Currency trading tips for beginners

USD/JPY – We got our answer
March 24, 2018
GBP/CHF approaching major resistance
March 27, 2018

When I began trading currencies, it was shortly before the housing meltdown in the United States. I believe that it was roughly 18 months before that I started to dabble in the market. If I knew then what I know now, I would have made an absolute killing. However, a colleague of mine and I were having a conversation about the financial markets and how things have gone for both of us over the last couple of years, and that got us talking about how things were in the beginning.

In this article, I’m going to look at some of the most important tips that I wish somebody had given me in the beginning. You see, the unfortunate thing is that many of you are in the currency markets based initially attracted to the currency markets for many of the wrong reasons. This is easy though, because the sales tactics that are used to attract new currency traders are a bit sleazy to say the least. However, if you keep some of these things in mind, this could cut back on your learning curve drastically. 

Your initial exposure to Forex markets is a lie.

Unfortunately, most of you are brought into the currency markets with the idea of the easy riches. Some of the marketing that you will see in the Forex market is beyond ridiculous. The adverts normally feature somebody sitting in front of a sailboat, or perhaps a Learjet. This is how they sell the dream and get you to sign up for an account that offers as much as 1000 times leverage in some parts of the world. The idea is of course that you can throw some money into this account, press a few buttons, and magically become wealthy. This is because the reality of Forex is much less exciting than people think.

Leverage is a killer.

I can’t tell you how many times I’ve had this conversation. On the forums, you will see people talk about how leverage is going to make them wealthy, and that the more leverage they can get, the better the situations going to be. However, you should ask yourself the following question: “Why on earth would somebody loan you 100 times your deposit margin unless they thought it was a good bet that they were going to come out ahead?” Remember, most of the time you are betting against the broker, so when they off you that type of leverage they aren’t doing it to be generous. They are doing it because it benefits them. This is the big lie about leverage, leverage doesn’t help you in the end, because it compounds losses just as easily as it compounds gains.

While it is true that leverage can help with gains, the reality is that a simple statistical analysis shows a high correlation between high leverage and high losses. Eventually things go wrong. Another way to look at it is this: some of the world’s best Forex traders that manage millions of dollars in their accounts struggle to gain more than 20% a year. However, if you take your deposit and multiply it by 20% a year, you can see that the magic of compound interest does make for huge gains, but you need to be patient enough to see them. Unfortunately, most people going into the Forex markets aren’t, and this is what most brokers bank on.

On the other hand, if there wasn’t leverage, there would be no market.

One of the true ironies when it comes to leverage is that it’s necessary. Most currencies will move about 5% a year, and if we couldn’t have leverage, it would be hard to make a profit. Beyond that, it would put the Forex markets out of the reach of most retail traders. Simply put, you would need to go back to the old system of depositing money in a bank account, most of the time which would have been a minimum of $1 million. While that sounds like a lot of money, those who trade the Forex markets understand that it isn’t. If you had no leverage, you would need to deposit $100,000 for every lot that you were trying to trade. Most people simply cannot do that. That doesn’t mean that you should crank up the leverage though, just use it more responsibly. As a demonstration, I have friends that trade for large banks in New York that have roughly 7 to 1 leverage at their disposal. Some of the riskier managers that I know will do 10 to 1.

Trust yourself.

It’s far too easy to lack confidence in the beginning. After all, you’re in a new realm of work, and there are plenty of “gurus” out there to tell you how things should happen. The reality is, after 12 years I still don’t always get things right. I know this will never change, so the earlier you accept this, the quicker you can learn to trust yourself. In some ways, when you first start trading, you are probably more likely to make money, if only because you haven’t developed bad habits yet.

There are a lot of forums online that people flock to, trying to learn as much as they can about Forex trading. This of course is natural, and I obviously did the same thing. In fact, I had a thread on a popular form that had over 3 million views. However, you need to understand that a lot of the people on the forums are professional traders, and certainly aren’t profitable. You hear a lot of nonsense on these forums, and that unfortunately will be hard to filter out in the beginning. I can remember a trader who had talked to several people into investing in his miniature fund, and then took off with the money. He was very popular on the Internet, and many people thought he was a great trader. However, the secret of his success was that he simply bought the EUR/USD pair for several years as it was in an uptrend. It wasn’t that he was such a great trader, it was simply that he was willing to follow the trend.

You should remember the following: even though you are a new trader, the currency markets can only do one of 3 things in the end:

  • go higher
  • go lower
  • go sideways

Never, ever, ever, fight the trend.

“Trends matter.”

While I wish this was common knowledge, and to some extent it is, the reality is that many of you will try to fight the trend. You will try to pick the bottom of a downtrend, and of course call the top of an uptrend. My experience has been picking the top and the bottom of the market is almost impossible, and in the last 13 years or so, I may have done it twice. Even then, it was probably dumb luck.

Think of it this way: when you look at a chart of a currency pair over the last several years, which has been going from the lower left to the upper right, it’s very easy to say, “All I had to do was buy this pair to make a fortune.” To be honest, that’s true. However, many of you won’t be able to hang onto that trend, which is in part due to a lack of patience, and of course the high leverage that you are using in your position. The lower leveraged position can be put out there, and simply left alone for months at a time. That’s the thing about Forex trading, it tends to trend for several years at a time. Unfortunately, far too few of you take advantage of that.

Walk away from the computer.

If I had a dollar for every hour I spent in front of the computer watching the markets, I wouldn’t be typing this article. Unfortunately, as a new trader you think that the best way to gain knowledge is to sit in front of the market and watch the candles go up and down. Unfortunately, that’s not true at all. In fact, it’s probably best to look at longer-term charts and just notice what happens. It’s always a bit easy to see things after the fact, but that’s because you’re not sitting there watching them unfold in front of you. You try to recognize a pattern or some type of technical signal that works out over the longer term, and you follow it. That’s your job, that’s it. By spending time and from the computer for hours on end, you are doing the one thing that you are trying to get away from: sitting in front of a computer and working all day. Remember, there’s an alert to Forex trading as it makes for a “easy” lifestyle. Pressing a few buttons and getting on your jet to go to Maui is the dream, not sitting in front of that stupid computer. That of course means that you need to be looking at longer-term trades, and quite frankly I don’t see how short-term traders do it anymore with so many high-frequency algorithms out there.

Be patient with your winners.

If nothing else, pure dumb luck will make sure that you have some winners occasionally. Unfortunately, newer traders tend to take their profits early, because they have seen winners turn into losers. My experience has been this comes down to the leverage issue again, because quite frankly if you are not worried about a market going back and forth and recognize that you are with the trend, you are not going to let a market pullback of 30 pips scare you off. The problem is many of you start out with short-term trading, and you’ve seen 25 pip gains turn into 10 pip losses.

I believe that when traders switch to long-term trades, there is a bit of psychology at play when they give up 80 pips. However, it may be in context of a 700 pip move, so a bit of context is needed. It is far more common for traders to let their losers run rather than their winners, in hopes of a turnaround. This comes down to the next point.

Accept that there will be losses.

“Looks like my first FX account.”

One of the hardest things for traders to do is to accept the fact that there will be losses occasionally. When you look at your retirement account, you see that at the end of the year you made 9%. However, what you don’t do is nitpick every trade that the fund made and raise hell about the occasional small loss. You need to give yourself the same type of leeway, understanding that you won’t be perfect. You don’t expect in out of someone who is a professional, you certainly can’t expect yourself to be that much better. There are simply far too many random events in the market that can lead to losses. That’s what stop losses are for, they tell you when your trade didn’t work out. That doesn’t mean that you have the wrong idea, you just may have had it at the wrong time.

One way to look at losses is that it is crucial information. For example, if you are at a part of the market that is going to decide where the market goes the next several months, if you lose 1% on a trade it can be thought of as an investment, because you can simply go in the other direction and make much more back. If I told you ahead of time that if you gave me $10 I would give you $100, you would take that bet quickly. Sometimes, that’s what a loss is, simply paying for the information as to where we go next. Instead of getting emotional, see what the market is telling you. Sometimes it is that you need to go on the other direction, perhaps the trend has shifted, and other times it is simply a pullback and what has been a longer trend, and it tells you that you can buy your desired currency at a lower price.

Realize that most financial news outlets don’t have the same interests as you.

It’s ironic that so many outlets such as CNBC and Bloomberg are considered to be a place where experts offer free advice. While this is true to a point, you need to understand that their

“The sheep bought BTC at $20,000.”

business goals don’t align with yours. What they need to do is continue to attract eyeballs to the television screen so that they can sell commercials. The easiest way to do this is to simply follow whatever mania is going on. One recent example has been that CNBC put a live ticker of Bitcoin pricing on the bottom of the screen. This was almost at the exact top of the market. Why did they do this? Because everybody was talking about it. If they were true stewards of their viewers interests, they would’ve spoke about how overvalued the currency was. Any idiot looking at a chart could have seen that by the time we got to $20,000 the market had gone too far.

This is why they have so many “Bulls versus Bears” conversations. It gives everybody a little bit of airtime, but more importantly it keeps you needing the channel for some type of clarity. You need to understand that currency markets move long before the news hits those channels. Do you really think that somebody who is responsible for $500 million is waiting for news to come out on CNBC? No, of course not. The financial television channels are entertainment at best.

Trading is only as difficult as you make it.

Trading is only as difficult as you make it. Most of the time, we make Forex trading much harder than necessary, as we jump from one system to another. We also use far too much leverage, so losses can become horrific. The truth is that if you are consistent, the money will come. As far as systems are concerned, there are a lot of systems that can make money, if you are willing to allow them enough time to work. Unfortunately, new traders very rarely do. They have a couple of losses, and on to the next great thing. Even the benign moving average crossover system will work over the longer term, if you allow them to. A couple of losses does not mean that suddenly a system that has worked for decades has become inept.

In conclusion.

Honestly, I could go on forever with this topic. However, these were some of the most blatant things that I wish I knew in the beginning that would have saved me from a lot of trouble. There are many different systems and methodologies that you can use that will make money in the Forex markets, so while this offers plenty of opportunity, it needs to be tempered with a bit of wisdom. I hope I’ve shown you a bit of that in this article.

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