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Help for Newbies. What can you learn on Forex Factory?

  • Post #1
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  • First Post: Edited Dec 17, 2008 7:15pm Jul 21, 2007 8:03am | Edited Dec 17, 2008 7:15pm
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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  • Post #2
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  • Edited Aug 9, 2007 3:46am Jul 21, 2007 8:04am | Edited Aug 9, 2007 3:46am
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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  • Post #3
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  • Edited Sep 29, 2007 6:22pm Jul 21, 2007 8:06am | Edited Sep 29, 2007 6:22pm
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:

  1. Indicators
  2. Systems
  3. Time frames
  4. Account size and leverage
  5. Money Management
  6. Psychology
  7. Demo versus Live

An alternative:

  1. Account size and leverage
  2. Demo versus Live
  3. Time frames
  4. Psychology
  5. Money Management
  6. Systems
  7. 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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  • Post #4
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  • Edited Sep 6, 2007 5:12am Jul 21, 2007 8:07am | Edited Sep 6, 2007 5:12am
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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  • Post #5
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  • Edited Aug 9, 2007 3:48am Jul 21, 2007 8:11am | Edited Aug 9, 2007 3:48am
'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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  • Post #6
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  • Edited Aug 9, 2007 3:49am Jul 21, 2007 8:13am | Edited Aug 9, 2007 3:49am
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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  • Post #7
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  • Edited Aug 9, 2007 3:49am Jul 21, 2007 8:16am | Edited Aug 9, 2007 3:49am
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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  • Post #8
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  • Edited Aug 9, 2007 3:49am Jul 21, 2007 8:17am | Edited Aug 9, 2007 3:49am
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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  • Post #9
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  • Edited Aug 9, 2007 3:49am Jul 21, 2007 8:19am | Edited Aug 9, 2007 3:49am
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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  • Post #10
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  • Edited Aug 9, 2007 3:50am Jul 21, 2007 8:31am | Edited Aug 9, 2007 3:50am
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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  • Post #11
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  • Edited Aug 9, 2007 3:50am Jul 21, 2007 4:02pm | Edited Aug 9, 2007 3:50am
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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  • Post #12
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  • Edited Aug 9, 2007 3:50am Jul 22, 2007 5:31pm | Edited Aug 9, 2007 3:50am
Actually there were two things that made the ultimate difference.

  1. 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!
  2. 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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  • Post #13
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  • Edited Aug 9, 2007 3:51am Jul 22, 2007 5:32pm | Edited Aug 9, 2007 3:51am
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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  • Post #14
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  • Edited Aug 9, 2007 3:51am Jul 22, 2007 5:36pm | Edited Aug 9, 2007 3:51am
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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  • Post #15
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  • Edited Aug 9, 2007 3:51am Jul 22, 2007 5:58pm | Edited Aug 9, 2007 3:51am
Anyone doubts the statement above, here are the actual trades...

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  • Post #16
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  • Edited Aug 9, 2007 3:52am Jul 23, 2007 6:00pm | Edited Aug 9, 2007 3:52am
I would like to go back over my modified list, explaining things in as much depth as I can. I would remind you that I am also quite new to this, and there is more for me to learn as well.

Nevertheless, all the points to be covered are discussed at our level, and will lack the complexity that some traders feel is necessary to get them through the day. Once you’re trading methodically, and your account, demo or live, is growing to your satisfaction, then by all means explore other areas in more depth. You never know when the next item you read will be the thing that launches you to a higher level.

As I re-visit each section, I’ll explain what my thinking is, and how I’ve applied it to my trading. If you are trading live at the moment this would be the time to open a demo account, and put these ideas into practice to see if any of this resonates with you. It’s true to say that, as individuals, no one way will suit us all. My aim is to try and get you to find a method that suits you, as a person. If you are very risk averse, some of what I will say might scare the pants off you. This is the beauty of a demo account; it lets you try scary new ways of trading without financial penalty.

There will be many indicators that I will not mention. Don’t ask me about them, because I won’t know. I may have tried them - most probably I haven’t. If I don’t use them now it doesn’t mean they’re no good, it simply means I didn’t find they added anything to what I do.

Wherever possible I’ll point you in the direction of solid threads, or posts, that have guided me in the past. I’ll quote sections of posts that I feel are relevant. If I mention a member’s name, go and search for his/her posts, and read what they say. Many of them don’t post that much and, if you’re new, you will have no idea of how much wisdom they can offer you. Never assume that a forum member’s number of posts has any relationship to his/her experience (and that includes me).

Never forget that the Forex market is always there. If you miss a trade, does it really matter? Once you learn to exercise patience in your trading, things start to become clearer. My own trading changed from the moment I started taking time to think about what I was doing, instead of hitting the Buy/Sell button every time price moved a few pips.

At the end of the day, our aim is to make money. No business has ever succeeded if it rushed into action with no thought of what it had to do to lay solid foundations on which to build that success.

The professionals you are trading against are businessmen & women, they take no prisoners, they can’t afford to. At least give yourself a chance of surviving long enough to take a little, or a lot, off them.

Enough of the waffle, let’s get on with it.

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I appreciate all the positive comments I have received here and by Private Message and without sounding ungrateful I would like to keep this thread as tidy as I can. I know how threads can get diluted very quickly.

As I will keep the main thread closed while I finish each new post, please post your comments, or questions, here in the Help for Newbies. (Discussion Thread).

Thank you
  • Post #18
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  • Edited Aug 9, 2007 3:52am Aug 2, 2007 5:35am | Edited Aug 9, 2007 3:52am
One post that had an enormous impact on me in the early days was posted by Jim, whose Price Action thread changed my trading approach.

As I was reaching the point of giving up this message appeared and firmed my resolve to stick with it, and learn to manage not only my learning experience, but also what I wanted to achieve, long-term, as a trader.

With his permission I have added it in here, I hope some of you get as much value from it as I did.

Quote
You do not have to go through hell trying to figure this business out

They say that 95 percent of traders lose and give up. For new traders, that trade anything less than 4 hour charts, its almost 100 percent. They lose everything within a year, and most of the time much sooner. Any new trader that wants to treat this like a business, and take future success seriously, should do the following as a minimum:

1. Whatever/however you trade, it should be done on daily charts or higher, and certainly not under 4-hour
2. To start it should be a demo account. It should stay a demo account until you show a profit three months in a row
3. After demoing open a small practice account with pocket change. You do this also for a minimum of three profitable months in a row
4. You open a normal account and never trade more than 1 to 2 percent of your account per trade. If after three months you have a combined loss you go back to steps 2 & 3.
5. If you get past step 4 you continue to refine what you are doing by never stopping the demo process. You continue to bring up/in refinements/additions to your normal account after they have proven themselves on demo and practice first.

After you have found solid success following this progression you then go back to step two and start all over with your intraday trading. This is how you treat it as a business with long-term goals and success in mind. Now let’s be honest, almost no one does this and there you have the 95% of traders that never accomplish what they set out to do in this business, that give their money to the 5% that do. I have been trading for almost 22 years and demoing is as big a part of my trading business as live trading.

Most new traders don’t want to trade, they want to gamble. There is the difference. The single biggest reason new traders blow out their accounts is thinking they have to day trade to be a real trader.

Professional traders don’t have a degree, they don't have more brains, they are not luckier, nor do they have some secret formula everyone else is trying to find. A professional trader is simply someone who takes money out of the market on a consistent basis. Consistent does not mean every day or even every week for that matter.

I don't know of one single good trader who doesn’t lick his chops over a new trader looking and trading off an intra-day chart (i.e. any time frame under daily). Even the very best trader has difficulty making consistent money trading under a 4-hour chart. There are a ton of reasons that I wont go into.

I have noticed more and more people posting that have come out of the futures markets, many from the Mini SP and Dow. The quickest way for a futures trader to get killed in the Forex market is to be ignorant of, or not aware of, the difference between an 8-hour market and a 24-hour market. The biggest obstacle I have faced in trading Forex is continuing to think like a futures trader.

A one-day move in Forex will take 2 or 3 days for a similar move in say the mini Dow. For years I have played the SP with great success. The day lasts 8 hours and I know to take my profit because,

1. The day does not last long and
2. With the way the world is I am not staying in overnight.

With Forex you don’t have to worry about overnight moves, and if you monitor your positions you can stay in any length of time you want. My problem has been that where I naturally would take a profit I now hang on looking for more.

The result has been the 24-hour problem. I get stopped out at Breakeven or at a loss. This is an ongoing learning process for me. Any trader just coming out of the futures markets would be well served to take what I am saying here seriously. For those of you who have never traded anything but Forex I think you have an advantage over futures traders. You are not programmed to think like they do. You already know that these markets can move fast and hard at anytime. You know that a 30 or 40 pip profit can disappear in 2 or 3 minutes overnight. Anyway I just wanted to bring it up, perhaps more for my own contemplation than anything else.

Discipline, hard work, and patience

If you’re not willing to give this at least two years of study and practice then you’re just playing around. Doctors and lawyers etc spend 6 to 10+ years mastering something that can make them rich. Why would anyone think that this business, which can make you much wealthier than most any other profession, is any different?

If you’re not going to treat this as a business then quit and go to Vegas where your odds are better. Going into the trading game blind with no plan is financial suicide.

1. State your goals
2. Make your plan
3. Execute your strategy

Ok so you’re brand new to this business. Get the worthless crap off of your charts. Stochastics, MACD, etc. There is a place for them but not with new traders. When it’s time, use them to spot divergence, which is all they are good for anyway. Get the stupid MA cross systems off your charts also,

They can work but that’s another story. There are only two things you need on your chart. Price and the 365 EMA. Nothing else. Daily, weekly and monthly charts only.

The bottom line

New traders starting off on intraday are already in the coffin. The nails are usually hammered in within two months.

Discipline, Hard Work And Patience

Yes, that’s exactly what it takes. There is no holy grail; there is no free lunch. There will always be fresh blood for those that have figured it out and paid the price. Without exception they were once the fresh blood and almost all of them found themselves on numerous occasions in the foetal position. Angry, frustrated and disappointed. This business can ruin you. It can steal your future, your family, and your sanity. Don’t put yourself through that. The only way to avoid it is put nothing of value on the line until you have proven you can do it.

Don’t open a $5000 account with money that is going to break your heart if you lose without proving first you can do it on demo.

It’s really just common sense.

I would just say that the 95 percent who never make it (and I say 95 is low) are the day traders. Put a calculator in the hands of any person just taking a look at this business and within ten minutes the leverage combined with a decent daily move will have their head spinning with the possibilities. The mindset of got to trade-got to trade sets in and so does disaster a great majority of the time.

Trying to figure this business out.

When I first started it was about the same time I was starting my contracting business. I was young, stupid and no way I was going to find any worthwhile help. No Internet, no nothing. All I had was a ruler, a piece of graph paper, a newspaper, and a phone to my broker. There was no one to convince me to paper trade until I knew what I was doing. I knew it in the back of my mind but fat chance I was going to give up all that easy money doing it on Demo. What an idiot, what a complete and utter fool I was. Worse yet I did it over and over and over again. Worked my ass off to fund yet another account. “Honey this is it. I got it figured out. That last 20 grand I blew was worth it, were gonna be rich”.

It makes me sick to my stomach, I swear to God it does. 8 years of it. Sure I had some great wins. I rode sugar from 2 to nearly 6, pyramiding up.

Made six figures only to lose it all trying to day trade before I had a clue. I can’t tell you how many times I cried myself to sleep slumped over my office desk. I couldn’t quit. I could see the reward if I could only figure it out. Maybe just a case of enough time trying, I don’t know. What I do know is, I started to realise this isn’t a game. Doctors spend 10-12 years killing themselves for a shot at a six-figure income. It took me more than that. What happened? What changed? I quit funding accounts with 1 or 2 grand and betting the farm. I flat quit period, with real money that is. The Internet came along at the right time and I flat said no more until I can prove it on demo. Period.

The key is this. The goal is to fund/build an account that it is large enough that it produces a staggering income off of a couple, or several, trades per month while only risking one or two percent on each trade. The pressure lets up and trading gets much, much easier. You don’t need every trade that looks promising. You know you don’t need but one or two and you know if you’re patient your damn sure going to get at least several in a month’s time.

It’s not hard to move your stop to breakeven or take some profit when your showing $2000 on the plus side after a small move. Its damn near impossible when that same move shows a 50-dollar profit. Think about it. Very few people can fund a $50,000 or larger account and even fewer can build one to that point starting from 500 bucks. It’s not that it can’t be done it’s just people don’t have the patience. So, my question is this. If it takes you ten years trading smart to build an account to that staggering point starting with very little, is it worth it? I can’t answer that for you.

I day trade the mini-Dow. I’m good at it. After so many years trading it and the mini SP it’s almost easy when I have even a little volatility. I position trade Forex. Why? Because I have proven on demo I can. When I can prove to myself I can day trade Forex for 6 months profitably on demo then I will. Not until.

I’m in no hurry, as I love the Dow. I wont go back to finding myself in the foetal position after blowing all my money being a fool. There is no reason in the world to go through hell risking your rent money, or, worse yet, money that took you a year or two to save. If you can’t do it on demo, you can’t do it live, I promise. So don’t do it.
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  • Post #19
  • Quote
  • Edited Sep 7, 2007 7:27pm Aug 2, 2007 6:15am | Edited Sep 7, 2007 7:27pm
Please note: In earlier posts I use the term micro-lots for the basic 0.01 (1 cent) lot size I use on InterbankFX, as that is how they are named by them. This relates to a position size of $100.

However, a normal micro-lot, as determined by most brokers, is 0.10 (10 cents), and relates to a position size of $1000. Therefore, to avoid confusion, from now on I’ll refer to my trading unit of 0.01 as a nano-lot.

I’ve already mentioned that for the purposes of learning a new system, or understanding Money Management, a broker that offers 400:1 Account Leverage is the one to use. I would prefer you demo first, but this may require you set a higher initial practice account size than my example will show. Nevertheless, the math is the same. As a matter of interest I use InterbankFX, as mentioned before, but you use whichever broker you think might suit, as long as they offer 0.01 (or lower) as their basic lot size. Oanda does offer these lower lot sizes, and many traders around here use them, but I have no experience with them so cannot comment. Search in the Broker Discussion thread and ask the traders who use them for more information.

Now I often hear the comment that high leverage like this is a BAD thing, and newcomers should stay away as it’s the quickest way to lose money.

This is true if you don’t understand the difference between Account Leverage (also known as Broker Leverage) and True Leverage. I’ll try and explain the difference as I go along. By the way, I’ve run this section past a very experienced trader to verify the points I’m making, so you can relax as you read this.

You may, or may not, be aware that the Standard Trade size in the real trading world is $100,000.00 (one hundred thousand dollars). Not many of us have access to sums like that, so the folk who give us the opportunity to trade allow us to leverage whatever money we do have spare. Therefore, instead of having to stump up $100K we can trade ‘on leverage’ and only put up a percentage of that figure.

Typically a leveraged trade only requires us to put up $1000 for every $100,000 of currency we wanted to buy or sell. This equals Account Leverage of 100:1. Now if you only have an Account size of $5000, and you put $1000 of it on a trade, you’re dealing with True Leverage of 20:1. This would be fine if a couple of things always happened.

  1. You never had a bad trade. EVER!
  2. You didn’t have to pay the spread. EVER!

Now the problem with trading, and the fact that you’re reading this tells me you’ve already discovered this, is that you will have bad trades. In addition, you will have to pay the spread.

Using True Leverage as high as 20:1 is a recipe for disaster for guys like us, whether it’s thousands, hundreds, or even tens of dollars, we are using, depending on the size of our account. This is covered in more depth in the Money Management part of the Information For Beginners thread (Post #18 onwards) in the Forex Beginner Q&A section.

Let me do this exercise on an account size we can all relate to - $300.00. I’ll do this in nano-lots as well; as that’s the way I trade. If your demo shows $3000 as the minimum size of your new account, keep your lot size to 0.01. I’ll repeat the exercise to show how to arrive at the same risk per trade using a larger account size.

For the sake of simplicity (for me) I’ll stick with GBP/USD as my pair to trade, the dollar value is always equal to 1 (i.e. 100 pips profit = $1), whereas the crosses can vary, typically .8 (i.e. 100 pips profit = $0.80 cents).

One simple thing that escaped me in the early days was this; if I traded GBP/USD I was essentially either selling dollars (long GBP) or buying dollars (short GBP). Stupid, I know, but it’s often simple things that make the difference. My trading account is dollar denominated so it was important for me to understand this, and I didn’t. The same rule applies in relation to any pair you’re trading; it’s just the actual currencies that are different. I can remember saying ‘Ooh look the yen’s going down’ when in fact it was the dollar diving south. How dumb can you be? All you need to remember when looking at a chart is that, with any currency pair in a rising chart, the first named currency is strengthening in value against the second named currency. The reverse is true in a falling market, i.e. the first named currency is weakening in value against the second named currency.

Exercise 1 ($300 Account):

  1. Right, I’ll break this down as far as I can. Our $300 trading account allows us to trade using nano-lots. 1 nano-lot allows you to buy or sell a USD position size of $100.
  2. The next thing we have to establish is our risk profile. Even when you’re trading in pennies, you need to think Money Management, and now is a good time to get into good habits. All the serious traders I’ve ever listened to say 2% of your account is a good figure to base your maximum risk on. It’s even better to go with 1%, so we’ll start there.
  3. 1% of $300 is $3 (300 cents), so that’s as much as we want to risk on each trade. We know we can expect losing trades, so now we have to work out where we think we should place our stops in order to take us out of this trade if things go wrong. Maybe the system you’ve been working with has a fixed stop loss. Let’s assume it’s 50 pips above/below entry. Therefore, we now have 300 cents (our financial risk on this trade) divided by 50 (our technical stop on this trade), this equals 6 (0.06) nano-lots.
  4. We’re risking $3, but you’re effectively buying 600 dollars (if you’re short GBP) or selling 600 dollars (if you’re long GBP). Your account, when you start, is $300 so your True Leverage is only 2:1
  5. $600 position size traded on a $300 account equals True Leverage of 2:1

Exercise 2 ($3000 Account):

  1. Our $3000 trading account allows us to trade using nano-lots. 1 nano-lot allows you to buy or sell a USD position size of $100.
  2. We’ll stay with 1% as our risk profile.
  3. 1% of $3000 is $30 (3000 cents), and our stop is 50 pips. Therefore, now we have 3000 cents (our financial risk on this trade) divided by 50 (our technical stop on this trade), this equals 60 (0.60) nano-lots.
  4. We’re risking $30, but you’re effectively buying $6000 (if you’re short GBP) or selling $6000 (if you’re long GBP). Your account, when you start, is $3000 so your True Leverage is only 2:1
  5. $6000 position size traded on a $3000 account equals True Leverage of 2:1

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One question that occurred to me the other day is why would brokers give us unlimited time to demo trade their platforms, and why they set the minimums at say $3000? They must incur costs supplying data feeds, updates etc. Maybe I’m being cynical but here’s my take on it.

Most newcomers don’t understand the difference between Account Leverage and True Leverage, and the brokers rely on the greed motive to sucker people into false expectations. If someone has opened a demo account, and has been trading risky amounts per trade, there’s a 50/50 chance they just got lucky during a big trending period. Their instinct will be that there is easy money to be made here, and they’ll fund a live account with at least the same amount as their demo. After all, $3000 isn’t a great deal of money for some people. Moreover, who has read the Risk Warnings attached to all the brokers’ websites and actually decided not to try trading because of them?

If many of the posts on the forum are typical, a fair proportion of those new traders will be dead in the water within months. Many will tuck their tails between their legs and never be seen again. Some will stick another lump of money into their accounts and try again, and all this time the brokers are gaining their spread income, to say nothing of all the other little tricks that they are (allegedly) accused of.

I’m not sure I’ve ever seen a broker advise a new trader to only trade single lots whilst learning how to trade. They may mention controlling risk, but it’s not until you find somewhere like Forex Factory that this will be spelt out in ways that you can understand.

So, back to my original thought. I’ve no idea how many new traders enter the FX market every week, but if the stats are anywhere near accurate, it means that 90%, or more, of these new traders donate substantial amounts of money to brokers’ bottom lines.

This is why playing them at their own game, taking advantage of the huge leverage they offer, can, if you learn patience, bring you out on the right side.

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