What I wish I knew when I first started trading forex - part 1

Author: Sam Eder | Category: Education

When you first start to trade forex, it's like trying to cross a minefield with a map you found on the internet.

Unless you have been lucky enough to work on a bank desk (a path not available since 2008) or you have a trusted mentor, it will only take so long before "ka-boom"!

But with a few smarts it does not have to be that way.

To help you get off on the right foot on your journey, here are a few pointers that I wish I had known when I first started trading.

You need to understand "common wisdom" on a deep level

Too often the most important things become cliché, so we tend to ignore them - or possibly worse - think that we already understand them.

Think "risk management".

It's a term that is bandied about with abandon, yet most traders think that if they do a few basic things like set a stop-loss, then they have mastered it.

Far from it. A concept like risk management has so much more to it. There is a reason all the Market Wizards focus on risk management first.

Get hungry, and dig deep - don't presume that you know because you have read about it on that beginner's blog.

Seek to understand common wisdom in depth. Don't take the surface value for the full value.

Don't put your stop so tight

There is an unhealthy pre-occupation with risk/reward ratios that encourages new traders to have a tight stop-loss so their profits on winning trades can be much bigger than the losses on their losing trades.

Sure it makes sense on the surface, but putting your stop too close to the low of the entry candle is a recipe for getting chopped out of your position.

A tight stop relies on you being very good at picking entries, which you are probably not very good at as a new trader. (When you are experienced, you realize it's not the key anyway.)

So instead try trading with a wide stop-loss, well away from your entry. And don't worry about sacrificing the risk/reward ratio - there are other ways you can improve it.

Wondering why I have so much feeling about this topic?

It's because it's the number one area that people decide they know better, and then months later come back and say:

"You know Sam, I was reviewing my trades, and if I had just had my stop-loss further away all these losing trades would have been winners".

So please avoid that pain and start off with a stop-loss that is twice as big as what the textbook tells you.

Of course this means you need to size your positions accordingly so you are not risking more than your position sizing model says you should.

Avoid spending too much time on demo accounts

One of the most unproductive uses of time is to "practice trade".

Now I am sure many people will disagree with me, but demo trading is so different from live trading that it is not only irrelevant, but it is counterproductive.

Think of it like this:

Imagine you have placed 100 trades in a demo account. Next, imagine you have placed 100 trades in a live account.

Which do you think will have taken you further along in your trading journey? Which set of trades will you be more psychologically invested in, and better able to learn from?

(Hopefully the answer is obvious to you)

So why waste your time in a demo account?

Worried about the losses you will surely take? If you are afraid to risk money to learn, then perhaps trading is not for you. And if you follow the correct system development process, you will keep your losses small (see the below point). By the time you get to 100 trades, you will be so much further along it won't be funny.

In saying that, there is a legitimate but limited role for practice accounts. You need to learn how to click the buttons and about lot-sizes, etc. Use your practice account to get a handle on that - just don't use it to practice your trading.

You should never lose much money

Your first job as a trader is to learn to protect your funds.

I'm talking about your core capital here - the funds you start out with.

Just because your trading plan says to risk 2% of your account per trade does not mean you should do this with your starting capital.

Cut your trade size dramatically until you are in profit by a few per cent.

Starting out with $10,000? Then only risk $10 or $20 maximum on a trade. Wait until you are up by $100, and then increase your position size to $30 per trade and so on. Only start trading at your full size when you are up 3%.

Yes, it may mean you have a slow start to your career. But more likely it will mean you keep any losses to your capital tightly constrained, which will boost your confidence and keep you in the game while you learn.

Failing to protect core capital kills more trading careers than anything else - not just for the financial loss, but also because of the very real psychological scars. Please take care.

Here is part 2.

About the Author

Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders (get free access)

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