Newbies Guide To Becoming A Forex Trader

How do you figure scalping has the lowest r:r ratio when such a disproportionately high percentage of a scalp trade is needed just to overcome the spread?
Regarding ability to cut losses quicker, if you use stops, as new traders should, it doesn’t make any difference at all.
No one’s looking down on scalping, its just not advisable for new traders

Namaste

I agree, and this article should be a must-read for all newbie traders:

Sorry I guess I should have mentioned that it has these properties when done correctly in theory. I should also say that I was never a big fan of putting trading styles into a box of 3 or 4 types and calling it a day.

Scalping (or any way of trading in my view), is not defined by how many pips are needed to overcome spread. It’s simply defined by risk (how much money will be lost if the trade fails), reward (how much is lost if a trade succeeds) and most importantly [I]probability [/I](the projected probability that the trade fails or not). Lets pretend I’m trading with a 10/10 pip tp/sl. This effectively becomes a 12 pip upside vs 8 pip downside if I’m trading with a 2 pip spread. This means that 20% of my move is eaten by spread. (This is typically how it is explained to me, so you’ll need to correct me if I’m wrong). Regarding this point, I just don’t care. I care about how much edge I have to complete the trade successfully, and what this means for my account.

Regarding cutting losses quicker, I think it makes sense If I explain how I view a (single among many) successful scalper approaches the market.

When I scalp EU for example, I never use a stop loss greater than 15 to 20. But, I don’t trade with a 15-20 TP. I don’t view scalping with a hard TP, so I can leave a position that isn’t killed after x time or pips to break even. I can lets the position run for 100 or 200 pips, whatever the trading system allows for. Since my risk is defined purely by my potential [I]loss[/I] and scalps have the smallest stop losses, they by definition have the ability to cut losses the quickest (i.e a 10 pip move will happen quicker than a 40 pip move).

Finally, regarding advisable vs not advisable for new traders, I believe this is just something we will disagree on which is fine by me. Trading is a world of so many differing ideas and things to learn that I simply don’t think there is a correct way to teach new traders. It’s probably advisable to teach new traders about trading psychology and emotions, but if that was a part of trading school I’d be sleeping straight through it - it’s just never really been an issue for me. I think we can both agree that astro trading is very likely useless, but what if a new trader learns something through it? For example the valuable lesson that correlation is not causation :58: Some traders need these lessons, others don’t. I think new traders should strive to learn as many lessons as possible, not necessarily just put on a path to a style of trading that x number of traders have said “is the best”.

Namaste to you as well sir.

Thanks Cledid, Phaz3d, nvp, all comments welcomed. If this thread can encourage a few new traders to study and practice before going live, find a trading style that suits their lifestyle and psychology, and become happy and successful traders, then I would be delighted.

Namaste

[B]Interact with other traders[/B]

The great thing about trading forex is that you can lock yourself away and get on with it at your own pace, in your own time, in the privacy of your own home, without interference from anyone else.
One of the drawbacks is that there is no one to discuss any concerns with, to clarify points, or just to listen when things don’t go well.

This is where Babypips comes into its own. Not only is it full of other traders of varied backgrounds and abilities, but most of us will face the exact same issues as you do.
So, read the threads and ask questions. Talk about anything outside forex that may be impacting upon your trading, the odds are that someone else here has had similar issues in the past and may be able to suggest a workaround for you. Bounce ideas off other members to check you haven’t missed anything.

To paraphrase Doctor Fraser Crane, " We’re listening"

In most countries there are minimum age requirements for working, holding bank (not savings) accounts, having credit cards, etc, so it is not straightforward opening a forex account.

However, it is possible for an underage person to have a trading account with his or her own name attached to it, but in order for this to happen, a parent or guardian [B]must[/B] also be involved with the account.

There are a few different ways this can happen. These may vary across countries so it’s best to check locally.

  1. The parent or guardian can open a guardian account for the child. This is an account in the parent’s name, with legal title to the assets in the account and all capital gains and tax liabilities produced from the account belonging to the parent. The parent has total ownership, responsibility, and control of the account, but the named child can trade live on it…

  2. A child can have a custodial account. In this account, the child owns the assets contained within the account, but the parent has control of the investment decisions and any withdrawals which might be made. With this type of account, withdrawals or capital gain tax liabilities are [B]taxed in the child’s name - not the parent’s[/B]. Of course, this can be an advantage over the guardian account (in which taxes fall under the parent’s name, at their marginal tax rate), since children often pay little to no tax.

  3. If a child has already been earning an annual income and filed their taxes for at least one year, then they would be eligible to open an IRA account with their parent’s help.

Having said all of the above, your preferred broker does not have to offer any of the above. This is understandable when you think of the instances where children have incurred large mobile phone bills yet the courts have found the parents not liable for these and the children too young for the contract to be enforced. The last thing a broker wants is to get dragged into problems on tax liability, negative balance responsibility, family disputes, etc.

Nice article sir :slight_smile:

I cannot for the life if me understand why so many new traders want to dive straight in, without any knowledge at all of forex.
Likewise, those who are happy to pay unknown strangers to coach or mentor them, rather than take some time learning their craft themselves.
Even if you are lucky and find a good, honest, affordable mentor, what will you do if something happens to him or if you fall out before you are able to trade alone? No one can take away the knowledge and practical experience you gain if you study and teach yourself, plus the enormous self satisfaction from knowing you achieved it yourself.

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Firstly, I am in no way claiming to be a seasoned trader, but here is my journey so far…I hope this will help some folks who are thinking about starting to trade professionally.

Couple of years ago I sold my home, moved in with my boyfriend and was happy with life. I had approximately £200,000 cash in the bank and spent a very long time thinking about what to do with it. My background was predominantly in property investment but decided now was not the right time to invest and thought I would wait out until the next market dip.

I was unhappy with my full time employed (stable) job and thought I would look at opening my own business, looking at popular franchises. Spent months researching and decided that this route was too risky for me, didn’t want the hassle of employing people, dealing with market lulls etc.

Then I had a brainwave! I remembered that years ago my dream job would have been to trade in foreign currency but I didn’t have the capital back then. After careful discussion and support from my partner we decided that this could potentially be a good option. My aim was to have a better quality of life and earn a little cash whilst being able to work from home.

I started with a couple of forex books, spent countless amounts of days online watching youtube video clips, completed the school of pipsology. I went to a couple of free seminars with my new found enthusiasm and quickly realised that these mainstream ‘coaching’ sessions where just a money pit for the organisers who prey on people’s lack or will to do their own research.

For me, this was never a get rich quick scheme, it was going to be a business, one which I would take as seriously as opening a new shop along with all the initial costs that came with it. I could’ve spent thousands of pounds on these educational courses that were being offered but decided that I would rather risk x amount of my own capital instead, learning from my own mistakes and understanding how the market works by watching it daily.

I opened my demo account in August last year and as the usual story goes, it went fantastically. I placed a realistic amount of ‘play money’ into the account which was £20,000, leverage at 1:100. Within a few weeks I had made about 20% return, was ecstatic and thought ‘wow, I can’t believe this is happening, I must really have a knack for this!’

My initial trading plan involved scalping, I wanted as little risk as possible and aimed for only a few pips per trade on large sized lots and with repetition I would hopefully make decent returns. I was incredibly lucky on news announcements, looking back I can’t believe how I managed to be on the right side of most trades but this was nothing short of just gambling. It wasn’t real money, I wasn’t feeling the pain of any loss but I was euphoric on the wins.

I felt that I had spent enough time researching and impatience also kicked in, I was clearly making lots of money on the demo so why waste any more time, get a real account!

I took a 3 month career break from work in November so that I could try out my trading full time, I could do this because I had enough funds to cover my living expenses without the pressure of having to make money for a living.

Well, I opened my new account on Friday 13th - day of the Paris attacks and lost £1300 within a few minutes. I did have stop losses in place but didn’t understand what was going on so I moved them, thought it was just a large whipsaw that I would fade out. That really killed my morale. I was so sceptical, believing the conspiracy that my broker had played me! I did’t trade for a few days, I was honest with my partner and again he was very supportive - you need that. If you don’t have support you will only hide your losses and well - we know what happens to relationships thereafter.

I completely changed my trading plan, promising to myself that would never happen again. I traded carefully, slowly, patiently and although I was slowly getting better I still felt that I was gambling. I didn’t know what the market was going to do?

I subscribed to a live squawking service for large monthly fee as I didn’t want to be left in the dark again in the event of breaking news. This is when I had blip no.2…

The squawking service was great, it informed me of economic news releases, central bank speakers, breaking news, option expiries and much more…including trading recommendations from the likes of Morgan Stanley and JPM…

When I heard that USDCHF was a great buy that week what do you think I decided to do? Yup, placed 1 lot on that mother! And what do you think happened??

Well, I moved my stop, refusing to admit that I was wrong, and stupid, and completely naive. I then thought "well it’s definitely going to move back up, so I’ll place another 1 lot so that I can make some pips on the way. When my partner came home that day and saw that I was in a large drawdown we had another discussion. “why don’t you just remove your stop losses, you always get stopped out just before price then moves in your direction?” For some stupid reason I agreed this was a good idea. The moment I removed the stop loss I felt an immediate sense of relief. I could now sleep easy knowing that my stop loss would not be triggered. I place more trades without stop losses and even though my days would be quite stressful they would mostly end well.

I handed in my notice and left my job in February, estatic at my new found career.

From being nearly £6000 in drawdown at it’s worst it took about 3 weeks before price rallied back up, but I closed the trades at breakeven through fear, although it carried on moving up. This gave me the confidence that trading without stop losses was a great idea, as I would’ve otherwise taken a large loss. My account was now up by around 10% overall and everything was rosey.

Well, a similar thing happened with EURJPY some weeks later. Full of confidence I just let them run. I had read about lots of people who had blown their accounts and I thought it would never happen to me, I was way more smart than them.

The JPY kept gaining strength and was becoming very overbought, I thought not long before its going to rebound. I was in quite a high drawdown and thought I could help save my capital if I added some more funds to the account to give it more room as I was closely approaching my margin limit. In my stubbornness, it took 3 weeks but one morning when I woke up I found that my account had blown. I’m sure I do not need to explain what a bad day that was for me.

I put this down to being a very expensive learning curve and went back to the drawing board. New trading plan, new strategies, new style. I tried dozens, not giving any particular one enough time or attention to make a difference. Long story short, I found my style eventually and everything was going well. Until another bad buy on sterling which I also allowed to blow my account. I had lost a small fortune and was questioning my ability as to whether I was just one of these dumb a$$ people who loved the idea of trading but was just not cut out for it.

I knew I had to give it one last go, if I stopped here then all that would have happened is that I had lost a great deal of money, if I carried on then perhaps it would all be worth the heartache in the end?

Through a great deal of luck, I was introduced to a trader who has now become a mentor of mine. He has shared his experience and knowledge with me and I now trade with strict money management rules and only take high probability trades. I miss a hell of a lot of opportunities this way but I also get to keep hold of my capital. I have spent a long time making lots of pips only to lose them in a day by overtrading so I now take the rest of the day off if I’ve had a great morning. Equally, if my mindset is not right or the markets just aren’t doing it for me I now back off - which is one of the most difficult things to do.

I have been quite lucky in the sense that I have had enough capital to see me through a period of unemployment, be able to blow accounts and still continue in the belief that even though I have been through hell I can see massive progression and learning from my mistakes.

“If you can’t take a small loss, sooner or later you will take the mother of all losses.” Ed Seyota

This is so true. All new traders suffer with an ego, they refuse to accept when they are wrong and take it personally. In order to survive your trades must end in 1 of 4 ways:

Big win
Small win
Small loss
Even

If you allow your losses to run you can never succeed. Cut them short and let your winners run - letting winners run is also one of the most difficult things to do for new traders.

Keep good records, make a log of all your trades so that you understand what made it un/successful - learn from them.

“Show me a trader with good records and I’ll show you a good trader.” Alexander Elder

Do not worry about trying to understand how economic new releases will affect the markets - just pay attention to how the market reacts to it.

Do not trade high impact news releases.

Do not take any trading recommendations from any financial institutions/articles! People are paid very good money to spread rumours. Ask yourself - why is this person giving me this information?

Start out by trading the trend - learn how to read charts and types of candlestick formations.

Buy strength and sell weakness.

Do not - I repeat - do not try to pick tops and bottoms - it only really ends one way!

Do not trade with a bias. Trade what you see.

If you are having a bad time (argument with partner, death in family etc) step away until you are ‘happy’ in yourself again, this will only lead to making bad decisions, revenge trading.

One piece of advice that I am certain I can give is that if you are expecting to make a a high return (over 20%) every month then walk away now. People can have ocassional great months doing this, but to do it consistently takes a lot of skill. I will be very please with myself if I can see a return on my (lost) investment in the next couple of years.

Just like any profession, you need to spend a lot of blood, sweat and tears in return for experience, over 10,000 hours of live trading is probably about right. I am trading/watching the markets on average of 12 hours per day to increase my exposure and understand what causes volitility, why some months of the year we trade in a range, why there is a large selloff without any fundamental reason. If you want to do this properly, you need time, and with time you need some capital backing.

If 95% of us knew what it takes to become a great trader, we would run a mile now!

Do not give up your job unless you are sure you can comfortably see yourself through the year. I have now got myself a weekend job to take the edge off but also just to keep myself in employment and maintain those skills whilst interacting with others on a ‘normal’ basis.

I know this is not what a lot of new traders want to hear - heck I was one of them! But the reality is that this is not easy, you really have to be passionate about this and want to do it because you love it, if money is your only motivator then greed will succeed.

Just reading charts or just paying attention to fundamentals is not enough, you have to fully submerse yourself and change your lifestyle, the way you think, what interests you. I have never been so up to date on my current affairs and I love it! Speak to other traders, share ideas. Use your judgement on the information you get and where you get it from, you can never stop learning and most of it is free on the internet!

And lastly:

‘If you are afraid of failing, you won’t get very far.’ Steve Jobs

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Thank you, Kilooscar, one of the best posts I’ve ever read

Indeed Kilooscar, that’s a cracking post outlining first hand experience with key points for people to take from it. Good work!

Thank you guys, thought I would write a short post which wasn’t so short in the end! I’m sure most of us could probably write a book on what we’ve been through already!


Three Ways to Become a Better Trader

Thursday, Mar 13, 2014 7:15 pm BST

By James Stanley, Currency Analyst

Talking Points:

Traders should plan their approach, strategies, and risk management before ever placing a trade.
Risk management protocols should be determined before the entry.
Trading journals and logs can allow traders to track their progress more efficiently.
Trading isn’t easy… well, I should clarify that. Placing a trade is simple; it’s just a couple of clicks of the mouse and boom: You’re in the trade. But trading profitably isn’t easy, and for most of us that’s the sole and primary reason that we’re in markets in the first place.

In one of the greatest trading books ever penned, Market Wizards, Jack Schwager interviews one of the best traders (and deeper thinkers) of the modern era, Mr. Ed Seykota. In the interview, Seykota offers an eye-opening quote:

“Win or Lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.”

While it may initially sound difficult to imagine the trader that likes to lose, think about this for a moment. Trading can be fun, exciting, and potentially profitable; but rarely is it all three at once.

To prioritize profitability is to do all of the little things that so many new traders avoid doing, for whatever reason. In this article, we’re going to address the top three of these, along with showing you how to address each.

The Trading Plan

I’ll be the first to admit, creating a trading plan (and further forcing one’s self to adhere to said plan), is not an exercise in excitement. It’s boring, it can be frustrating, and retaining the discipline to actually adhere to the plan is not easy.

Most new traders will draw up a plan, only to discard it in the next couple of days because something about the plan ‘doesn’t feel right.’

Gut instincts and reactions are probably the most costly risks faced by traders. As humans, we’ve evolved to follow these instincts to keep us out of danger; but modern-day markets are not the Darwinian environment for which your survival instincts are honed. Quite frankly, markets can be dangerous but they’re far from predictable which is what can make reactions such a risky concept.

Think about this for a moment: Markets are unpredictable, and that much is a given. Any trade is, at-best, a simple hypothesis or a probability. How would your gut-instinct be able to predict the future or make any one trade more than a simple probability?

Traders need to build, and adhere to a well-thought out plan-of-attack when approaching a market. This functions like a trader’s constitution to ensure that any position taken on falls within a criteria with which the trader has decided they’d like to speculate. It also helps to eliminate the ‘gut instinct’ reactions that can inevitably cost the trader so much money.

There are many different ways to go about creating a trading plan. The article ‘How to Build a Four-Point Trading Plan,’ offers a simple template with which traders can begin creating their own plan. The article ‘The Four-Hour Trader, a Full Trading Plan,’ offers a sample of a plan created for the swing-trader. And more lengthy and descriptive, the article ‘The Trader’s Plan,’ offers a template for a more detailed arrangement.

Manage Your Risk Before Your Risk Manages You

The biggest disconnect for most new traders is the conceptualization of risk management. Most traders that come to markets think that you have to have amazingly high winning percentages to be a profitable trader.

This couldn’t be further from the truth.

Not only is having a high ‘hit rate (percentage of profitable trades v/s losing trades),’ difficult; given that markets are unpredictable it’s likely unsustainable.

This topic was investigated in-depth in the article series, The Traits of Successful Traders. In the research, The Number One Mistake Forex Traders Make was found to be inadequate risk-reward ratios. In many cases, such as GBPJPY in the below chart, traders were losing more than $2 on losing positions for every $1 generated on winning positions.

Three_Ways_to_Be_Better_body_trade_pips.png, Three Ways to Become a Better Trader
Taken from The Number One Mistake Forex Traders Make, by David Rodriguez

This type of money management is an exercise in futility. Traders would need to be right about 75% of the time to be able to squeak by with a profit; and even then – the risk of slippage or gaps can drain that minimal profit to give the 75% hit rate trader a negative profit line.

Sure, it feels good to close a winning position; even if it’s a small win. But just as Ed Seykota said in The Market Wizards interview: Everybody in markets gets what they want.

If you want to feel good, ok – taking small wins might help you accomplish that.

But if you want to work towards profitability, you’d likely be best suited to follow the advice of some of the best professional traders in the world; advice echoed in The Number One Mistake Forex Traders Make, and look to manage your risk before it manages you.

Traders should look for a minimum risk-reward ratio of 1:1; and are likely best suited looking for even more aggressive risk-reward ratios of 1-to-2 or better.

Track Your Results

An old quote from Yogi Berra goes like this: ‘You’ve got to be very careful if you don’t know where you’re going because you might not get there.’

Analyzing one’s progress when trading can be boiled down to a very simple denominator: How profitable have you been?

But to the trader that hasn’t yet been profitable, this can be extremely difficult to analyze because they don’t know the behaviors that are needed to find that profitability.

Keeping a trading journal, and a trading log can be hugely helpful in tracking that progress. It allows for the trader to utilize critical analysis to see what has, or hasn’t worked for them in the past.

In the journal, write down the ‘reason’ for taking each trade, along with your plan for that position. Where are you going to look to exit, or move your stop, or scale into or out-of the position.

When the trade closes, go back and note how the position performed.

The trading log is simpler, and can be done on any spreadsheet software. This is simply you marking each position taken along with initial risk amount, and profit targets; and when the trade closes record the gain or loss.

In time and with enough positions, this can allow you to calculate your winning percentage, you’re average size of win, and average size of loss along with a flurry of other statistical data points.

With this, you can then begin noticing trends or deficiencies that could amount to improvement in the trading plan.

In conclusion

All-in-all, the three things mentioned above aren’t necessarily fun. But – you have to decide why you’re in markets in the first place.

If you’re here to have fun, you should get comfortable with losing. But, if you want to be profitable, you have to prioritize what’s really important, and what should be secondary (like having fun).

In the long run, many professional traders have found being profitable (if not less exciting) is a heck of a lot more fun than continuing to lose money.

— Written by James Stanley

James is available on Twitter @JStanleyFX

[B]Avoid trailing stops[/B]

Trailing stops are stops which follow price as it moves, locking in profit as it does so. It follows price at a distance set by the trader, 10, 20, or 200 pips, it’s up to you.
So, this seems like a good idea, doesn’t it, a stop which automatically follows price? Well, not exactly. Price doesn’t move in a straight line. It typically will go up 20 pips, fall back 10, go up another 30, fall back say 10 again, then up 20, down 20, up 50, down 20, and so on.
Let’s say you’ve entered a Buy trade and have set your trailing stop at 10 pips. In the example above price went up 20 pips, so your trailing stop would have gone up to 10 pips behind. Price then fell back 10 pips, taking your stop out. You would have bagged the 10 pips but missed out on the subsequent gains. Much better if you can allow the winning trade run until it reaches a profit take level that you had decided upon when you entered the trade, after all that’s why you have a trading plan.

This isn’t to say there is no place for trailing stops. If you’re likely to be away from your screen for a prolonged time you may want to use them to help protect your trade, just be aware that unnecessary use of them will restrict your chances of maximising your profits in a trade.

But you are trailing your stops manually? Do you have some tips for good trade management.

I like to set and forget but that doesn’t work well. My good friend Sharebazar explained me this once
For example a trade 1:2 with a 50 pips stop and TP of 100 pips After the trade moved 50pips in plus the trade looks like 100 pips risk and TP for 50 pips Time to move it to brake even and make it a 1:1 trade.
Again when you trade is 80 pips up you are risking 80 pips to gain another 20 pips a 4:1 risk/reward

This is something that I have to clarify more in my trading Any tips?

The difference with moving stops manually as price moves is that you can take other factors into account, for example Support & Resistance levels, upcoming news events (you may want to widen your stop or close the trade completely), unexpected events.

This gives you a more dynamic stop loss, one that is bespoke for what you can see in your screen. By all means place a stop when you open your trade to secure your acceptable risk:reward, but how much you move it as the trade progresses should depend on what you see in front of you. This allows you to let the trade run longer if price moves further in your favour than expected, provided you are at your screen. If you are going away from your screen for any time, by all means place a trailing stop and a TP to be on the safe side.

Hope this helps

Great post Kilooscar!

Under capitalised newbies are the norm on most forums and their mantra seems to be " I could smash this forex thing to pieces if i traded a bigger account".

Of course as highlighted in your post, capital is hugely important but not a substitute for skills, and lots of them may i add.

Skill acquisition and maintenance, the things that go on up and down the country behind closed doors in “ordinary” homes, in front of computer screens ehhhh lol

Great that you didn’t quit!

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Hi TC,

The example you give is correct but what i personally found was that moving stops in this way can be more for your psychological well being than for your profit and loss.

If your target is 100 pips and you are at 80 pips taking a loss or even BE can result in stress, however you are thinking only of the individual trade when you should be thinking about a series of trades.

[B]The thing is that when you are right you have to get paid and get paid well[/B]. It’s here you clear your losses and make your profit. It’s an over simplification and a cliche but it’s true, risk a little to win a lot.

Over time you can train yourself to get closer to being able to do this on a regular basis.

Well put WinPsych.
Once a trade is sufficiently in profit to let you place your stop at BE or better, r:r becomes irrelevant as you can let price continue in your favour ad infinitum should you wish, moving your stop up as new S/R levels come into reach.

As I’ve said before, [B]more trades end in profit than in a loss,[/B]. The problem is that traders close winning trades too early and losing trades too late, so the average loss is bigger than the average win. [B]Cut your losses and let the wins run[/B]

Thanks WinPsych,

I made many trades and not touched my SL and of course I lost them after being only a view pips from my target. Then I start to move SL it as quick as possible to BE and then it hit BE and went to my target. I had two kind of trades. They hit BE or full SL. Not a good situation for making profit. I experimented with bigger SL and the result was a bigger loss (in pips not money) I reduced my profit target maybe it was to greedy to aim always for 1:2 RR But winning less then 50% of my trades with a small RR was not making me a profit

Trading is a delicate balance of all these elements Being paid for being right sounds good but paying for being wrong is not. And what if you are more wrong then right?