keep to the left (or to the right, as the case may be), stop at the red light, give the pedestrian the right of way, drive within the prescribed speed limit, don't enter into a one way street and so many more. As long as he adheres to these rules, the motorist can be relatively assured of a safe ride to work and back home and that the traffic police will not bear down upon him. The City Motorist can hardly ever afford even a scratch on the car.

The Rally Driver is a little more adventurous and his sponsors are ready to bear the expenses of the car getting mangled as long as he manages to win the trophy. The same applies to people like Michael Schumacher. Both, however, have to follow the rules of the races they take part in, else they run the risk of getting disqualified.

Let us draw some parallels between Driving and Forex Trading:

Licence to Drive Licence to Trade
Car and size of car Capital available and size of capital available
Self Driven Car Owner Proprietory Trader
Rally / Grand Prix Sponsor Trading Client(s) or Employer
Traffic Rules Trading rules such as Stop Losses, Take Profits etc
Speed Deal Size - the higher the speed, the greater the deal size
Speed Limit Deal Size Limit
The Map/ Route The Charts
Navigation/ Chart Reading Technical Analysis

A few things emerge from the above:

1. You need to know the car you are driving, who owns the car and how much of damage you can sustain. If you are a City Motorist, you cannot imitate Michael Schumacher on the streets. Conversely, if Schumacher were to drive like a city motorist on the tracks of Milan, his sponsors would have nothing more to do with him. Not everybody can be Schumacher, and that is perfectly alright.

2. You need to know the rules you are supposed to adhere to.

3. You need to know the route you are on OR, more importantly, you need to know how to read a map so that you can understand the route you are on. If you do not have a map, you can get lost and get into one ways and dead ends and end up without fuel (when your trading capital runs dry). Reading a newspaper (Fundamental Analysis), is not the same as reading a map (Technical Analysis). You may read the Financial Times or the Wall Street Journal and still be hopelessly lost.

4. You cannot break the rules without bearing the consequences. Even if you did not mean to break the rule, the traffic sergeant will still hand you a ticket or fine you.

5. If you do stupid things, you can die. You do not usually park your car in the middle of a busy intersection with the thought "Let's try this out, let's see what happens". You do not get into a One Way street and say "Since I have, in my wisdom, got into this street from this side, the traffic should flow my way and not against me. I know better than the road sign." No, you better turn around at once and flow with the rest of the traffic.

6. If you do not drive yourself, but employ a chauffeur or hire a Formula One champion to drive your car, you jolly well do not do back-seat driving. No driver worth his salt will stand for that.

Many more pages can be written on the topic of road maps, signs, conditions, traffic jams etc. and how they relate to the Charts and Technical Analysis and how effective Chart (Map) reading can translate into effective City Driving (Day Trading).

Another section can be devoted to driving techniques and skills and how they relate to Trading Techniques and Skills. Yet another section will deal with a driver's mentality, his love and care for the car and for Driving itself. And how you cannot be a good driver if you do not love driving and if you do not want to cover the distance you need to cover.

Having introduced the concept and the metaphor, I shall develop these aspects in later musings.

Have a safe journey home.

The above views are based on my own thoughts. Though I believe in what I say, you may not agree and certainly I do not guarantee the validity of my thoughts. While these musings are proffered with the best of intentions, neither I, nor my firm are liable for any losses (or profits) that may occur as a result of motorists becoming forex traders. The roads, especially the roads of Calcutta, can be as risky as the markets and it might be a good idea for forex traders to become motorists in Calcutta.

Reading this article while driving is strictly prohibited..

Visitors should be aware that Foreign Exchange transactions and trading are or can be subject to laws, rules and regulations of the country in which the entity undertaking the transactions is situated. It is incumbent upon the Visitors to keep themselves informed and abreast of the Laws they are (or would be expected to be) subject to and governed by, and act in accordance thereto.

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