Forex Lesson 1 : So You Want To Trade FX ?

I had readers ask about wanting to trade FX and how to start and thus I am writing this for everyone like them out there, wanting to play on the great big FX poker table to the ends of untold riches (as advertised), fame and glamour.

I cannot find too many former bank traders standing out there advertising to help you make a million dollars out of $10k in 6 months because the probability of disappointment is a lot higher than success.

Methods are closely guarded secrets and my opinion is that it is because FX is a zero sum game in a 4.3 trillion US dollar a day market (2013 BIS statistics) of which half comes from spot FX trading i.e. T+2 settlement, out of which 99% are pure speculative trades. If one makes, another must lose.

Bonds, commodities and equities are different because they are assets and their prices can inflate as much as they like without inflicting loss unless the other person is a short seller (bonds are liabilities on the balance sheet and like commodities etc, are just opportunity loss, if we examine it closely).

Nonetheless there is still a big market for fx seminars out there, selling systems, models, techniques, all to teach you how to make profits beyond your wildest dreams.

What do you know about foreign exchange rates ?

My homemade definition is that it is the relative value of one currency against another in a global marketplace that is open to most participants who determine the value in their collective trades.

As a zero sum game, you are pit against another – a central bank, hedge fund, bank trader, corporation, a fellow retail trader or a trading-bot (computerised trading algorithm), in a big poker table, spanning the globe.

Therefore the first question, how much are you willing to lose ?

Yes. Lets be realistic about trading even though we mostly hear only about nice things albeit the headlining scandals of fraud and decadent lifestyles that makes us all salivate.

But it is not a bed of roses all the time.

And if you cannot afford to lose, then you better not even start. As I realised over the years, the human mind is a feeble and fickle thing sometimes. Winning and losing streaks are real according to some research, sometimes less to do with luck than to do with psychology and decision making.

Fx trading is a digital outcome – Profit or Loss, led by the main emotional drivers of Fear and Greed (which has also been quantified into a Fear and Greed Index).

When a person is unbalanced, decisions go awry and emotions get in the way which hampers a logical trade.

Second, how well can you handle stress and do you have a family history of heart attacks and strokes ?

An ex colleague had 2 strokes while trading fx in London which is not uncommon until you hear that he was under 30 of age at that time.

Humans vary in their ability to cope under duress but that does not make an Iron Man champion a better trader than others.

Years of heightened emotional trauma in experiencing market crashes do lead to physical damage that we are sometimes unaware of in our bodies. I know this well because of a deceased friend who suffered an ruptured aneurysm while at work and passed away shortly after.

So what do you really know about FX trading ?

After 16 years, I know a lot about it but do not ask me how it works.

Fx is the favourite instrument for day traders for the concept is easy enough – currency pair, price up or down and you are ready to go. Compared to the dreaded 4 syllable word. – derivatives…

But I would say, FX is probably the hardest instrument to understand in the entire menu of financial instruments of the world. How do you value the EUR ? against the USD ?

It is not like bonds, you plug in the interest rates and the estimated credit spread and voila, the price appears [over simplifying the process, a little].

You have a former bouncer, bar tender and nuclear physicist all trading the EURUSD at the same time. How do they value the EUR ?

And so, the promises of the retail FX seminars will start by telling you to forget about everything and focus on the chart. Because the charts do not lie we have to buy the idea that charts are all encompassing, for all the news and noise.

It is all good for someone who already knows about the markets and how it works but it is a dangerous handicap for a novice who does not know the name of the central bank of China or dates of IMM option expiries. Because FX is really part of the entire monetary system of interest rates, central banks, trade deficits, bond auctions, futures, options, options futures, commodity prices, IPOs, M&As and so on. .

And charts ? What charts ? There are millions of charts, of different time intervals that serve different purposes – from basic to severely mind boggling complicated. Multitudes of patterns to be seen in bars, candles and lines. Statistics, trends, bands and oscillators to name just the categories.

And what sort of trader will you be ?

A scalper ? – someone who makes money by small moves in short intervals.
Day trader – someone who makes money within the day and does not carry an overnight position.
Proprietary – someone who makes money in the longer term.

There are people who follow moon cycles, astrology and seasonal changes when they trade.

There are also those who are pure chartists who only rely on their set of charts to make decisions.

Then there are the algo-bots now that we are up against.  Programs that carry in them simple rules or years of regressed data that dwarfs normal human brain capacity.

In the end, it boils down to the decision of whether to buy, sell or do nothing.

I do not believe I can teach anyone how to make money trading FX or become a good FX trader but I think I can teach someone how to start trading FX and about the markets even as I learn new things daily.

It starts with knowing thyself and I cannot believe I have rambled on so much without even scratching on the topic of trading.

That will have to come in the next lesson then.


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