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How to become a successful FX trader

Either you want to be a lawyer, doctor, engineer or skilled worker – to work in any professional capacity – you face several years of education and many years of practice before you become really successful in your profession.

To become a successful FX trader is not a task easier than either of those professions mentioned above. I would claim it is even more difficult as there are no structured, formal education available for retail FX traders – unless you start your carrier by working for a professional institution like a foreign exchange bank, which is not an option for most retail FX traders.

What retail FX traders in general are offered is an introduction to the market in the form of a demo account with a broker, which the broker has an interest you convert to a real account with your own money as soon as possible.

Then there are some simple courses in the form of webinars, some trading books, videos, etc. available – most of them presenting very simple strategies – and in an even more simple way. The same goes for risk management procedures.

The industry have established this as a norm for what is needed to get on with your trading and they market it as being sufficient to obtain success.

No wonder there are so many casualties in the form of burned accounts, financial and private disasters coming as a result of failed trading.  Lack of regulations means that anyone can sell or offer foreign exchange products or advise traders on how to trade the foreign exchange market.

Lack of regulations also means that the industry encourage trading with a higher degree of risk than what most traders should take. I mean – is there a broker to be found that doesn’t advertise 200:1 or even 400:1 as their offering of leveraging your trades?

You are encouraged to open accounts where they give you bonuses, to top up your account or participation in a lottery to win a sports car. They say there are no commissions for trading.

You get the feeling that this is a free ride to become rich.   They don’t tell you of course that the combination of high leverage and frequent trades are giving them the income needed to pay for all the freebies. What they don’t tell you either is that they make more from their client accounts than what the clients do and likely in the ratio of 99:1.

If you leverage your trades to 5 times your account value and you go in and out of a EURUSD position 5 times a day with a broker that has 2 pips spread and you do this every day, then you have to make 100% profit on your account just to pay for the transaction costs. A free ride? Bullshit!

The retail FX industry has had good times for several years despite the overall losses their clients have faced. This will likely be the case for some years more, though I would think that the failure ratios and the tragedies that follow for many will trigger more of regulations. Hopefully it will also trigger more serious thoughts about education and training, which should be in the interest of the industry.

What the felling of a Trading Room can do to you

The day I graduated as an Economist I visited the FX of a bank – on an invitation from a friend who had a summer job in the back-office. I hardly knew what trading was at the time and I for sure had not seen it conducted for real.

The buzz, atmosphere, speed, flashing screens and noise level fascinated me. After five minutes I knew that this is what I wanted to do professionally and when I was due to leave I put my foot in the door and said I refused to leave before they had employed me.

It was easier to get employment with a bank in those days – but I think my reaction to what I witnessed that day was what triggered an interest from the bank to employ me.

I started working there the next day. This is almost 37 years ago and throughout this period I have never done anything else but foreign exchange – 17 years with the bank and almost 20 years on my own thereafter.

The route via a bank

For anyone that has not exceeded 25-26 years of age and with an interest for economics, markets and trading I would always recommend to seek the employment as a FX trainee with a recognised FX trading bank – and preferably in one of the major financial centres.

Most of them offer trainee programs, In fact it is their major source of recruitment to trading. The young age limit mentioned is especially for spot FX traders as they would need some three years of training before they are given the task of managing a major currency pair and because they tend to “burn out” after say ten years in the role as market maker, which is a very demanding profession. Not only do you manage the bank’s positions in a currency pair but you offer prices all day to the bank’s clients and hundreds of other banks being market makers in that pair.

You might be a bit older and with a bit of working experience on top of your education should you go into FX sales or the trading of other specialised products in foreign exchange and fixed income markets.

Of lately banks have tended to like graduates in economics, business administration, maths, IT engineering but there is not very formal criteria for this. I have recruited a priest, taxi driver, psychologist to mention a few exemptions. The most important is that the person in question is one which has analytical skills and is a quick thinker.

Many traders in banks “retire” to an activity of trading their own accounts and for some that might include some clients.

Training with a reputed FX bank, including the role of market maker in a currency pair is beyond all alternatives the best background you can have should you want to trade your own accounts. Nothing beats the experience you gain from being so centrally placed in the market – nothing. You learn what those who influence the price is doing and why.

If you are young enough and with a lots of guts, make contact with the well-known banks. Show a lot of determination and confidence. One of them might take you on.

Other professionals

An alternative – but not to the same level – would be to work for other market participants like a broker, fund manager, hedge fund or a corporate with significant foreign exchange exposure. You learn a lot also when working for those institutions should they be really active in the market. What you miss compared to a bank is to experience what market makers do.

That is fine for a few – but neither of those alternatives is an option for me

Which is the case for most aspiring retail FX traders and therefore the main topic for this article.

You don’t come around the fact that this is a profession that requires a lot of understanding, knowledge, studies, hard work and experience before you will succeed as a trader. I see almost everything being offered from the industry more as a door opener, something to sniff, to get a taste of what this is. But very little from what is offered is something you can use as more than a base for trading. The rest requires studies and research, networking and hard work by yourself over a long time.

To think that trading is an easier way to make money than anything else which requires skills and professionalism is an understatement and the best route to failure. No one should quit whatever they make a living from – regardless of how much money you have – to trade full time without years of practicing part time. That is if you don’t have someone else to pay for your living expenses.

Open an account – to familiarize yourself with a platform as a tool kit

Start with a demo account. That is fine – just to familiarize yourself with the tool kit this is. You can even move on to a real account as long as the funds you put up are a fraction of the financial assets you have. And by a fraction I mean a really small part. This working capital is not going to make you a fortune. It is only an amount necessary to get going as you at this early stage shall develop your ability to make pips – not “serious” money.

Read the small print of your contract with your broker – especially the points about margins requirements, how stops are executed and what they could do should – for whatever reason – your positions lose more money than you have on your account.

Yes – you read it right. There might be circumstances in the market for which a stop order by you or one set by the broker is not possible to execute and that the open trade is closed out with a bigger loss than the funds you have on your account. Will they then trace you for the amount missing? I guess they will. Read the contract to this point.

Start with one currency pair

Most successful traders have made money from trading a limited number of – sometimes only one. The reason is predominantly that to be really good in a pair you have to focus a lot on the two currencies in question, the economics they are related to, politics, technical indicators and sentiment factors that influence the currency.

This is not something you gain from catching headlines. You have to go deep into the material, developing a proper understanding of what is going on in all relevant matters. I trade EURUSD only and has done so since 1999. I spend at least 60 hours a week reading, studying and researching everything that can influence the euro and the USD. While I have lots of screens, including those of relevant graphs – looking at the graphs might occupy 5% of my time – never more and normally far less.

Graphs are easy to read in terms of quick observations. Too many traders though are too focused on the graphs in the belief that they have more to tell than what actually is the case.

Read financial news, article and reports

Subscribe to websites of The Financial Times, WSJ, the Economist and others who write about economics, politics and markets. Follow the market coverage of Bloomberg TV and CNBC.

Familiarize yourself with websites of central banks, IMF, OECD and other institutions with great economic research teams. Many banks have the same which can be subscriber to for free.

Prepare the week ahead in terms of news and data releases

Plan the week by going through what is coming up this week in terms of scheduled news and data releases. Study the historical data in terms of what is expected and what the historical trend has been of lately. Research what previous surprises – those often seen by a released data being very different from consensus estimate – have caused of price impact.

Follow the daily news and data releases to record the impact and make your own views to which data are important to follow for you and which one you can focus less on.

Many retail FX traders dread to trade or to have a position leading up to an important data release. I can understand that should you not be well enough prepared for the release. Stay side-lined throughout those releases for as long as you fell unsure about how to manage your positions before and after important releases. Over time you will gain some appetite for trading such releases and see the potential they represent in terms of making money.

Open your first small position

After a while the temptation to open your first real position is too big. You have an idea which you can argue well and you are tempted to test it out. Do it – but do it small.

Risk monitored from two dimensions

Leveraging your exposure too much is the evil in the FX market and the main reason why most retail FX traders face substantial losses early in their trading life. Equally important is their lack of adhering to stop losses.

So – let’s stress this point once and for all and while I will not repeat it in this article – you should always remind yourself about these procedures – until they sit and sit properly.
Use a stop loss in terms of maximum negative impact this positions should have on your account. This is a figure – a nominal amount or a percentage of your account you are willing to put at risk for the position you want to enter into. Most people use a fixed percentage, I tend to set the percentage more from the attraction the position has in terms of what can be obtained.

Ideally the stop should be the price level for which you admit that your arguments supporting your original thoughts are not there anymore. That would normally be too far away simply because it takes some time or a too long move before anyone admit they are wrong.

For something which would not have the potential for say more than 150 pips in EURUSD terms, I would tend to recommend a stop of not more than 50 pips.

But the critical aspect is actually how close to an assumed strong support level you would be able to make the entry level for a long position or how close to an assumed strong resistance level you would be able to make the entry level for a short position. The closer you are to such strong support and resistance levels, the smaller you can set your stop loss level. Have in mind though that such stops should be implemented should such levels clearly break. But a stop loss this way may not always give you a full protection that you actually only stand to lose what can be calculated from the entry level to your set stop loss level. There might be circumstances where the price simply flies through this level with no chance for your broker or bank to execute the stop where you have put your stop loss order. Gaps – as we call them – could occur over weekends or even at normal trading sessions should something “out of the blue” happen. You don’t have to go further back than September of 2011 to find a situation where EUCHF moved 8% in seconds with the consequence that most stops which were set around 1% from their entry level were executed on average 6.5% away. This was the consequence of the speed of the 8% move and the volume of orders put in place. Don’t read me wrong. Banks and brokers handling these orders went by the book. They were committed to conduct the orders at the first price available to them. Regrettably that was at levels pretty far away from where they were set.

Now – if you would have had a short EURCHF that morning and you exposure would have been say 10 times your capital, you would have stood to lose 65% of your capital. If you had been leveraged to 5 times your capital, you would have lost 32.50%. And if you had been leveraged say 100 times your capital – well – then your broker or bank would have gone after you looking for much more than you had on your account.

As a rule of thumb I would say that you should never enter into foreign exchange exposure which exceeds 10 times your capital. Have in mind that you would then have your account wiped out should a move for a currency pair go 10% against you.

I would recommend exposure of 2-3 times your capital for positions of normal attractions and possible once in a while there would be a position setup you would see as extremely attractive and therefore you could justify an exposure being 5 times your capital. Those should be exemptions more than the rule. Trading foreign exchange successfully is a matter of building sustainable profits over time. It is like eating an elephant. You don’t do it in one piece.

It is a point to avoid draw down on your account of say 50%. It takes a long time to regain that profit.

You have to monitor risk from both the maximum impact you want a bad position to have on your account in the normal circumstances that your stops can be executed as you have instructed – and – as a maximum leverage to your account value for the purpose of something happening that none of us would expect. During the first years of trading you never do either of them – you do both and you are square headed to this point.

You need to trade from strategies you can argue well

Most young traders like to start trading foreign exchange from technical indicators. They also trade positions with rather short objectives and tight stop losses. I did the same in my early years and I understand in many ways why. are mathematical and rather easy to understand as well as to construct trading ideas from.

Due to the rather short profit objectives and tight stops normally set, you need a succession of successful setups to make money. My own experience was that this is not so easy over the long run. To be overall profitable – yes it worked. To make really attractive profits – no – in my case it did not work out so well.

As an economist I was “by nature” curious to learn and understand how economics influenced currencies and how currencies influenced economies. Through my banking years I was close enough to central banks to understand what their role were and what they actually were doing and why.

Add to this that I was for many years a market maker, enabling me to see what other banks were doing, their own position taking and those for their clients – not to forget the rather substantial portfolio we managed ourselves – and you get a sort of feeling for the importance of market sentiment, market psychology, how the big ones do it – when and where.

All of this was such a breach of what technical trading was about that I felt you could not really be in only one of the camps – you had to trade from both fundamentals, technical indicators and market sentiment.

I gradually moved into trading based on all these factors and my success as a trader is the consequence of doing so.
I would therefore only enter into positions for which I have a line of supporting arguments. They are normally set from a fundamental outlook – which might well have a short time frame – contrary to what many traders think and strongly influenced by market sentiment at the time. The exact entry and exit levels I very much set from technical indicators and very close to assumed strong support and resistance levels. By strong I mean in volume terms.

As I hardly leverage my positions, I am less fixated on stop losses to protect my accounts. I am old enough to admit when I am wrong and experienced enough to do something about it – meaning I stop myself out when one or more of the supporting arguments for the position setup is not there anymore.  But until you get to that experience level, you set a stop loss to protect your account and you adhere to that principle. You shall not be vague in this respect.

Invest a bit in technology

The more hours you spend on computer per day, the more you need to invest in technology. Many retail traders trade from a laptop, a tablet or a mobile phone. Should you read reports and analysis extensively – as you should do – then you might need a second screen, which doesn’t cost that much. You might even go for a 2nd computer and more screens, which is strongly recommended today when one graphic card can serve several screens.

Use spreadsheets to build your own database for recorded prices and economic data. Set up some simple models that can be used for simulating strategies or amendments to those.

Subscribe to websites from financial papers, magazines or regular reports. Many of them are free as are the data base for many of those doing economic research.

Be a social trader

Most retail FX traders live a pretty lonely life professionally. Join forums, take part in webinar sessions, ask questions and be active.

Try to source whether there are other FX traders in your neighbourhood. Make contact with them, suggest to meet for a drink or lunch to discuss markets. Join FX Meetups and network as best as you can.

There are online trading rooms you can join. Find out about their profile and the strategies they discuss and join in should you like their concept.

By the time you start trading full time, look for whether there are offices you could share with other traders. Team efforts often give better results than facing them alone. You can share expenses, discuss lively and still trade your accounts individually.

Read, study and research extensively

The professionals in the market have their own analytical support. Most of the analysis they produce for themselves, some for their clients and others they share with the public. Source them, read them and over time you will find out who are doing well and who you can forget.

The first step is to understand their analysis – why and how. The second step is to start being critical to their supporting arguments and possibly also the economic models used. The third step is when you start building your own – or at least you have your own ideas.

This is a lengthy process and one which last for your entire carrier as a trader. You never give up analysing and researching – it is an everlasting activity for a successful trader.

The big step

The big step you make when you decide that you are ready to leave your current professional activity and to go for trading FX full time.

You would need a bit of capital by that time. You should not mortgage neither your property, your wife nor pets for the purpose of raising working capital. Nor should you trade the capital of others.

How much you need is depending on how much your normal living expenses are and what other financial commitments you have.

I normally would recommend this not to be at a period when your children are very small or you have recently bought a property with a substantial mortgage. In those circumstances you likely should have more of an ordinary job and more of a predictable income.

I took the step from employment to trading on my own when our children were small and that is a challenge – one which often ends with a conflict of interest. You have promised your son to see him playing football on the pitch with his friends just when the FOMC minutes are out. What do you do?

Calculate what yearly expenses your trading income should cover. Do not estimate that you will make more than 10% per annum as a return on your working capital over the first three years.

From those brief calculations you can assume what working capital is required for your full time trading. You might find a 10% return as a low return and for successful traders it is.

But you might get off to a difficult start – for whatever reasons – and you likely will be trading from a rather conservative risk profile, which you should.

Doing so will not double your money or even give you a 50% return the first year. These will be the return levels you will see when you are fully established with lots of experience. But it is normally not done in the first three years. You must have this in mind when you make the big step.

You might aim for more but you should not budget for more.

And to finish off

For almost any profession there is a formal education you can take and for most of them it is a lengthy one.

To be successful in any profession you talk about years of building experience normally with an employer who is highly recognised in their field.

To become a successful retail FX trader you have normally none of these options available to you. For most of them it is a route of working on your own with the help of very few.

Common for all professionals though – including successful retail FX traders – is the time it takes to get there.

If you want to become successful, set your own plan for personal developments: what you need to learn, read, study and research, how you get to the working capital you need and whom you could seek professional help from as a coach or mentor. There are some of them around though I don’t know how good they are. Invest in your education and development. What is offered for free is normally not so valuable. What is for sale might not be so either. Be critical in this respect and source the background and relevant experience from those offering to help. Set a long time frame for your own development. Only the exceptionally talented ones will get to success in a short time.

See your won development a bit like those of an athlete. Very few makes it to stardom without hard work and training over many years.    It might sound as a long way to go – and it is. I have just pointed out that to be successful as a retail FX trader it is not enough with a few days on a demo account, topped up with a couple of books and a few webinars and then you are ready for high leverage and high frequency trading which the industry very much encourage you to do. If you are up to the task – get on with it. If you take a structured, long term approach to your own development you might get there.

Good luck to you!

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