FOREX TRADING BEGINNERS’ GUIDE
A basic introduction to the world of Forex trading – by TradeForex.co.za
1. Risk Disclosure
Your Capital is at Risk. The leveraged trading products reviewed on this website are not appropriate for everyone. Do not trade with funds you cannot afford to lose and seek advice if you do not understand the risks.
TradeForex.co.za will under no circumstances make any trading recommendations in any of its guides. Guides are meant for information purposes only. Trading in Margin Transactions such as those described in this website is not suitable for all investors. It is important that you carefully consider whether trading in Margin Transactions is appropriate for you in light of your investment objectives, financial situation and needs. NEVER trade with money that you cannot afford to lose.
My main goal is to provide the beginner- and intermediate Forex trader with the right tools and information to succeed in the competitive market that is Forex trading from the very beginning.
Since the start of electronic trading, online investing has become easily accessible for traders wanting to earn an additional income from the comfort of their homes. Unfortunately it has also opened the door to an industry filled with scammers, chancers, frauds… you name them. This has had a negative effect on the trading industry. Many people have probably tried trading in one form or another, whether it was Forex, Futures, CFD’s trading etc. and failed at it. Statistics reveal that more than 95% of all traders who tried trading have either lost all their money or given up completely. It is my opinion that this high percentage of drop-outs is directly related to the amount of rubbish that clogs the internet when it comes to trading. Misinformation, false expectations and “get rich quick” schemes are all traps that a beginner trader should look out for.
It is therefore my objective to direct beginner traders down the right path, teaching them the basics of Forex trading. But there is only so much I can do – there is so much to learn, and it will soon become evident that trading with real money involves a large degree of psychology. Someone once said that “You will learn more about yourself from trading, than any other occupation”. While I cannot teach you this particular aspect, with the right information, dedication and hard work trading can become a great way of bringing in additional income, and who knows, maybe it can even replace your day job, if this is your goal.
3. Myths And Truths About Trading Forex
Before we start with the basics, let’s go over some of the “Myths” and “Truths” about trading Forex.
- Trading is easy and you can make lots of money in a very short period of time with little knowledge.
- Following the so called “GURUS” will make you successful
- Purchasing an automated trading system or so called “EA” (Expert Advisor) will make you money while you sit back and relax.
- Markets move in a scientifically predictable way.
- Day trading is a great way to make money (unless you are highly experienced and have nerves of steel)
- You only need a small start off capital to make lots of money.
The above “myths” are the most common ones, and beginner traders often fall into believing them because of all the misinformation present on the internet. They try one new EA/system/signal service/advice after the other. If one doesn’t work, they hop and skip to the next “best” thing, only to find out that they have blown their whole account in a very short space of time, resulting in them either depositing more money or giving up.
Rather than learning to trade for themselves and learn a new exciting skill they were more than willing to give up their hard earned money to someone else or some next best thing. Trading takes time to learn and it’s essential to trade a method that is known to work and to stick with it.
The old saying “If it sounds too good to be true, it normally is” rings true here. A little bit of common sense and a lot of scepticism will serve a beginner trader well and provide longevity in the world of Forex trading.
- Trading takes time to learn.
- It’s not easy and takes dedication to succeed.
- Trading takes extreme discipline.
- A trading plan is essential and has to fit your personality.
- Emotions in trading are very dangerous.
- You will have loosing trades.
- Cutting your losses short and letting your profits run is the only way to make money.
- Longevity in the trading world, in other words, surviving without blowing your capital = Success.
4. Basic Principles Of Trading Forex
Throughout this guide I will elaborate on the points made above. I could write large volumes about how to trade etc. but instead I will introduce you to the basics first, and then refer you to essential reading about all the various topics that Forex trading entails. This includes, in my opinion, the best trading books ever written by seasoned professionals, to make sure that you are exposed to the right information from the beginning, and to avoid you being exposed to all the garbage out there. These books and author references will appear under every appropriate heading as you progress through this introductory course.
Below is an outline of the basic principles; knowledge that any trader needs to understand. Take your time, do not rush things. One thing at a time and small steps at first. Get to learn the basics BEFORE you even start trading.
4.1. What is Forex?
Forex in short stands for the Foreign Exchange Market or Currency Market, where one currency is traded for another. Participants in this market speculate on the movements of exchange rates. Currencies are paired against one another, for instance the EUR/USD pair. The price of the EUR/USD at any particular moment reflects the price of the Euro in US dollars, for instance 1 Euro = 1.23884 USD. The first currency in the pair is referred to as the base currency.
4.2. Forex Trading Hours
New York opens at 8:00am to 5:00pm EST (EDT)
Tokyo opens at 7:00pm to 4:00am EST (EDT)
Sydney opens at 5:00pm to 2:00am EST (EDT)
London opens at 3:00am to 12:00pm EST (EDT)
In the table above one can see that there are times when two sessions overlap, namely:
New York and London: 8:00am – 12:00pm EST
Sydney and Tokyo: 7:00pm – 2:00am EST
London and Tokyo: 3:00am – 4:00am EST
During these overlapping times, one will find the most liquidity (see terminology section).
P.S All the above times are in Eastern Standard Time (US) since this is the time all trading references. To calculate the times in your time zone, please refer to the following link: http://www.timezoneconverter.com/cgi-bin/tzc.tzc
4.3. Forex Brokers
You can view our recommended Forex Brokers for South Africans here.
4.4. The Trading Platform
After you have selected the right broker, it is time to download their trading platform to your desktop. Download a demo account first. Risking real money without testing and developing your skills is foolish.
When you have downloaded and opened your trading platform, and if this is the first time you attempt trading Forex, things might seem like Greek to you, but rest assured, a good broker will provide free training and/or videos to orientate new users.
As I have mentioned before, the novice trader should open a demo account and only risk trading real money when he/she has gained a full understanding of how to place a trade, and when s/he possesses at least a basic trading strategy that has been proven to work in demo mode.
Knowledge breeds success. Success comes from hard work. When you have developed a winning strategy you will become more confident. More confidence will, in turn, foster good trading habits, meaning discipline, emotional control and sticking with your strategy no matter what.
All this should be done in demo mode first. Build a good track record, gain confidence before risking real money and when you do start trading with real capital, start out with small amounts and stick to a good money management plan. More about money management later.
4.5. Forex Trading Terminology
The study of price movement over a period of time by studying historical price movement and/or the use of technical indicators to help the user in making investment decisions. Price movement is represented on a chart and allows the user to visually study historical chart patterns or indicator signals to help predict future market behaviour.
Is the analysis of current economic conditions, government policy and societal factors to predict future price valuation and market trends. These economic conditions and governmental news releases include:
- Interest rates
- Gross Domestic Product (GDP) of a country
- Inflation and spending indicators
- Employment figures
- Retail and Consumer Confidence
- Government fiscal and monetary policy etc.
A visual representation of price movement over a specified period of time or representation of a specific time frame.
- Bar Charts
Or correctly referred to as OHLC bars (Open, High, Low, Close)
- Japanese Candle Sticks
- Line Charts, Renko Charts, Range Charts, Tick Charts etc.
For our purposes, these types of charts will not be used, as the above two are the most common ones. However, when you have gained some more experience it will be a good idea to look into these charts also.
Studies applied to a chart that assists with the prediction of price movement when doing technical analysis. There are hundreds to choose from and will be provided by the broker platform.
Is the quotation of the value of a currency against another currency in the foreign exchange market. There are many currency pairs and they are classified as follows:
EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF and USD/CAD
They are called majors as they have the most trading liquidity (see explanation of liquidity in the terminology section)
- Cross Pairs
Pairs that do not involve the US dollar i.e. GBP/JPY – British Pound vs. the Japanese Yen. There are also so-called Euro crosses i.e. EUR/GBP – Euro vs. British Pound
Pairs like the USD/ZAR – U.S. Dollar vs. the South African Rand that does not contain a great deal of liquidity.
- Exotic Pairs
Pairs where at least one is from an emerging economy, i.e. USD/MXN– U.S. Dollar vs. the Mexican peso. They are generally less liquid.
The relationship between the volume traded and the price change on any given currency pair. In other words, the volume traded on major currency pairs is much larger than those on exotic pairs. It makes for more active markets and larger daily trading ranges.
The measure of price change and the speed of change over a given period of time.
An order placed with a broker to buy or sell at a particular price. There are various types of orders which will be explained in more detail in Chapter 9.4.
When a trader decides to buy into a trade and hold a position for any given time.
When a trader decides to sell into a trade and hold a position for any given time.
An order that has to be placed manually to protect your margin account and prevent the trader from losing too much money on any particular position should a trade go into the opposite direction than originally intended. Consider it a safety net when you were wrong in predicting the direction of a trade. This will be elaborated upon in the Money Management section of this guide as it is a crucial step to implement when trading.
Flat (Square) Position
When a trader has no positions in the markets and all his/her positions are closed.
The offer price, the price a trader is willing to buy at.
The demand price, the price a trader is willing to sell at.
The difference between the ask- and bid price of a currency pair.
Refers to the smallest increment in price movement of a currency pair.
The money that a trader needs to keep with a broker in order to execute trades. If you were to lose an amount of money it will be deducted from your margin.
If your margin falls below a certain minimum, a broker might issue a margin call to the trader to deposit more money to his/her margin account.
The amount by which your margin is multiplied by so that you can control a larger amount of money. For instance, a leverage of 100:1 would allow the trader to trade an amount of $100,000 with a margin account of only $1,000. This, however, can be a double-edged sword, meaning that you can make more money with a smaller margin BUT also lose more money.
Refers to the standard unit size of a transaction. A standard lot size is 100,000 units of the base currency. For instance, when we trade the EUR/USD, we buy or sell the 100,000 units of the base currency, in this case the Euro. This amount, in effect, causes the pip value to be $10 per increment that it moves. When opening an account with a broker you will have the opportunity to open a standard-, mini- or micro account.
Each broker has a minimum deposit amount required to open each of these accounts. A mini account allows a trader to trade with mini lot sizes where the pip value is $1 per increment for the EUR/USD and $0.10 for a micro account holder.
Note: By combining leverage and lot sizes it is possible to increase or decrease a trader’s exposure in the market, therefore allowing the trader to exercise proper money management.
A clear direction of the market, either up or down. In an uptrend the market will continue to make new highs and in a downtrend the market will continue to make new lows. Please see the Chart Patterns section of this guide for in-depth detail of what exactly constitutes a trend.
Below is a diagram illustrating an up-trending and a down-trending market:
During an uptrend, consolidation happens when prices pull back a little from a new high, going into the opposite direction, before resuming the uptrend and breaking the new high again. In a downtrend, consolidation happens when prices pull back a little from the new low, before resuming the down trend and breaking the new low again. (See diagram above.)
An area in a downtrend, where prices find support and fail to break through, often going into the opposite direction.
An area in an uptrend, where prices find resistance and fail to break through, often going into the opposite direction.
Note: In the case where prices have either tested the support or resistance areas/levels and eventually broken through those areas, the support level, in a down trend, will turn into resistance and the resistance level, in an uptrend, will turn into a support level. (See diagrams below.)
A level where support/resistance occurred, calculated using the previous trend’s high-, low- and close prices.
When opening a chart, a trader can choose which time-frame the chart should be a visual representation of. The smallest time-frame is one minute and the largest is one month. When looking at a candle stick chart, for instance, on a one minute chart, a new candle will form after every minute that passes.
When looking at a one month candle stick chart, one candle stick would represent what happened in a whole month. The smaller the time-frame, the more “noise” there is in the market and prices can seem to fluctuate extensively. The larger the time-frame the more sense the price movement might make to the trader when predicting the markets direction, as a larger time-frame provides a bigger picture of price action. (See diagram below, based on one minute vs. five minute candle.)
Joe Ross, The Law of Charts www.tradingeducators.com (free subscription)
Joe Ross (1991) Trading the Ross Hook Ross Trading Inc. (order on his website www.tradingeducators.com)
This chapter will primarily deal with the basics of Forex trading. Please refer back to the terminology section for terms used here. We will first cover basic chart patterns – these are patterns that have occurred since the onset of trading and that still occur. There are hundreds out there but I will expose you to the ones that I consider the easiest to learn. These patterns are found on all trading markets, not only Forex.
One of the best traders, in my opinion, is the person whose ideas have improved my trading style and way of thinking– Joe Ross.
5.1 Chart Patterns
Following below is an excerpt from Joe Ross’ freely available eBook The Law of Charts on basic chart patterns. Please note that it is not the full version. I have only included the first part, since this is the one that deals with chart patterns.
5.1.1. 1-2-3 Highs And Lows
A typical 1-2-3 high is formed at the end of an up trending market. Typically, prices will make a final high (1), proceed downward to point (2) where an upward correction begins; then proceed upward to a point where they resume a downward movement, thereby creating the pivot (3). There can be more than one bar in the movement from point 1 to point 2, and again from point 2 to point 3. There must be a full correction before points 2 or 3 can be defined.
A number 1 high is created when a previous up-move has ended and prices have begun to move down. The number 1 point is identified as the last bar to have made a new high in the most recent up-leg of the latest swing.
The number 2 point of a 1-2-3 high is created when a full correction takes place. Full correction means that as prices move up from the potential number 2 point, there must be a single bar that makes both a higher high and a higher low than the preceding bar or a combination of up to three bars creating both the higher high and the higher low. The higher high and the higher low may occur in any order. Subsequent to three bars we have congestion. Congestion will be explained in depth later on in the course. It is possible for both the number 1 and number 2 points to occur on the same bar.
The number 3 point of a 1-2-3 high is created when a full correction takes place. A full correction means that as prices move down from the potential number 3 point, there must be at least a single bar, but not more than two bars that form a lower low and a lower high than the preceding bar. It is possible for both the number 2 and number 3 points to occur on the same bar.
Now, let’s look at a 1-2-3 low.
A typical 1-2-3 low is formed at the end of an down trending market. Typically, prices will make a final low (1); proceed upward to point (2) where an downward correction begins; then proceed downward to a point where they resume an upward movement, thereby creating the pivot (3). There can be more than one bar in the movement from point 1 to point 2, and again from point 2 to point 3. There must be a full correction before points 2 or 3 can be defined.
A number 1 low is created when a previous down-move has ended and prices have begun to move up. The number 1 point is identified as the last bar to have made a new low in the most recent down-leg of the latest swing.
The number 2 point of a 1-2-3 low is created when a full correction takes place. Full correction means that as prices move down from the potential number 2 point, there must be a single bar that makes both a lower high and a lower low than the preceding bar, or a combination of up to three bars creating both the lower high and the lower low. The lower high and the lower low may occur in any order. Subsequent to three bars we have congestion. It is possible for both the number 1 and number 2 points to occur on the same bar.
The number 3 point of a 1-2-3 low exists when a full correction takes place. A full correction means that as prices move up from the potential number 3 point, there must be at least a single bar, but not more than two bars, that form a higher low and a higher high than the preceding bar. It is possible for both the number 2 and number 3 points to occur on the same bar.
The entire 1-2-3 high or low is nullified when any price bar moves prices equal to or beyond the number 1 point.
A ledge consists of a minimum of four price bars. It must have two matching lows and two matching highs. The matching highs must be separated by at least one price bar, and the matching lows must be separated by at least one price bar.
The matches need not be exact, but should not differ by more than three minimum tick fluctuations. If there are more than two matching highs and two matching lows, then it is optional whether to take an entry signal from either the latest price matches in the series (Match ‘A’) or those that represent the highest and lowest prices of the series (Match ‘B’). [See below]
A ledge cannot contain more than 10 price bars. A ledge must Exist within a trend.
The market must have trended up to the Ledge or down to the Ledge. The Ledge represents a resting point for prices, therefore you would expect the trend to continue subsequent to a Ledge breakout.
5.1.3. Trading Ranges
A Trading Range (eee below) is similar to a Ledge, but must consist of more than ten price bars. The bars between ten and twenty are of little consequence. Usually, between bars 20 and 30, i.e., bars 21-29, there will be a breakout to the high or low of the Trading Range established by those bars prior to the breakout.
5.2. Practical Exercise
It has to be noted here that there are more chart patterns than the ones mentioned by Joe Ross. However, the ones described above are in my opinion the major ones and occur on every timeframe. I recommend you choose a 1-Day time-frame on the EUR/USD, for example, and scroll as far back on the chart as it allows (called historical data) and then try to identify all the chart patterns as described above. Be careful to follow the rules as to what makes up the specific chart patterns. Open up your tool bar and mark the patterns on the chart with writing. Identify each pattern.
This might take some time but soon you will get used to the patterns and spot them only with a quick glance, and eventually even identify them while they are happening in real time. I have attached screenshots of each of the patterns to show you what I mean.
Also note that these are only chart patterns. The recommended way to trade them can be found in the second part of Joe Ross’s “The Law of Charts”, which you can access by subscribing to his website as mentioned earlier.
6. The Importance Of Building A Winning Strategy
Joe Ross (1997) Trading is a Business, Ross Trading, Inc. (order on his website www.tradingeducators.com)
Van K. Tharp (1998) Trade your way to financial freedom, McGraw-Hill
Before we take a look at how you might approach trading these patterns, I would like to start by posing some important questions that every trader should answer before placing his/her first trade. This is true also for demo mode.
The questions, which I will elaborate on in great detail, are listed below. They are crucial questions that will guide you towards building a strategy that suits you both on a personal and emotional level.
- How much time do you have to dedicate to trading?
- What is your risk tolerance?
- What are your expectations, what are you hoping to achieve from trading?
- What is your emotional status?
- Do you know how to apply proper money management?
- Are you willing to continually adapt to changes in the markets?
6.1. How Much Time Do You Have To Dedicate To Trading?
Answering this question will dictate which time-frame suits you the best and it can also beg the question as to how much money you have for trading, which we will cover in the next point.
There are different types of traders: Short-, medium- and long-term traders. You should decide which one you want to be by looking into how you see yourself fit into each role. You also need to take into consideration the amount of time that you have available for trading, as most probably, trading will not be your full-time occupation at the outset.
6.1.1. Short-Term Traders
Short-term traders include day traders or even traders that hold a position for a couple of days. Typically, these traders would make trading decisions based on shorter time-frames, like the 1-minute, 3-minute and 5-minute charts, if they are purely day trading. This means that they will not leave positions open overnight and almost always close them by the end of their trading day.
These types of traders mostly implement a scalping strategy, a strategy that focus on taking small profits but making many of them per day. Some day-traders focus on opening and keeping a position for the whole day, and either add on to their positions or take their profit at certain pre-established targets. It is possible for a day-trader to keep a position for up to two days, should the position strongly move in his/her favour and the trader has every reason to believe that there is more profit to be made by keeping the position open for longer.
I personally favour the strategy that keeps a position open for the entire day, if possible, and that makes money by adding on to an already winning position and banking money at target areas.
Scalping requires immense concentration. The wild fluctuations you get from trading in very small time-frames mean that your strategy should rather focus on banking small profits and trading more frequently. It makes it difficult to make sense of price patterns, as they do not reflect what’s going on in the “bigger” picture. Scalpers are normally not bothered by the bigger trends but focus on times when liquidity is perhaps less and prices move in smaller predictable ranges. Remember that it is up to you, the reader, to decide what trader you want to be, but a word of caution here – scalping is not best suited for beginner traders.
6.1.2. Medium-Term Traders
Medium-term traders include traders that will keep a position for more than a couple of days, up to one week, and get their trading signals from longer time-frames, i.e. 1-hour to 4-hour charts. These traders take fewer trades than short-term traders as their entry signals are generated from larger time frames and take longer to develop. Often than not, one can expect better and clearer entry signals from longer time-frame charts as there is much less “noise”. This type of trading requires patience and larger stop loss orders than short-term traders like scalpers use.
6.1.3. Long-Term Traders
Long-term traders include traders that keep positions open for a long time, as long as a week, month or even years. They will enter positions from time-frames ranging from daily-, weekly- and monthly charts, often joining major long-term trends. Trading this style requires even more patience, as a trader can experience large drawdowns when prices move against the original direction, as markets require larger space to move. Stop losses are therefore much further away from the entry price. Entry signals can take weeks and even months to materialise. However, trading longer term can be less stressful as opportunity only comes by now and again. Long-term traders often have better success rates than shorter term traders as entry signal according to price patterns are more reliable than shorter time frames.
Taking all of the above into consideration, you will have to decide how much time you would like to dedicate to trading. Maybe you have all the time in the world but not a great deal of money to invest, forcing you to trade shorter term as your money management rules do not allow you to use stop losses that are as wide as those involved in longer term trading. Maybe you don’t have the patience to wait it out and crave the excitement of shorter term trading. We will look into this in our next point.
6.2. What Is Your Risk Tolerance?
When it comes to trading, answering this question may be more difficult than you think. Can you handle losing five – or even ten times in a row? How would an occurrence like this affect you mentally and emotionally? Will you stick to your tried and tested strategy or alter it because of your emotions? Are you confident enough in your strategy and ability as a trader to accept losses?
Answers to these questions might only come after you have traded a live account with real money. The markets will quickly make sure that someone with a large ego gets taught a lesson. Losing is part of trading. The quicker you accept this, the faster you can move on and succeed as a trader.
It is how you lose, and what your strategy dictates you to do in a losing trade that will separate the winners from the losers. The old saying “cut your losses short and let your profits run” holds true in trading. Many traders will feel the temptation to change their strategy game plan by moving their stop losses further away in the hope that trades will eventually go their intended way. It is human nature not to like losing and being wrong. In trading you will have to learn to forget about and minimize those losses. It’s almost as if you have to re-program the way you think about losing.
Find out what your risk tolerance is by considering how you behave emotionally when under pressure and during a streak of losses. Be honest with yourself and do some self-discovery. Once you understand yourself and how you react when trading you can decide what time-frame suits your personality better.
Risk tolerance also means how much money you are willing to lose. How much you can lose during a single trade or how many times you can lose before you are not able to trade anymore because you have no funds left. Look at the amount you are investing into this venture and ask yourself these questions BEFORE you risk that money.
NEVER risk money in trading that you cannot afford to lose!
I cannot stress this point enough. Develop a trading plan around your personality and trade that plan to the tee. Build a winning strategy in demo mode first. Gain confidence and then trade with real money.
6.3. What Are Your Expectations, What Are You Hoping To Achieve From Trading?
If you thought that you were going to make lots of money quickly, then you have another thing coming. What are your expectations? Are they realistic? Forget about what you might have read on the internet about systems, strategies or the next best trading robot. They all promise massive returns on a small investment. Most of them claim that you will double your investment in as short a period as a month. If this were true we would all be making millions.
The truth is that the top traders in the world make anywhere from 30% to over 50% per year return on their investments and on a consistent basis. So how on earth does a beginner trader expect to double their investment monthly with no experience? The answer is simple: It’s impossible.
Maybe you have more realistic expectations like going on a well-deserved holiday, buying a new car etc. Just be aware that they might also be unrealistic. How would you know what to realistically expect as a return on your investment?
This can only become clearer once you have developed and tested a trading strategy that suits your personality, by knowing how many out of a hundred trades are winning trades, and how many are losing ones. A hundred trades might sound like a lot but anything less will not give you a clear picture of what you can expect from your trading strategy.
You also need to take into consideration that this has to be a strategy that has been proven to work for you and that you cannot change as you please during your test period. If you do, you will have to start from the beginning again. It is true that it might need altering in the future to suit new market conditions, but this should only be done when you know the strategy has worked well for a long time, but that it has gradually started losing its accuracy.
Some of the best trading strategies in the world, developed by highly respected traders, only generally have a winning expectancy of 45–55%.
That might seem low to the untrained trader but let’s look at it a bit more carefully. The only way that they can be making money of a low expectancy strategy like this is if their winning trades were far bigger than their losing trades. Professional traders have the skill and discipline to manage their trades to perfection after they have entered them. They know from experience when a trade is not working in their favour and when to cut their losses short. When a trade does go their way they have the patience and skills to manage their open positions to milk the market out of as much profit it is willing to give them.
There are strategies out there that have higher winning ratios but they mostly rely on smaller profits that in the end outweigh their losses. Again, you will have to develop a strategy that you are comfortable with.
Only once you know the expectancy of your system should you allow yourself to set goals. Otherwise it is almost like shooting a target in complete darkness! When you know what to expect you can create realistic and achievable goals. Remember, trading should be approached as a business and one should have a healthy respect for the markets. Once you have traded with real money you will know what I am taking about.
Just a note here: It might be unrealistic to expect a trader to place 100 trades to test the reliability of a strategy. If you were to decide on a long-term strategy it might take years to complete and a trader will most probably lose interest. Rather test a strategy with historical data, and note the accuracy of your strategy “as if” you were entering a trade during that time. Be cautious when doing so because you will be able to see the outcome after the fact. Be honest with yourself and note the outcome as it would have happened in real time.
6.4. What Is Your Emotional Status?
Are you going through a tough time financially at the moment? Maybe you have family problems? Perhaps you are coming down with a cold and feel physically ill? These are all personal questions but be careful if you decide to trades when you are tired, angry, frustrated, confused or had a few too many drinks.
Think clearly before you place a trade – you cannot have a clouded mind as it will affect your judgement. Even highly-skilled traders will walk away from trading when things do not go their way, and gain some perspective. We are all human, not machines – although you should apply your trading plan like a machine…
6.5. Do You Know How To Apply Proper Money Management?
There are large volumes of books written about money management, yet very few people seem to care much about the subject. This again ties in with running your trading like a business. It even includes the need for a trading journal to keep track of one’s performance. This subject will literally make you or break you as a trader.
I will sum up a good trading management plan by describing the three phases a trader should process when trading: before-, during- and after a trade.
6.5.1. Before A Trade
What is your emotional status?
It’s good to be excited, but if you lost a previous trade and feel like you want to revenge the market by quickly trading again, then rather forget about it and walk away. You should be feeling calm and relaxed and, more than anything, feel confident in your strategy and trading abilities.
Did your particular trading strategy give you a signal or a warning that a trade might be coming up?
This means that you have enough time to prepare before entering the trade. The following points will describe what I mean.
Do you know how much you are willing to lose on this trade?
Once you have defined your risk tolerance and developed a proper trading strategy, knowing how much you are going to lose beforehand is an integral part of a decent trading strategy. There should always be a safety stop to protect your capital. But a safety stop or stop loss is also there to tell you that you were wrong. Do not change your stop loss to accept a larger loss in the hope that the markets may turn in your favour eventually. This is breaking the rules of your trading strategy and is bad discipline. There will be losses, this is normal, but forget about them and move on to the next trade. Don’t take it personal!
What are your profit objectives before this trade?
Do you know beforehand at which levels you want to take profit or part of your profit? Every trade should have a plan and it will not always go according to your plans. One of the most important parts of money management is to manage open trades and bank your profits while they are still on the table.
6.5.2. During A Trade
How will you manage this open trade?
Too often traders will allow a trade that was in the money to go negative and, in doing so, lose money. With experience a trader will know when to bank profits or to exit with partial profit while the trade is going their way. The trick is to recognise when a trade is turning against you and rather break-even than to lose money.
Knowing beforehand what to do and always having a plan for the worst case scenario is essential to a good trading strategy. This allows the trader to be prepared, and if a trade ends in a loss, to accept it better. If you were not prepared for the worst case scenario, stress levels could become high following a sudden reversal in your position, which could cause you to react emotionally, forget about your trading strategy and end up with a loss – simply because you were trading without a plan!
A good trading strategy should allow the trader to move the stop loss in the direction of the trade once certain target levels have been reached. If you were to exit a partial amount of your position at your first target, then at least move your stop loss to break-even (the point where you entered the trade).
Banking your profits while they are available is in my opinion the most important part of trading. Sounds like a simple concept but in reality it’s not, as taking too small profits is equally problematic. Too often do I hear that “banking small profits never made anybody poor”. But how small are these profits they are talking about? Novice traders tend to get nervous and excited when they see profit and exit their trades before their trading targets were reached. This happens because many traders lose so many times that when they do have a trade going their direction, they take a too small profit. They would rather allow their stop losses to be hit than their profit targets. This allows one’s losses to outweigh the profits.
Keep your strategy simple and rather move your stop loss to break-even after you have reached your first profit target. Don’t get greedy and place your targets too far; have realistic profit targets. Try to develop strategies that deal with momentum in a trade. This way a position should be going in your intended direction very quickly. If it struggles along and it does not feel right anymore, get out and look for the next opportunity. Do not let ego get in the way of your trading. Like I said before its human nature to try and be right all the time, this will not work in trading! Accept that you are wrong and either change direction in your trade or get out with a small loss.
The best strategies deal with large profits and very small risk. But they tend not to materialise often. Therefore patience is key. These types of strategies allow for partial profit-taking at a designated target level, a move of the stop loss to break-even, and then to let the remaining open position run as far as the market would allow. Often the stop loss would be adjusted to follow the market higher or lower, in the intended direction of the trade. This way it is not possible for you to lose more. You banked some profit, and the rest will also be a profit when the market decides to reverse and hit your adjusted stop loss.
Towards the end of this manual we will focus on the creation of a possible strategy, refer you to the right material and all this will start making better sense.
6.5.3. After A Trade
Do you keep a trading journal and learn from your mistakes or experiences?
Keeping a trading journal is essential to the business of trading. Keep track of your losses and your wins. Write down the date, the type of market that you traded, the time you opened and exited your position and at which price. Write down comments as to how the trade developed and ended. Most importantly, write down if you followed your trading strategy, be honest with yourself. If you strayed from your trading strategy write it down and why you chose to do so. Learn from your mistakes and do not repeat them! After a month or so, go through your journal and note which trades you were successful at and which ones were not. Note why you were winning or losing. If there is a problem, see if there is a pattern that keeps repeating itself and fix it. Your journal should point out problems when revising your trades and caution you to stop for a moment and reconsider your strategy or your emotional behaviour.
6.6. Are You Willing To Continually Adapt To Changes In The Markets?
Markets also change over time and what worked today might not work in a few months’ time. The political climate continuously changes and can make for very volatile periods in the markets. Do you have a strategy that can trade in this type of market?
Another reason why markets can change is because of the amount of people that actively start trading. It is important to know that the markets move in whichever direction it moves only because it wants to fill orders. If the majority of traders in a given market at a given time were buying the market and/or placing long position orders above the market, then the market prices would naturally tend to move up.
The more traders there are and the more indecisive they are, the more the market is going to whipsaw up and down. A trader should learn when markets are trending and when they are in congestion and deploy strategies around the current market behaviour.
Before the internet, and even before Forex trading, markets like the futures markets – commodities etc. – tended to be in long trending periods that could last for months on end. Most people involved in trading during those times were stock brokers, large firms, hedge funds, banks or similar. The ordinary guy on the street was not even aware that he too could trade these markets until the start of the internet. Many old-timers that traded those markets back then have since stopped trading as markets started changing too fast and they could not adapt to these changing times.
Be flexible, reassess and adapt your trading strategy when things seem not to work anymore!
7. Putting The Strategy Together
Van K. Tharp (1998) Trade your way to financial freedom, McGraw-Hill
Every trader is different – traders have different personalities and different risk tolerances. In order to describe how a potential strategy might be put together, it’s probably best to use an example. In this example, I will create a typical character with qualities that hopefully relates to the average person.
Let’s call him John. John is an adult male, 40 years of age and holds a day job from 9 – 5, five days a week. John has been searching for a way to make an additional income by means of trading Forex. John simply wants to find an alternative way to save more money, but he wants to do so over the long run. He’s afraid that his retirement fund might not be sufficient and that it will limit his spending on the things he wants when he retires. John has R20,000 to invest in this venture and it is money that he can afford to lose and that will not impact on his financial wellbeing. Let’s say for argument’s sake that John has been exposed to the right material from the start and that he is now at the moment were he wants to plan a trading strategy to suit himself.
From the things John has learnt when planning a good strategy he goes on to identify key points that will suit his personality. They are:
- What is my goal?
- How much time do I have to trade and keep up with the markets?
- How much money am I willing to invest?
- How much risk tolerance do I have?
John knows that his goal is long-term and that he has a conservative approach, he therefore expects a return of 15% per year, compounded over 25 years when he retires.
Since John holds a day job he knows that he can only trade after work. John looks at the times that the markets are open and picks a currency pair that is related to that period during which he wants to trade.
John has got some spare cash to invest and knows that he is risking it on the markets, but with his conservative approach he knows that the amount he will risk on any given trade is small and that he plans on keeping positions open on a longer term. He decides that he can spare R20,000.
John has always had an analytical approach to everything and has a long-term goal. He therefore knows that his goal is not unrealistic and should be attainable over the long period he is willing to invest in. He therefore has very little risk tolerance and the amount of money risked on any trade will be small. His leverage on his account will not be set high and he can work out exactly how much money he can lose on a trade, by knowing how far his stop loss will be from his entry price.
After answering the questions above, John can start putting together his strategy. From his personal evaluation he decides on the following:
John will spend no more than 2 hours per day doing technical and fundamental analysis. This includes looking at a daily- or weekly chart, since his strategy is long-term. He will be patient and enter the market when his strategy dictates him to do so and he will also monitor his open position during the time he has set aside to do so.
John identifies a couple of currency pairs that he wants to specialise on and finds out which fundamental news releases impact on these two pairs the most and when they occur. These news events mostly happen before the time that John has chosen to monitor the market. John will be wary to enter the market or take irrational decisions that might impact on his open positions during such news releases. John also knows that his stop loss should be far enough to absorb the impact of wild market fluctuations during these events.
John decides on a long term strategy and monitors the daily charts of his particular currency pair/s.
Since this is the beginning phases of his strategy, John feels that he wants to choose some type of breakout strategy and back-test this strategy by looking at historical data over the past two years and start to define entry conditions, stop loss placement, target levels etc. John uses the chart patterns described earlier in this manual as his potential entry signals. Please subscribe for free to Joe Ross’s Law of Charts, by entering your details on his website and find out how you could possibly trade these chart patterns.
Over the past two years, John has identified 20 chart patterns. Since he now knows how he would potentially trade them, he applies his entry, management and exit rules to each identified pattern and notes the result. It is possible to tweak rules to get a better outcome, but be very careful when you do this, because you are looking at things in hindsight, not as they are actually happening. When you have a strategy developed you have to stick to it and can’t go bending the rules that strategy relies on! You could tweak the strategy though and apply it to all the 20 patterns and see if you get a better outcome, but keep the best outcome and its rules as is, when you decide to use it in real time.
John plays around with his stop loss placement – when to move it to break even, where he would take partial or full profit etc. and by doing so he gains different results from his analysis. John settles on an outcome where he will minimize his losses as soon as his first target is reached by moving his stop loss to break even and only taking partial profit at those targets, allowing the market to run in his favour until his modified trailing stop is hit and he’s completely removed from the market. This all sounds very easy but being honest with yourself is of great importance when looking at historical occurrences. Remember it’s easy to change the strategy to favour maximum outcome because you could see the result after the fact. When you are trading real time you cannot see the future, so you need to be honest with yourself and have a robust strategy, by which you stick to no matter what!
By doing some calculations, John sees that out of the 20 trades, only 11 were profitable. This only produces a 55% winning average. In my book, anything above 50% is a good strategy. More often than not, you will find that top traders have a winning strategy of between 45%-60% max. Strategies in these percentages normally focus on large wins and small reduced losses. They also tend to be longer-term trades and happen less often. There are strategies with higher percentages but they tend to focus on many smaller profits but less frequent larger losses.
John calculates that his risk to reward ratio during these trades were very good, only risking a small amount with decent reward. By knowing how much he was willing to invest and knowing the risk to reward ratio, John sees that his expectation of 15% per year return on his R20,000 investment is well within reach.
John believes that he has created a particular strategy for each chart pattern and is now confident that his long-term goal is reachable and well within bounds. He writes and maps out each strategy according to its chart pattern and sets about trading his strategy, without emotional interference, in demo first.
It is true here that since John’s strategy is a long-term one, he might only expect 10 trades per year. To demo-trade for a year before risking real money is unrealistic. The point being made here is that John increasingly gained confidence in his strategy, knowing its potential and limitations and managing his open positions until the end, just like a good business manager would.
John is a fictional character and you should decide for yourself how to approach this important part of trading. If your circumstances call for a shorter-term strategy, just follow the logic that goes behind developing the strategy and be honest with yourself. Remember, a good strategy looks good over a long period of time. It is possible that your first three trades have been unsuccessful, but this does not mean your strategy is not working. Keep at it and test it over a long period of time. Read the book Trade you way to financial freedom by Van K Tharp on this subject, it will shorten your road to success dramatically.
I have learnt from experience that it’s best to pay to learn from the best rather than trying to figure things out for yourself. Whether it be buying a book or attending a course. This makes it more likely that you are exposed to the right information from the start, and it is more likely to prevent brainwashing from unreliable sources.
Use this information to your advantage, make it your own and mould it to suit your personality. Be careful not to blindly follow any person in the hope of success. Like I mentioned before, what works for one person might not work for another. We are all different and have different risk and tolerance profiles.
8. Can A Trader Be Taught To Be Successful In Trading?
Michael W. Covel (2009) The Complete Turtle Trader: How 23 Novice Investors Became Overnight Millionaires HarperBusiness
Curtis Faith (2007) Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders McGraw Hill
This might sound like a silly question. After all, is this not the purpose of this guide? Do yourself a favour and read the above recommended books. There are millions of trading books around but only a few that are worth the paper they are printed on.
My answer to the question in this chapter is a resounding Yes. Yes, trading can be taught to anybody but the success part still needs to come from within. Reading these books will show you that successful methods can be taught, and that it can work. The people referred to as “turtles” all came from different backgrounds with different personalities, yet they were successful.
I just want to add from my own experience that there are no shortcuts when it comes to trading. You still have to have the will to succeed and the drive to make this venture work, otherwise you will throw in the towel after your first failure and give up. The people that succeeded in the “experiment” described in the books, all had determination, although they maybe not have had the biggest confidence at first, but that’s human nature. Once you see that something works, your confidence will grow, which will allow you to forget and move on after a loss.
9. Tricks Of The Trade
In this chapter, we will deal with various tools and tips that should help the novice trader in making their trading decisions.
Indicators are technical studies that are applied to a chart on whichever time-frame the user prefers, in the hope that it can predict a certain outcome, and by doing so, assist the trader in making trading decisions.
The problem I have with this, is that all indicators are �?lagging”. They only tell you what is going to happen after it has already happened. It is true that they worked well in the past, but as more and more people started using them the less accurate they have become. Please note that I am not prescribing the reader to not use them. I am simply trying to prescribe the right way of using them.
It is my recommendation that a novice trader, or someone that has had limited success before, gets back to basics. Most online courses skip the basics and move straight on to how to use certain indicators, whether it be a custom-designed indicator or a combination of various indicators, when making a decision over to when to enter a position and when to get out.
What are the basics? Do you understand why the market moves up, down or sideways? Is it because of a major news release, fear, greed or some indicator telling us to enter at a particular time? Understanding why the market moves the way it does at a particular moment is essential to your ultimate success.
The Forex market only exists because there is always a willing buyer and a willing seller. For you to buy X amount of EUR/USD you need someone on the other side of the market willing to sell you the X amount and vice versa. Therefore, the market moves for the sole purpose of Filling Orders!
An up-trending market is a reflection of that most of the participants are of the sentiment that the market is going to move up, and the majority of them therefore place buying orders, creating a condition where the market moves up filling those buy-orders until sellers come in to play and start outweighing the amount of buyers and cause the market to be dragged down again.
If at any time there are more buyers than sellers, the market will move up. If there are more sellers than buyers then the market will move down. Equal amount of buyers and sellers and the market will move sideways.
Now you might say that there must always be an equal amount of buyers and sellers to fill orders. This is true but if there were more buying orders placed above the current price, which will only get filled when the market reaches them, and they outweigh the amount of sell-orders below the current price, then the market will move up to fill those orders first.
The trick is to study price movement by only looking at a chart, without indicators, and try to understand where most of the orders lie. If you can identify the areas where all the orders potentially lie, then you would have an advantage over most traders and rather trade with price movement than against it.
This brings me back to the use of indicators.
There are people, and even large institutional traders, who apply the normal indicators we are all told to use on our charts and then trade the opposite way from what the indicators tell us to do.
They know how the majority of traders will react at a given price when a certain indicator tells us to be either long or short. They can fill large amount of orders to go the opposite way, because they know there are enough orders at that level/price to fill their positions. This is why most indicators do not work accurately anymore. The markets can in a great way be influenced by entities with large sums of money. They can draw the market towards their orders by placing it above or below the current market price. This is Market Manipulation at its best and it is perfectly legal.
The question is whether you are going to be caught up in their plans or trade with their plans. Luckily, these market manipulators only have the power to do so for a short while before the market resumes its previous direction. There are too many role players, including you and me, to allow them the power to do this for a long period of time. One can observe their influence when prices approach technical levels, Fibonacci levels, major indicator signals or even major news events. As soon as you see the market behaving oddly and it’s doing the opposite of a major news release, then you are probably witnessing their manipulation!
So here are a few tips if you were to use indicators and, if so, how to use them properly.
- Define a trading strategy that relies on chart patterns and combine your entry strategy or exit strategy with an indicator BUT in this case, use the indicator/s as a filter rather than an outright signal to enter or to exit. If you were to read Trading the Ross Hook by Joe Ross, you would notice that there are many indicators that can be used to filter out good possible trade setups from bad ones, which would otherwise have been difficult to spot by only looking at chart patterns for your trading setups.
- Avoid using indicators as an entry or filter for a trade when prices are at or near technical levels, i.e. support-, resistance- or pivot points. Market action tends to become more volatile at these levels and even the use of indicators can give false signals.
- Avoid using indicators close to major news releases and thereafter. Wait for normality to return to the market before looking to re-enter the market.
- Do not rely on too many indicators, try to use one or two max. Certain indicators can and will at times give you conflicting indications. Too many indicators applied to your charts will more likely confuse you.
- Find out what the purpose and function of each indicator is. If you were, for example, trading a breakout strategy by looking at chart patterns, use a momentum indicator as a filter to enter the breakout. You should therefore combine the strategy with the right indicator.
9.2. Predictive Indicator Software
Above we talked about standard indicators, the type of indicators that you will receive from your broker with your charts. We also talked about the fact that they are “lagging” indicators in that they only show you what happened after the fact or, at best, what is happening at the very moment. They can’t, however, predict the future.
The best possible way to give you the upper hand in predicting a future outcome with a high degree of accuracy using indicators is to purchase software that tries to do exactly that, predict the future. Let’s make it absolutely clear here that predicting the exact outcome of future price movement 100% of the time, is impossible. However, it is possible to use this kind of software to predict a future event with an accuracy of 80% and up.
How it works is actually science and not witchcraft. Software of this type relies on comparing the current market conditions/data with similar historical data over a vast historical period. They then go one step further by analysing interrelated market influences with the market you are trading, to finally arrive at a predicted outcome.
In short, the software does all the technical analysis for you and also calculates the influence of other markets on the market you trade. This is called Neural Network Analysis. Not many traders are aware of the amount of inter-market related issues that can affect, for instance, a Forex pair like EUR/USD.
The Neural Network software looks at all other markets in the world that can affect this pair, it compares the current conditions/data with historical price data of similar conditions and predicts an outcome. In my opinion, this is a very good software to have in ones “toolbox”. Using this sort of software as a filter together with a good trading strategy will greatly improve the outcome of your trades.
Although this software can make good predictions, it is of the utmost importance to take note of one fact: Neural Network software is accurate in predicting where prices might be in the future, from two to 18 days, but it cannot tell you the exact price to enter at. It will only give you a clue of market direction. Fine tuning the exact point where you will enter is entirely up to yourself!
This can only be done by using a decent strategy in combination with pattern recognition i.e. 1-2-3 patterns etc., and then confirming your direction by consulting with your Neural Network software. These predictive indicators should therefore act as a “filter” and not an outright reason to enter a trade. It is entirely possible to be right about the direction using this software but entering at the wrong price and losing money. Timing is everything!
9.3. News Releases
I have written about news releases and that they can have a huge impact on the currency pair you trade. Keeping an eye on news releases can influence the entry of your trade or the current position that you might be in. So where do we find these news releases? There are many websites that offer it for free and you should bookmark them and follow them daily. Here are a couple of good ones:
Alternatively, you could watch these releases live on a channel like Bloomberg, either on a television set or live streaming on your computer.
Another word of caution here! There are traders that trade news releases only, and place their trades depending on the outcome of these events. I strongly advise against it as it is a sure way of losing money fast. News traders normally rely on high speed internet connections and subscribe to expensive news services to receive their news a few seconds before the general public. You will probably notice that during a big news release, like non-farm payrolls, that the news websites mentioned above are slow as their servers get overloaded by the amount of people accessing the information.
Market manipulation can be rife during these events as investors with deep pockets temporarily draw the market in the opposite direction to the news outcome, to gain a more favourable position to go long/short for maximum profit potential.
In my opinion, it is better to enter a position once the market has settled after a major news event. To exit a position (in the case of a short-term strategy) well before a major news event or to monitor an open position closely (in the case of a long-term strategy) during a major news release.
Do your homework and find out which news event will affect the market you trade in. I could list them for you, but it will be a good exercise for you to instead research them yourself. Take the pair/s you want to trade and write down events that might impact each side of the pair i.e. interest rates, crisis in Europe, non-farm payrolls, unemployment claims, economic sentiment etc., and keep an eye on them on the news calendars of any of the websites I mentioned. Note the impact they can have on the market but be sure to remember that the markets almost always react differently to the same type of news event.
Again a word of wisdom here, try to not be influenced by all the hype that some news channels can create before a high impact news release. They are masters at creating excitement and if you were to get excited with them it could most probably influence your emotions and therefore influence your execution of your trading strategy. A decent strategy should anyway not factor in, or rely on, entering orders using news releases.
9.4. Types Of Orders
During the terminology section at the beginning of this manual I mentioned that there were various order types that can be placed with your broker. I decided to only mention them toward the end of this manual as I felt that the importance of building a good trading strategy and gaining the right psychological attitude to be of greater importance than the actual mechanics of placing a trade. As you should know by now, placing a trade is not more important than the actual homework required before placing it and the actual management of an open position. However, it is important to know the different types of orders though.
I have included this section under Tricks of the Trade, as using the right order type is important and can get you in at the right price and even avoid getting you in under unfavourable conditions.
9.4.1 Market Orders
A market order is an order to buy or sell at the best available price.
For example, the current bid price (the price a trader is willing to sell at) for EUR/USD is at 1.2140 and the ask price (the price a trader is willing to buy at) is at 1.2142.
So if you wanted to buy EUR/USD using a market order, then it would be sold to you at the ask price of 1.2142 and vice versa. You would click buy and your trading platform would instantly execute a buy order at that exact price. These orders tend to get filled instantly and are a way to get you into the market quickly.
9.4.2. Limit Orders
A limit order is an order placed to either buy below the current market price or sell above the current market price. These orders are resting orders and will only be filled when the current market price reaches the limit order price.
For example, if the EUR/USD is currently trading at 1.2060 and you believe that when prices reach 1.2080 it will reverse, then you would place a sell limit order at 1.2080.
Using these orders will allow you to be away from your platform so that you do not have to be present when prices reach your target.
9.4.3. Stop Orders
Stop orders are placed to buy above the current market price or sell below the current market price.
For example, if the EUR/USD is currently trading at 1.2065 and appears to be moving upwards and you are of the opinion that prices will continue in that direction, you could perhaps place a buy stop order at 1.2075 that will be filled when prices reach it. Stop orders are placed when you believe a market will move in one direction.
9.4.4. Stop-Loss Orders
These orders are very important as they will limit the amount of loss you are willing to take for any trade. See them as a safety net. They should be a vital inclusion with any trading strategy. They are placed below your entry price when buying, and above your entry price when selling.
For example, if the EUR/USD is currently trading at 1.2080 and it appears to be moving upwards and your trading strategy dictates that you enter at 1.2085, you could place a buy stop order at 1.2085 and at the same time you are filling in your order ticket, click on the Stop Loss button and enter a price below 1.2085, so that if the market reverses against your position you will automatically be stopped out at that price. Where you set your stop-loss is up to your risk profile and should in any way be a part of your strategy before entering the trade.
Using the above example, prices would have to reach and trade at your buy-stop order of 1.2085 before your platform will activate both orders. When placing a sell-stop order the reverse is also true.
A stop-loss order can and should be placed with any order type you wish to use.
9.4.5. Trailing Stop Orders
These orders have the same function as stop-loss orders but are programmed to follow the market a set distance behind the current market price.
For example, if the EUR/USD is currently trading at 1.2040 and you decide to enter a short position by using a market order, you could decide to use a trailing stop order to follow the market down in your direction 20 pips above the filled price.
Let’s say your short position was executed at 1.2038, then your trailing stop will become active at 1.2058. If the market price continues to drop then the trailing stop order will automatically follow the market 20 pips behind the market price. If the market would reverse against you then the trailing stop order will stay at its last position. It will therefore not move upwards 20 pips above the market if the market reverses, the market has to continue down wards in this example to allow the stop loss order to “trail” a set distance behind it. It is therefore called a Trailing Stop.
When developing a strategy, try to use stop orders and always place a stop-loss when filling out your order ticket. If you were to get into a trade and you for some reason need to get out of it immediately, place a market order. Your trading strategy should be based on getting you into a position at a certain price, based on chart patterns and whatever your entry signal might be. Your take profit levels should be limit orders.
Market orders, in my opinion, should be used to get you out of a position quickly, not to enter a position since when volatility picks up and there are hectic price fluctuations, a market order can get you filled at a price that is not optimal and therefore have your stop loss at the wrong level.
In my own trading I only use stop orders to enter a market. If I do not get filled at the optimal price that I decided on then I am unlikely to take the trade. I will not chase the market by trying to enter a market order, because normally, at that point, the market has moved substantially in my direction and I have missed out on the optimal entry point according to my strategy parameters.
If your strategy relies on short-term trading, have your stop-loss set at a default distance from your entry point. Once the order has been filled you can adjust your stop-loss to the right level. Often a short-term trader will be presented with an opportunity that comes by very quickly and it might not be possible to determine your exact stop-loss level prior to entering.
There is great debate in the trading world as to where to place a stop-loss. Many say that the distance the stop-loss is set at should never be more than the equivalent of risking 1 – 3 % of your equity. Others say that they should reside at a natural support or resistance level when a market is trending. In this case, and depending on your time-frame, it might be too far away and you may not be comfortable to risk that much of your equity. However, too often traders place their stop-losses too close and do not allow the market enough space to “breathe”, which causes their stop-losses to be hit too often, taking them out of a trade, before the market resumes in its original direction. This gives traders the feeling that the market is out to get them. Which is almost true, we discussed how the market functions by filling orders. Avoid putting your stop-loss at levels where you might think a bunch of other peoples’ stop-losses are.
This guide does not cover how a platform works and the function and navigation thereof. A decent broker will provide training videos, seminars or even live platform orientation via internet to their clients. Make use of their services and know your way around your platform.
We have covered a lot of material in this guide and I’m sure that it’s written in a different way from most other introductory courses on the same subject. There are no false or get-rich-quick promises. Instead, this is a guide written by a trader who has been there and have fallen for all the tricks in the book, but who, through hard work and dedication, have come out at the other end with valuable lessons learnt and a more sustainable way of trading. In no way do I hope that what I have written here have put you off trading, but what I do hope is that it has given you a realistic look at what it takes to succeed.
The best advice I can give a beginner trader is to think out of the box and not to trade with the crowd. If you are doing what the majority of traders are doing then you would become part of the 95% that lose their money and ultimately fail. To be a winner in this business you have to think like the top 5% and do things differently than the 95%.
Developing a strategy that relies on patience, thinking out of the box and that works around your personality is a key factor in this success. Plan your trades properly and trade your plan to the end.
Educate yourself and read the books we have recommended throughout this guide, they are worth their own weight in gold. Beware of online scams and rely on teaching yourself how to trade rather than following trading recommendations from a subscription service or signal service. Getting it right yourself is more rewarding and will assure longevity in this business. If you do not get it right then take a step back and reassess your strategy. If you lost because you did not follow your plan, and believe me it will happen, then don’t go out blaming the market or someone else. Take responsibility for your own actions, moaning about a lost trade is not going to help as there is nobody that will be willing to listen.
Trading can be a lonely road and takes very hard work to succeed in. It can be nice to meet likeminded people that also trade or join online trading forums, but be aware not to follow other people’s opinions. Their opinions should not influence your trading strategy either.
It is my hope that you find success through trading and that this guide has helped you on the right path and that you will keep referencing it during your own trading development. Remember that what we have covered in this manual should not to be taken as trading advice, but rather as a guide to help you develop your own trading strategy and style.
To your success and happy trading!