3 Things I Wish I Knew When I Started Trading Forex.
Trading Forex is not a shortcut to instant wealth. Excessive leverage can turn winning strategies into losers. Retail sentiment can act as a powerful trading filter.
Everyone comes to the Forex market for a reason, ranging between solely for entertainment to becoming a professional trader. I started out aspiring to be a full-time, self sufficient Forex trader. I had been taught the 'perfect' strategy. I spent months testing it and backtests showed how I could make $25,000-$35,000 a year off of a $10,000 account. My plan was to let my account compound until I was so well off, I wouldn't have to work again in my life. I was dedicated and I committed myself to the plan 100%.
Sparing you the details, my plan failed. It turns out that trading 300k lots on a $10,000 account is not very forgiving. I lost 20% of my account in 3 weeks. I didn't know what hit me. Something was wrong. Luckily, I stopped trading at that point and was fortunate enough to land a job at a Forex broker, FXCM. I spent the next couple of years working with traders around the world and continued to educate myself about the Forex market. It played a huge role in my development to be the trader I am today. 3 years of profitable trading later, it's been my pleasure to join the team at DailyFX and help people become successful or more successful traders.
The point of me telling this story is because I think many traders can relate to starting off in this market, not seeing the results that they expected and not understanding why. These are the 3 things I wish I knew when I started trading Forex.
#1 – Forex is Not a Get Rich Quick Opportunity.
Contrary to what you’ve read on many websites across the web, Forex trading is not going to take your $10,000 account and turn it into $1 million. The amount we can earn is determined more by the amount of money we are risking rather than how good our strategy is. The old saying “It takes money to make money” is an accurate one, Forex trading included.
But that doesn’t mean it is not a worthwhile endeavor; after all, there are many successful Forex traders out there that trade for a living. The difference is that they have slowly developed over time and increased their account to a level that can create sustainable income.
I hear about traders all the time targeting 50%, 60% or 100% profit per year, or even per month, but the risk they are taking on is going to be pretty similar to the profit they are targeting. In other words, in order to attempt to make 60% profit in a year, it's not unreasonable to see a loss of around 60% of your account in a given year.
"But Rob, I am trading with an edge, so I am not risking as much as I could potentially earn" you might say. That's a true statement if you have a strategy with a trading edge. Your expected return should be positive , but without leverage, it is going to be a relatively tiny amount. And during times of bad luck, we can still have losing streaks. When we throw leverage into the mix, that's how traders attempt to target those excessive gains. Which in turn is how traders can produce excessive losses. Leverage is beneficial up to point, but not when it can turn a winning strategy into a loser.
#2 Leverage Can Cause a Winning Strategy to Lose Money.
This is a lesson I wish I had learned earlier. Excessive leverage can ruin an otherwise profitable strategy.
Let's say I had a coin that when heads was hit, you would earn $2, but when tails was hit, you would lose $1. Would you flip that coin? My guess is absolutely you would flip that coin. You'd want to flip it over and over. When you have a 50/50 chance between making $2 or losing $1, it's a no-brainer opportunity that you'd accept.
Now let's say I have the same coin, but this time if heads is hit, you would triple your net worth; but when tails was hit, you would lose every possession you own. Would you flip that coin? My guess is you would not because one bad flip of the coin would ruin your life. Even though you have the exact same percentage advantage in this example as the example above, no one in their right mind would flip this coin.
The second example is how many Forex traders view their trading account. They go "all-in" on one or two trades and end up losing their entire account. Even if their trades had an edge like our coin flipping example, it only takes one or two unlucky trades to wipe them out completely. This is how leverage can cause a winning strategy to lose money.
So how can we fix this? A good start is by using no more than 10x effective leverage.
#3 Using Sentiment as a Guide Can Tilt the Odds in Your Favor.
The 3rd lesson I've learned should come as no surprise to those that follow my articles. .. using the Speculative Sentiment Index (SSI). I've written many articles about this topic. It's the best tool I've ever used and is still a part of almost every trading strategy I am using, present day.
SSI is a free tool that can be found here that tells us how many traders are long compared to how many traders are short each major currency pair. It's meant to be used as a contrarian index where we want to do the opposite of what everyone else is doing. Using it as a direction filter for my trades has turned my trading career completely around.
Learn From My Mistakes.
If I could tell my younger self 3 things before I began trading Forex, this would be the list I would give. I hope they help your trading as much as its helped mine.
---Written by Rob Pasche.
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How Banks and Bureaus make Big money from Exchange Rates.
Many financial institutions provide Foreign Exchange services to their customers. These can include buying foreign currency in cash form, making International bank-to-bank transfers or providing pure Foreign Exchange dealing services for large multi-nationals.
These FX deals can be very profitable to the Banks, so where do they make their money?
Fees, Commissions and Exchange Rate margins.
Most Banks will charge a Fee on each transaction. Often around GBP25/EUR30/USD40.
Money Transfer Bureaus will more likely charge a sliding scale fee that is very often considerably higher.
But very often it's the margin (or the "spread") they add to the Exchange Rate that generates the most income on a Foreign Exchange deal or transfer.
Exchange Rate Spreads.
When you see a single exchange rate quoted on a web site or in the newspaper, this is the mid-market rate. It's the rate half-way between the sell rate and the buy rate that is in operation between the banks. For example.
If the GBP USD rate is quoted at 1.50 ($1.50 to £1), then the Banks will buy GB Pounds from each other for slightly more than $1.50 and buy US Dollars for slightly less than $1.50.
Mid-market rate = 1.5000 USD/GBP Interbank buy GBP = 1.5005 USD/GBP Interbank buy USD = 1.4995 USD/GBP.
These 'wholesale' rates are only available to large financial institutions (like RationalFX) who conduct a high volume of FX transactions. The difference between the upper and lower rates is called the 'Spread'.
However, when you as a customer buy or sell GB Pounds for US Dollars, you are more likely to get rates like these;
Mid-market rate = 1.5000 USD/GBP Customer can buy GBP = 1.5400 USD/GBP Customer can buy USD = 1.4600 USD/GBP.
This is for bank-to-bank transfers and is higher if you are buying holiday cash. The difference is an additional margin that the Bank makes on the transaction.
Bureau de Change Spreads.
If you think that the Banks are charging a lot, the Bureaux de Change in your local High Street and, in particular, at the Airport, are likely to be charging you even more! It is reasonable to expect to pay more for cash versus electronic transfers but even so, spreads of 10% are not uncommon. e. g.
Mid-market rate = 1.5000 Buy USD via Bureau = 1.4000 Buy GBP via Bureau = 1.6000.
RationalFX Saves you money.
RationalFX are a FSA-authorised Foreign Exchange specialist that carries out hundreds of millions of GBP worth of FX deals each year on behalf of it's customers. Because of our volumes we get wholesale rates from our partners - and unlike our competitors we pass these savings on to you our customers .
As soon as you open a Free Personal Account, you can access our live highly competitive exchange rates online. Why not open one today - there is no obligation to carry out any transfers or payments. And you can compare actual Exchange Rates with any quote from a Bank or Bureau.
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Issued by HM Revenue & Customs (HMRC) Rational Foreign Exchange Ltd trading as RationalFX is a registered Money Service Business (MSB) – Money Laundering Regulation number: 12206957.
How to Make Money in Forex.
"Forex" is a shorthand way of referring to the foreign currency exchange. It's the market where currencies from different countries are traded. [1] Investors trade in forex for the same reason that they trade in any other market: because they believe that the value of certain currencies will go up or down over time. Remember, currencies are commodities just like anything else. On some days, they'll go up in value. On other days, they'll go down in value. You can use forex to take advantage of the fluctuation in foreign currency prices to make money.
Steps Edit.
Part One of Three:
Learning Basic Forex Principles Edit.
Part Two of Three:
Finding the Right Forex Broker Edit.
Part Three of Three:
Trading in Forex Successfully Edit.
Community Q&A.
There are a ton of mutual funds and ETFs that specialize in Forex trading. However, you should not just throw your money at a professional broker. You should put a lot of time and effort into selecting a professional broker, especially because ones that invest in Forex trading are limited and probably have very high fees. Pick one that takes into account the risk vs reward that you want.
I would contact them to see if they can add it to the list.
Fidelity Investments -- which enjoys an excellent reputation -- does not specifically trade in commodity futures, and therefore would not be listed with CFTC. Fidelity does offer brokerage services that could help you invest in that field if you so desired, but they might not want to advise you in that area.
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This version of How to Make Money in Forex was reviewed by Scott Maderer on June 15, 2016.
Making money in forex is easy if you know how the bankers trade!
How to make money in forex?
I’m often mystified in my educational forex articles why so many traders struggle to make consistent money out of forex trading. The answer has more to do with what they don’t know than what they do know. After working in investment banks for 20 years many of which were as a Chief trader its second knowledge how to extract cash out of the market. It all comes down to understanding how the traders at the banks execute and make trading decisions.
Why? Bank traders only make up 5% of the total number of forex traders with speculators accounting for the other 95%, but more importantly that 5% of bank traders account for 92% of all forex volumes. So if you don’t know how they trade, then you’re simply guessing. First let me bust the first myth about forex traders in institutions. They don’t sit there all day banging away making proprietary trading decisions. Most of the time they are simply transacting on behalf of the banks customers. It’s commonly referred to as ‘clearing the flow”. They may perform a few thousand trades a day but none of these are for their proprietary book.
How do banks trade forex?
They actually only perform 2-3 trades a week for their own trading account. These trades are the ones they are judged on at the end of the year to see whether they deserve an additional bonus or not.
So as you can see traders at the banks don’t sit there all day trading randomly ‘scalping’ trying to make their budgets. They are extremely methodical in their approach and make trading decisions when everything lines up, technically and fundamentally. That’s what you need to know!
As far as technical analysis goes it is extremely simple. I am often dumbfounded by our client’s charts when they first come to us. They are often littered with mathematical indicators which not only have significant 3-4 hour time lags but also often contradict each other. Trading with these indicators and this approach is the quickest way to rip through your trading capital.
Bank trader’s charts look nothing like this. In fact they are completely the opposite. All they want to know is where the key critical levels. Don’t forget these indicators were developed to try and predict where the market is going. The bank traders are the market . If you understand how they trade then you don’t need any indicators. They make split second decisions based on key technical and fundamental changes. Understanding their technical analysis is the first step to becoming a successful trader. You’ll be trading with the market not against it.
What it all comes down to is simple support and resistance. No clutter, nothing to alter their trading decisions. Simple, effective and highlighting the key levels. I’m not going to go into the ins and outs of where they actually enter the market, but let me say this: it’s not where you think. The trendlines are simply there to indicate key support and resistance. Entering the market is another discussion all together.
How to make money in forex?
The key aspect to their trading decisions is derived from the economic fundamentals. The fundamental backdrop of the market consists of three major areas and that’s why it’s hard to pin point currency direction sometimes.
When you have the political situation countering the central bank announcements currency direction is somewhat disjointed. But when there are no political issues and formulated central bank policy acting in accordance with the economic data, that’s when we get pure currency direction and the big trends emerge. This is what bank traders wait for.
The fundamental aspect of the market is extremely complex and it can take years to master them. This is a major area we concentrate on during our two day workshop to ensure traders have a complete understanding of each area. If you understand them you are set up for long term success as this is where currency direction comes from.
There is a lot of money to be made from trading the economic data releases . The key to trading the releases is twofold. First, having an excellent understanding of the fundamentals and how the various releases impact the market. Secondly, knowing how to execute the trades with precision and without hesitation. If you can get a control of this aspect of trading and have the confidence to trade the events then you’re truly set up to make huge capital advances. After all it is these economic releases which really direct the currencies. These are the same economic releases that central banks formulate policy around. So by following the releases and trading them you not only know what’s going on with regards central bank policy but you’ll also be building your capital at the same time.
Now to be truly successful you need an extremely comprehensive capital management system that not only protects you during periods of uncertainty but also pushes you forward to experience capital expansion. This is your entire business plan so it’s important you get this down pat first.
Our stringent capital management system perfectly encompasses your risk to rewards ratios, capital controls as well as our trade plan – entry and exits. This way when you’re trading, all your concerned about is finding entry levels. Having such a system in place will also alleviate the stresses of trading and allow you to go about your day without spending endless hours monitoring the market.
I can tell you most traders at banks spend most of the day wandering around the dealing room chatting to other traders or going to lunches with brokers. Rarely are they in front of the computer for more than a few hours. You should be taking the same approach. If you understand the technical and fundamental aspects of the market and have a comprehensive professional capital management system then you can.
From here it just takes a simple understanding of the key strategies to apply and where to apply them and away you go. Trust me you will experience more capital growth then you ever have before if you know how the bank traders trade. Many traders have tried to replicate their methods and I’ve seen numerous books on “how to beat the bankers”. But the point is you don’t want to be beating them but joining them. That way you will be trading with the market not against it.
So to conclude let me say this: There are no miraculous secrets to trading forex. There are no special indicators or robots that can mimic the dynamic forex market. You simply need to understand how the major players (bankers) trade and analyse the market. If you get these aspects right then your well on the way to success.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these securities. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Forex involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.
Note: All information on this page is subject to change. The use of this website constitutes acceptance of our user agreement. Please read our privacy policy and legal disclaimer.
Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any doubts.
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