Getting Started in Currency Trading - A Primer for the New Trader
By Michael Duane Archer, author of Getting Started in Currency Trading
Getting started as a currency trader is easy. But doing it correctly can make a big difference to you chances of success. In Forex the statistics are probably as bleak as in futures where nearly 90% of new traders fail; some very quickly.
I have traded futures, stocks and (since 1997) Forex. I made many mistakes early on; most traders do. But I was fortunate to have an experienced trader as a mentor. Had I followed all of his advice I’m sure I could have made my early trading life easier. But the markets are exciting and we tend to be caught up in that excitement.
I believe following some basic steps and establishing a few principles early will guide you down the path to trading success.
1) Learn everything you can about the Forex markets
Read two or three introductory books. Spend a week cruising the Internet and reading about Forex trading. The Global-View website has a wealth of great information for the new trader. Follow some of the Forex forums for a week or two. You will learn the concerns experienced traders and the pitfalls for the new trader.
2) Learn the mechanics of trading
If you come from futures or stocks the Forex quotations may seem strange and a little difficult to master.
Use one of the Forex calculators such as www.forexcalc.com. Make a few dozen imaginary trades to get a good feel for how the quotes and lot size convert to profit and loss. This knowledge must be automated in your mind. You won’t have time to figure out what 125 pips in a pair is worth real-time without interrupting your trading.
Find a good Forex glossary and learn the lingo.
3) Develop a simple trading strategy
My own opinion is most traders use too complex an approach to trading and too many different tools. Keep it Simple. I think charts are still the best and there are a variety to choose from – Bar, Point & Figure and Candlesticks are the most popular.
There are hundreds of books, methods and systems for trading. Don’t get lost in them. Be realistic. Making money requires experience, skill and effort. If there was a sure-fire system for profits, it wouldn’t sell for $200.
I have used the Goodman Swing Count System (GSCS) for almost 30 years. I use other tools but it has always been the backbone of my personal trading whether in stocks, futures or Forex. An Overview is available on the Global-View website.
4) Develop a basic trading style
Are you going to be a scalper (very short term trader), a day trader or a position trader? There are very few position traders in Forex because of the risk of holding a position over multiple trading sessions. Scalping, if you aren’t experienced, can be expensive. The many in-out trades of scalping can be expensive and you have to be correct a large percentage of the time to be successful. I recommend the day trader style for those new to the game.
5) Find a broker-dealer and open a Demo account
I actually recommend opening at least four or five Demo accounts.
Find a broker-dealer who fits your style well and has the tools you need. Read the reviews of brokers for more information about them. Remember, people are more likely to complain than compliment so factor that in when you study reviews or forum comments. But if you see a common complaint across different forums and different dates – beware.
Always remember there is no central clearing house in Forex. Most retail dealers are ‘market-makers’ although a few are ECNs. An Electronic Communications Network actually matches orders. Both types have advantages and disadvantages although large traders seem to prefer ECNs.
Be wary of brokers with many complaints of requoting, unexpectedly widening pip spreads and harvesting stop-loss orders. You may want to read my article, “How the Game is Played” explaining more about how Forex dealing works.
Use the Demo account to trade a dozen or more different pairs and crosses. I have found they each have their own personality. Select four or five that seem to fit your trading style.
A month with a Demo account can sharpen your mechanical skills and put your trading ideas to a reasonable test. Remember, paper trading is an excellent tool!
Read the manual that comes with your demo account thoroughly. It will almost always answer your questions. If not, email the broker. Some are great about responding; some are awful.
6) Open a Mini-Account
If your selected broker-dealer offers mini-accounts (most do nowadays) your next step is to open one and get your feet wet trading very small lots, perhaps 1000 or 2000 units of a currency pair.
Next, take a couple weeks off before starting to trade a full account. Fine tune your trading approach and develop your money management parameters.
Use the time off to fully develop your trading plan. It doesn’t have to be long or complex but write it down. Decide on the markets you will trade, your trading tools and – most important - your money management parameters.
7) Money Management Principles
My experience is the traders who fail mostly do so because they either fail to establish good money management practices early on – or get carried away by the excitement of trading and begin ignoring them. My mentor taught me to aim first to break even. Stay in the game and the good trades will eventually find you.
Some traders can monitor a dozen or more markets at the same time. I can’t. I have three primary markets I always watch and five more secondary markets that I monitor "on the side". If one of them looks like it might be an opportunity I move it into my primary list. I have a fourth primary slot I use to rotate such transient opportunities as they make themselves available.
Don’t have more than one or two open positions going concurrently if you are new to Forex. The floors are always wet and it is easy to slip and fall.
You essentially set your own leverage in Forex because of the ability to select lot size. Try not to have more than 75 percent of your capital in play at any given time.
Watch charts for three different time frames for your favorite markets. A day-trader might use a five-minute chart as his or her basic tool, a 30-second chart for timing and a 30-minute chart for perspective. Bounce around them every hour or so – making each a full screen size for a minute or two. Perspective is an important trading tool all by itself. That monster trend you’ve been following on the 30-second chart can hardly be seen on the 30-minute chart!
The new trader should avoid getting too fancy with trading tools. The same advice goes for money management. I recommend initially allocating your trading capital into three "trading campaigns" of ten trades each. If you have $3000 to trade, then three trading campaigns of $1000 each. Set a fixed risk of $100 per trade.
The lot size you trade should also be fixed, at least initially. Once you have some experience trading you can adjust it up or down according to how strongly you feel about the trade. For a $3000 day-trader I would recommend lots of 25000 units. 40 pips on 25000 EUR/USD is $100. In a normal market that’s a pretty good swing.
Keep your money management parameters realistic and consistent with your trading style. If you are a day trader looking for a 60 pip profit and taking 40 pip loses, you obviously need something over 50% profitable trades to make money. Again, work with a Forex calculator. Get a feel for how the numbers work and relate and what you will need to do to be successful vis-à-vis your trading style and available capital.
8) Advice for New Traders
Don’t ‘trade the news’ if you are just beginning in Forex. In fact, I recommend trying to stay out of the market during times when announcements are typically made. For USD traders, 8:30 AM Eastern is the witching hour. Watch how the market reacts to the news or to an announcement. You’ll note very often prices react sharply in one direction for a brief time, then head in the opposite direction for a longer period of time. At the beginning of each trading session review the news and announcements due out, and the time.
You will have problems with your broker – requoting, ballooning pips or a down server. If they are too frequent you probably need to move on; solid research before opening an account is designed to prevent that from occurring. But things happen in Forex. It is a very laissez-faire market. Complaining won’t generally do much good and getting upset will interfere with your trading. Ergo, build a few such minor disasters into your plans at the outset.
Generally, try to keep your emotions in check. It is natural to be upset when you lose, elated when you win. But monitor them constantly so they don’t get out of control. Next to poor money management, wild emotions are the biggest bane of the new trader.
Come to the market each session prepared with a list of "What if" questions and answers. What do you do if the market opens higher, then falls? What do you do if the market is more volatile than it was the past few sessions? What do you do if you are stopped out and then the market begins to go your way? Given the fast pace of Forex and the leverage, you need to have answers to basic "What ifs" ready. Giving yourself the leisure of ten minutes contemplation to decide how to react won’t work in Forex.
Keep a written record of your trade statistics. Winners, losers, percentage of each, average gain, average loss, markets traded and the like. Review them periodically and look for patterns in your trading – both good and bad.
I use a technique called Market Environments to analyze what kind of markets I do both best and worst trading. An article Trading with Me Charts is available on my website.
Study the Characteristics of Successful Traders in my book, Getting Started in Currency Trading. They’re based on 35 years of observing traders. You don’t have to have them all to win – no one does; everyone slips as we are all human. But make an effort to develop as many of them in yourself as possible.
If your trading plan needs adjustments, try to make them in small evolutionary steps. Don’t pull the plug on your computer (especially if you have an open position!) and start over each time you have a losing trade.
Use stops and don’t walk away from an open position without one. Yes, they will get hit from time to time. But for the new trader they help instill regimen and consistency.
Pyramiding a winning trade is risky; pyramiding a losing one is suicide.
Keep it simple.
Duane Archer has traded for 35 years- stocks, futures, & currently Forex. He has been a SEC registered investment advisor and a CTA/CPO. He is the author of Getting Started in Currency Trading as well as several other books.
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GVI Trading. Potential Price Risk Scale
Mon 26 Feb 2018
AA: Major, A: High, B: Medium
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AA 15:00 US- Powell House Testimony
Wed 28 Feb 2018
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co-founding Partner, Global-View.com
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