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| forex mark |
Everyone involves the forex marketplace for a reason, move between exclusively for recreation to turning into an expert trader. I started aspiring to be a regular, self-sustaining forex trader. I had been schooled the 'perfect' strategy. I spent months testing it and backtests showed however I might create $25,000-$35,000 a year off of a $10,000 account. My set up was to trade forex for a living and let my account compound till i used to be thus wealthy, i would not need to work once more in my life. I used to be dedicated and that I committed myself to the set up 100 percent.
Sparing you the small print, my set up failing. It seems that trading 300k heaps on a $10,000 account isn't terribly forgiving. I lost 2 hundredth of my account in 3 weeks. I did not recognize what hit me was wrong. Luckily, I ended trading at that time and was lucky enough to land employment with a forex broker. I spent following number of years operating with traders round the world and continuing to teach myself concerning the forex market. It vie an enormous role in my development to be the trader i'm these days. 3 years of profitable trading later, it has been my pleasure to hitch the team at DailyFX and facilitate individuals become made or a lot of made traders.
The point of me telling this story is as a result of i believe several traders will relate to starting up during this market, not seeing the results that they expected and not understanding why. These are the 3 things I want I knew after I started trading Forex.
1) FOREX IS NOT A GET RICK QUICK OPPORTUNITY
Contrary to what you’ve read on many websites across the web, Forex trading is not going to take your $10,000 account and turn it into $1 million. The amount we can earn is determined more by the amount of money we are risking rather than how good our strategy is. The old saying “It takes money to make money” is an accurate one, Forex trading included.
But that doesn’t mean it is not a worthwhile endeavor; after all, there are many successful Forex traders out there that trade for a living. The difference is that they have slowly developed over time and increased their account to a level that can create sustainable income.
I hear about traders all the time targeting 50%, 60% or 100% profit per year, or even per month, but the risk they are taking on is going to be pretty similar to the profit they are targeting. In other words, in order to attempt to make 60% profit in a year, it's not unreasonable to see a loss of around 60% of your account in a given year.
"But Rob, I am trading with an edge, so I am not risking as much as I could potentially earn" you might say. That's a true statement if you have a strategy with a trading edge. Your expected return should be positive, but without leverage, it is going to be a relatively tiny amount. And during times of bad luck, we can still have losing streaks. When we throw leverage into the mix, that's how traders attempt to target those excessive gains. Which in turn is how traders can produce excessive losses. Leverage is beneficial up to point, but not when it can turn a winning strategy into a loser.
2) LEVERAGE CAN BE A WINNING STRATEGY TO LOSE MONEY
This is a lesson I wish I had learned earlier. Excessive leverage can ruin an otherwise profitable strategy.
Let's say I had a coin that when heads was hit, you would earn $2, but when tails was hit, you would lose $1. Would you flip that coin? My guess is absolutely you would flip that coin. You'd want to flip it over and over. When you have a 50/50 chance between making $2 or losing $1, it's a no-brainer opportunity that you'd accept.
Now let's say I have the same coin, but this time if heads is hit, you would triple your net worth; but when tails was hit, you would lose every possession you own. Would you flip that coin? My guess is you would not because one bad flip of the coin would ruin your life. Even though you have the exact same percentage advantage in this example as the example above, no one in their right mind would flip this coin.
The second example is how many Forex traders view their trading account. They go "all-in" on one or two trades and end up losing their entire account. Even if their trades had an edge like our coin flipping example, it only takes one or two unlucky trades to wipe them out completely. This is how leverage can cause a winning strategy to lose money.
So how can we fix this? A good start is by using no more than 10x effective leverage.
3) USING SENTIMENT AS A GUIDE CAN TILT THE ODDS IN YOUR FAVOR
The 3rd lesson I've learned should come as no surprise to those that follow my articles... using the IG client sentiment tool (IGCS). I've written many articles about this topic. It's the best tool I've ever used and is still a part of almost every trading strategy I am using, present day.
IGCS is a free tool that tells us how many traders are long compared to how many traders are short each major currency pair. It's meant to be used as a contrarian index where we want to do the opposite of what everyone else is doing. Using it as a direction filter for my trades has turned my trading career completely around.
LEARN FROM MY MISTAKES
If I could tell my younger self three things before I began trading forex, this would be the list I would give. Utlimately though, if you are just starting out in the forex market, the best thing you can do is take time to learn as much as you can, starting with the basics. Read guides, keep up to date with the latest news and follow market analysts on social media.
ROB PASCHE
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