Trading FX

I have been trading FX for 3 years now and as I am starting to become profitable in my trades, I would like to share with you some of my findings to help newer traders avoid some of the common mistakes that I made. I strongly believe that people following the below points should be able to move away from the 90% of losing traders and join the 10% of profitable (or breakeven) traders.
By all means, this is not a post that will transform you into advanced traders overnight, but it summarises a lot of sound advice that I came across during my journey as a retail trader.

Find the right broker
Having tried many platforms, I soon realised the importance of working with an interface where you are comfortable making trades. You will be spending a lot of time staring at charts, so you want to ensure that the platform is pleasant to use and well-equipped with all the tools that you need. I believe that the below criteria should be satisfied:

  • Good charting, ability to customise and plot all the technical indicators that you need
  • Speed of execution (I realised the importance of having an execution system where you can swiftly adjust stop losses, take profit levels as price moves)
  • Notification/Alerts: I have learned the importance of using alerts that notify you when certain technical indicators are breached so that you don’t have to stay glued in front of the screen the whole time

In selecting a broker, you also want to ensure that you check what spreads your broker is charging. The higher the spreads, the more this will erode your returns. Brokers that are accessible to you will depend on the region where you are based but for Japan at least there are numerous comparison websites for a) spreads b) swap points, between different providers.
The spread refers to the bid-ask spread that your broker is quoting you. The higher the spread, the higher disadvantage you will have when entering and exiting trades. The swap rate instead is the interest rate differential between the two currencies; for example, if you are selling JPY which has low interest rates and buying USD which has higher rates, you will have a positive carry and swap points will be added to our account on a daily basis.

Identify what kind of trader you are
There are different type of trading styles and such styles are mainly based on the frequency of trading and holding time period. Traders can be classified as Scalpers, Day-Traders, Swing Traders, Position Traders. Whilst scalpers might enter into numerous trades throughout the day in the attempt of making few pips in each trade, Position Traders who are on the other side of the spectrum, will hold onto positions for months as they seek a longer-term price movement in their favour. It is important to understand where you fit as a trader as this will dictate your position sizes, stop losses and take profit levels.

Stick to a few currency pairs
They say that each currency pair is unique and has its own characteristics and I couldn’t agree more with this claim. In my case, I have been focusing on GBPJPY (one of the most volatile pairs as this pair is very sensitive to global risk appetite). As I have been gaining more and more experience in trading this pair, I have been getting a feel for how it tends to move, how news announcements affect it, and at what price ranges it trades. You must develop that gut feeling for the FX pair that you are trading and this is difficult to do if you spread yourself thinly on several pairs.

Treat your losses as educational fees
Losses are an inevitable part of the game; you are betting on an uncertain outcome so there is always a possibility that price might move against you and you will have to realise a loss. When you are in a losing position if you have set up a disciplined and rules-based trading system, you should have a stop loss and your trade should have already been closed. If you haven’t set a stop loss (which his not advisable) and you are in a position where you need to make a decision. I have been in this situation multiple times, especially in my first months of trading. I kept thinking that the price would eventually move back in my favour and let the trade play out. I can guarantee to you that this is how you will accumulate massive losses so as hard as it might be to depart from your hard-earned cash, learn to cut your losses short and prepare to fight future battles. A good way to help you cut your losses is to treat them as fees that you pay to learn, it is very important that you analyse the outcome of that trade to avoid future mistakes.

Setup stop losses and think in terms of Risk & Reward Ratio
I already briefly mentioned this in previous paragraphs, but this is so important that it deserves its own section. Stop losses are there to protect your whole capital when the price moves against you. It’s fine to lose trades here and there, what will keep you in the game is to be making money on average after considering a large number of trades. This idea of expected trade winnings is very important and links perfectly with the concept of Risk & Reward Ratio. In very simple terms, you are telling yourself, how much money you are willing to risk to make a certain amount. Let’s say, you are looking to enter a trade that can make you 30 pips and you set up a stop loss of 10 pips, then your Risk & Reward Ratio is 30/10 or 3. You need to start thinking of trades in terms of expectations rather than looking at individual winners or losers. Before I enter a trade, I always ask myself if the trade has a positive expectation. If it does, this helps me realise my losses quickly so that I can enter into new trades that will more than offset the losses and make me profitable in the long run.

Keep your strategy simple
When I initially started trading FX, I thought that profitable traders had sophisticated charts, arcane entry signals and complex algorithms. As I started researching profitable strategies and following successful traders, I quickly realised that this belief couldn’t be further away from the truth. A lot of the strategies are very simple and require discipline and patience in the execution but are proven to be very effective. Strategies are important but they must be adapted to people’s unique trading styles and must be coupled with rigorous risk management.

FX is a mental game
When I tell people that I trade Forex very often I am told that it’s very risky. FX is risky only if you trade with no clear strategy, let your mental emotions take over and overleverage. If you approach FX in a disciplined and methodical way it has the potential for being very profitable. My advice to take control of the mental game is to start trading small amounts and learn more about yourself. Play money won’t be a good indicator so be sure to start with very small amounts that you can afford losing. As you start testing your strategies and start becoming profitable, start increasing your position sizes to a level where you feel comfortable. If you over-leverage, you will end up making decisions that are driven by emotions rather than sound rational rules.

Keeping Track of your P&L and entry/exit decisions
I would like to conclude with the most important piece of advice. I strongly advise that you keep a diary and document your trading decisions in addition to keeping a spreadsheet where you calculate your P&L. This will help you identify mistakes and help you adjust your trading plan to achieve longterm success. From personal experience I can say that the below are some of the most common mistakes that I was making:

  • Bad entries
  • Keeping positions open before major economic announcements
  • Trading when volume is low
  • Increasing the sizes of my positions and taking too much risk on single trades
  • Not setting stop losses

This post was aimed at people who are about to start their FX trading journey. For those who want to be successful trading FX, they need to treat it like a business, listen to expert advice and devote the required hours to become proficient in executing their strategies. If approached correctly, FX has the potential of helping people to achieve financial success, approached in the wrong way FX is on the par with gambling and can lead to big losses.

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