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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 advise 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.
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, almost everyone makes money paper
trading!
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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