[PeterFM]

I'm creating this thread to give Forex newbies an insight into how they can either start making their accounts grow steadily, or, hopefully, recover from earlier disasters in their first forays into live trading. This thread is based on my 18 months’ experience, and tells how my journey has been. Others' experiences will have been different. All the thoughts outlined here are the culmination of information absorbed from this Forum, from people for whom I have developed a great respect.

You may, or may not, agree with the comments I will post here, and I respect that. All I would ask is if you have any serious problem with what I'm saying that you take the trouble to start your own thread rather than dumping on mine.

My reason for starting this thread is as a result of countless posts from newcomers to trading with very similar pleas for help - 'How can I make money on a 1 minute chart and which is the best indicator to make 5 - 10 pips?' There have been so many of these type of posts, I thought I could help some of these folks by putting all my thoughts into one thread, rather than keep typing the same replies, time and time again.

Who knows, if one new trader finds some value in this, and makes the same progress as I have, in half the time it took me, then it will have been worthwhile.

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[PeterFM]

I was introduced to FX by a friend, who showed me this wonderful program that, based on 5 & 15-minute charts, would, as the little spots appeared on the charts, lead me to create a substantial income. Once I'd done this, all I needed to do was introduce everyone I met to the program and earn even more money.

OK, so, several months later, to say nothing of several hundreds of pounds, I had to get out of the leasing program as the little fund I'd put to one side for this was fast disappearing. I could never seem to make any sort of profit; certainly not enough to cover the leasing costs.

Nevertheless, I was hooked. All those little candles moving in obvious patterns, up and down the chart, must be easy to understand, I thought. All I needed to do was find the correct combination of indicators and I would be made. In addition to this, there were so many sites on the Web offering free advice on where currency pairs were heading, all I had to do was take these experts' advice and I'd always be on the right side of the trade. I ended up with an A4 folder full stuff on trading; different methods, different indicators etc. I had RSS feeds pumping information at me all day long.

However, I still couldn't make money. Until I found Forex Factory.

I'd registered at other forums, and some brokers' sites that had forums, but there was too much noise, too many conflicting opinions. After a little while, I moved in here and the rest, as they say, is history. Even then it took some time to filter out the noise.

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[PeterFM]

There were, for me, several areas of confusion that affected my progress as a newcomer, and I'll address these areas individually. I've put them in this order, as this was the route I took when I started out. I now realise that that was the wrong way to approach this business, so I have modified the list later to show the route I wished I'd taken.

My route:

• Indicators
• Systems
• Time frames
• Account size and leverage
• Money Management
• Psychology
• Demo versus Live

An alternative:

• Account size and leverage
• Demo versus Live
• Time frames
• Psychology
• Money Management
• Systems
• Indicators

I will explain, in more depth, my reasoning for each heading as I go along, but for now this is the thinking behind the modified list.

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[PeterFM]

It takes time to learn a consistent way of producing steady growth in your account. To ensure you have that time it's important to consider how much effort and money you are prepared to invest in that learning, and, more importantly how slowly you are prepared to lose your money. Because, as a rule, you will be more likely to lose than win as you start trading. The smaller the account, the more risk is involved, therefore the less time you can afford making wrong decisions.

Whether you go for a live, or demo, account (covered next) you should start with a broker offering 400:1 account leverage. This lets you master Money Management (MM), by trading micro lots (0.01). You also need to understand the difference between Broker Leverage and Actual Leverage, and I'll point you towards links that will help you with this terminology.

A good place to start is from Post #18 in the Information For Beginners thread.

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[PeterFM]

'Should I demo or go live?' I started live, and regretted it. However, I started the wrong way. I began with too small a fund relative to what I was trying to achieve. I didn't understand any of the stuff in my list, all I could see was the house on the beach.

Not understanding MM, I tried Spread Betting. The same problem of account leverage came up. I didn't have enough in my account to enable me to set sensible stops, I couldn't face the drawdowns whilst waiting to see if my trade was going to turn into a winner. The value in demo trading is two-fold.

Firstly, you get to understand all the terminology (Sell Stops - Buy Limits etc) and, secondly, you get to develop a feel for how your chosen method works. Every method, or system, has weaknesses. You need to find those out as soon as you can, and how MM can keep you in the game longer. When you decide to go live, stick with Broker Leverage of 400:1 and continue to trade micro lots. As you gain experience, and your account grows, your MM will enable you to increase your lot size and grow it faster.

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[PeterFM]

Time frames are down to personal choice; all I can do here is tell you what worked for me. As I said, I started on 5/15-minute charts, and always struggled. I now focus on the Daily charts, but use the shorter time frames to look for better entries in order to reduce risk. I realise that many people, starting out, have difficulty with this. I now feel that the reason is simply that we fall into the trap of 'having to trade'. By that I mean if we're not trading, we feel we're not working. The urge to always have a position on is hard to resist, but it's the biggest problem I had to overcome.

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[PeterFM]

Even when I felt I'd started to turn the corner in trading, I didn't really make the major leap forward until I read a book entitled 'Trading in the Zone' by Mark Douglas. I recommend that you read this before you go much further in your trading. It will help you come to terms with losing trades, and develop the vital neutral mindset so crucial to your success.

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[PeterFM]

I've mentioned MM already, and you may wonder why it's this far down the list, but until the first four items are resolved it's hard to fully understand how important this is to you. Choose your account size and leverage, demo to learn the how things work, and what it all means, pick your time frame and get to grips with your mental state. Now you can devote time to mastering MM.

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[PeterFM]

During all this time, you will have probably tried 3, 4, or more, methods/systems. The threads devoted to them here are almost limitless.

However, let’s assume you’ve found one that you think suits you. You’ve sorted out all the points raised above. You’ve made money on a demo account, or shown steady growth using micro lots. At last, you think, I have this trading thing cracked. Now you’re thinking about the house on the beach again.

Stop.

This is the one time when you need to sit back and take the time to ensure that the move to a live account, or time to up the ante, is sensible. Depending on how much time has passed, you may not have discovered yet that all the weaknesses have been revealed. Your weaknesses, or the system's.

If you’ve been trading an MA crossover method during a great trending period, you’re unaware of all the bear-traps hiding ahead of you when things move into range-trading mode. All of a sudden, things are going wrong. Instead of lots of winning trades, you’re getting more losers than you’d come to expect. What happens to most of us is we immediately head off into The Indicator Trap.

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[PeterFM]

As a newbie, I believed that all I had to do was to learn to recognise the RIGHT signal, at the RIGHT time. Not only that, but if I could get 3 or 4 of these indicators' signals ALL lining up at the RIGHT time, I would have cracked it. It seemed so easy. I'd stay out of red news days, not trade Mondays or Fridays, and wait until the London Session opened. I studied all the Trading Systems threads, trying this one, trying that one, never quite getting to grips with any of them. Maybe if I'd stuck with one I might have done better, but I just couldn't find a method that suited me. Obviously the guys that designed them knew how they worked, but after a while I got tired of endless posts trying to modify the methods, or adding another indicator. All in an effort to prevent losing trades. I now know that this is not possible.

Why do I call it the Indicator Trap? Simple really. Indicators, for most newbies, are a crutch that you end up thinking you need to make a trading decision. The rules for entry can be so complex that you spend your time watching the indicators, and forget about watching the markets, as reflected in your charts. I also believe, rightly or wrongly, that they were designed to work in a completely different market place - Equity Trading. Having had an interest in stocks and shares in a previous life, I understood that decisions on buying, or selling, shares were premised on something different to FX. There is a longer-term view taken when considering buying shares, because apart from capital growth in the shares themselves, there was the additional benefit of dividend income. Buy and hold is not an attitude you meet very often in your early introduction to FX trading, and certainly has no relevance to a 5-min chart on GBP/USD, not in my mind anyway.

So there we all are, applying Slow Stochastics to fast moving FX charts, where, on any given day, a currency pair can move 100 pips or more. No wonder some of these indicators are always behind the action. The next thing we do is alter the settings, taking them down to even shorter timescales, expecting them to still perform the way the author designed, and optimised, them to work. I've had Stochs down to 5,5,3 just because it seemed to match what I wanted to see on the chart. If I still couldn't make the right call, I'd apply RSI, and adjust its settings until it seemed to match what I needed to see, or maybe CCI, or ADX, something, anything that would give me that magic signal.

Even the simplest indicator, the Moving Average (MA), is not the answer. Not in the way we think it is when we first apply it to a chart. I've tried all combinations of MA cross systems, and all have a weakness that I couldn't quite come to terms with. I didn't know why at the time, even though I knew I was dealing with something that dealt in averages.

The warning bells still weren't ringing. The answer is that these MAs lag. Obvious now, but, believe it or not, that simple fact didn't register. Too often, by the time I'd hit the order button, price was on a different path, adding a new position to its sequence of averages, and generally that path was against my trade.

Now I know that there are folk around who make these MA cross systems work for them, and I wish them well, but I'm sure they are bringing other skills to the table that enable them to refine (maybe subconsciously) how they use these methods.

I would love to tell you newcomers to clear all the indicators off your screens, but I know it would be a waste of time. Like any addiction, (I speak as a smoker) old habits die hard. At this stage we don't understand the markets well enough to simply trade the charts without some help. Even I have a couple of EMAs (Exponential Moving Average) on my screen, but I use them differently to how I did when I started. How I use them I will explain in due course, but I am starting to see that I really could get by without them (but I might have to demo first - not sure I can go cold turkey yet).

So, this is the first message. Start clearing your screens - watch price and then check if Stochs, RSI etc are confirming. Remember that you should be using these tools as Points of Interest, areas where a trading decision could be made. Learn to read your charts and don't just blindly follow what you think may be a signal. Try and learn the patterns that occur around these Points of Interest. For example, if you trade a MA cross method, does price ever pullback to the faster MA before taking off again? Maybe if you seem to get into a trade a bit late, and your stops are getting taken out too early, then why not wait for a pullback, if that pattern happens often enough, and go in as price bounces off the MA.

Indicators, of themselves, aren't bad things. The problem is we, in our development stage, don't understand how they work. Nor do we apply them to our trading in a logical way.

A classic here are the Overbought/Oversold signals give by certain indicators. Have a really good look, and see how long, and how often, Stochastics have been screaming Overbought on GBP/USD. I've been in most of this uptrend, on and off, for weeks, and I've always been Long.

I can promise you you don't need them. Try and lose them, or at least commit to only using one as an indicator (pun intended) of what MIGHT be happening.

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[PeterFM]

So many things that it might take a while to get my thoughts in order, but here are the key points that have re-shaped my trading career.

I spent a lot of time in Jim’s Price action thread. This convinced me that indicators are not necessary to become a successful trader. I found a few people on the forum that I always read, whenever they posted. Some immediately spring to mind, Jim, Diallist, Mbqb11, Habeeb, Isotonic and several others, many of whom have moved on to pastures new. I joined the Private Forum where I found further assistance in the form of FijiTrader. A series of threads, authored by FT, devoted to Psychology, and the finer points of Money Management, finally started to smooth off the final rough edges.

There was another trader called Twoblink, whose thought processes were, at times, beyond me, but who made me think about what I was doing. More importantly, he made me go out and do my own research when I had a question, rather than just hoping someone could give me an answer. Admittedly, I wasn’t always sure what question I needed to ask, but I would sit back and consider what I was struggling with, and this, in itself, helped me focus.

I stopped reading the various currency pair threads, again for no other reason than I discovered I needed to make my own decisions, and not rely on other people’s guesses.

As I moved to longer time frames, I took less and less interest in news releases. I still occasionally check FF’s calendar, simply to see if there’s anything going on that might make me consider tightening stops. To be honest, I forget to check more often as time goes by.

I decided on my own method, having tried to create a MA crossover system months before, that was based essentially on ParabolicSAR. I was always in the market; I took every signal come hell or high water, there was no discretion used and it made more than it lost. I set up a whole string of buy and sell orders with a fixed 50-pip stop loss and 50-pip take profit. Went away for 2 weeks, came back to find myself at break even on all trades.

At last I felt I was on the verge of a breakthrough. What I needed now was the last little thing to help me over the final hurdle. Once I found out what it was, I couldn’t believe how simple it was, and why on earth hadn’t I realised it before.

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[PeterFM]

Actually there were two things that made the ultimate difference.

• The first occurred as a natural result of trading with PSAR. I stopped using Market Orders. In Jim’s Price Action thread he mentions trailing entries, but I didn’t really understand the significance of what he was saying. I did notice though, that as I was now placing Buy/Sell Stops above/below the current price, this naturally kept me out of a lot of bad trades. If price didn’t reach my entry it was because it was heading the other way. Simple!
• However, the real secret is - Trade With The Trend. You read it all the time in any senior trader’s posts, you steadily ignore it as you search for other answers to your trading dilemmas; you add another indicator (and tweak it every time you lose). You head off and start trading a new method you found in another thread.
  All you have to do is keep with whatever method you employ now, but keep any eye on the longer time-frame charts (Daily for me) and only trade with the trend. Yes, you’ll miss pips on retracements. Yes, you’ll still get losing trades. Nevertheless, I’m sure you’ll discover that this simple rule will change your trading outlook in a way that no other change can.

Sorry, it wasn’t very magical, and I don’t suppose it will make me as much money, short-term, as the author of the Harry Potter books, but, now I know it, no-one can take away from me.

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[PeterFM]

This is GBP/JPY around the 6th Jun 2007. Tell me how you can make money on a 15 min chart like this. I’ve added the 5 & 13 MAs, as these seem popular MAs to use, from what I read.

Is there a trend you can trade? You might have thought it was down. You might have been trying to scratch a few pips on shorts.

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[PeterFM]

I was waiting for the retracement (shown in blue box) to finish. I had a buy order placed above the point where price had started heading down, and simply waited for price to resume its main trend, which was up.

Did I make money? You bet I did. Did I have to be patient? You bet I did. Did I only have to pay the spread once from that point to the next point of resistance (the 2nd blue box)? You bet I did. In fact I had 3 trades set around the 1st box all closed for a total of around 2000 pips.

As a matter of interest, each of these boxes highlights a bar pattern discussed in James16’s Price action thread. Those patterns are known as Pin Bars, and, if chosen at the right time, can be deadly. They, alone, are worth the time it takes to study his thread so that you can understand how to play them.

I appreciate I’ve picked a good example, but the principle applies to all my trading now. Why would I want to change it? More importantly, why wouldn’t you want to change from what you do now, if it isn’t working, to what I’m doing?

It doesn’t matter what system you use, or what indicators you have on screen, just get to see what’s happening on the Daily charts and only trade that way.

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[PeterFM]

Anyone doubts the statement above, here are the actual trades...

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