After deviating off route into risk aversion in the last post, let me navigate back to recounting the steps I’ve taken along my journey to becoming a foreign currency trader.  I’ll pick up from telling you about finding the lady on the internet that had a ‘foolproof’ system I could use to trade the foreign currency markets from my home computer.  So here goes….. another little step along the road to becoming a currency trader.

Trading Systems: Foolproof, Fantastic, or Foolish?

The eagerly awaited manual covering the Trading System had arrived and I settled down to begin to learn everything I needed to know in order to trade the currency markets.  Now remember folks, at this stage I knew absolutely nothing about trading, let alone what to expect from a written manual explaining a specific trading system.  Would I comprehend the information presented? Would it be written in an easy to understand manner?  These were a couple of questions I’d been turning over in my mind whilst waiting for the manual to arrive.  

Well I need not have worried, the compact little manual I received was well presented; nothing fancy, but nicely bound and well laid out.  The information was put across in a very straightforward and easy to understand manner and, importantly, progressed logically and simply from one step to the next. Written with the complete ‘fledgling’ trader in mind it did not assume that the reader knew anything at all about currency trading, but also did not bamboozle one with information that would go straight over a newcomer’s head.  

In short the manual briefly (very briefly) covered the very basics of beginning to trade forex.  Items such as contact information for a couple of companies to get started with was provided (screen shots and instructions included). The history of foreign exchange, some forex ‘jargon,’ candlestick charts and support and resistance were explained and the importance of money and risk management, together with recommending ‘paper’ or demo trading until you were really comfortable with the system and consistently achieving gains was strongly driven home.

Okay so far then.  But now you want to know what this foolproof system was?  This is where the Foolproof, Fantastic, or Foolish question comes into the equation.  Here goes… I’ll explain the system and after give you my thoughts against each of the three statement words.  I wonder if any of your conclusions will concur with mine.

System Parameters:

• Spot trade a forex spread betting account (Spread betting is Tax free in the UK)
• Simultaneously trade only two currency pairs:  Sterling/US Dollar and the Euro/US Dollar.
• At the outset of trading the system, decided which pair you will always sell and which pair you will always buy
• Once the buy/sell decision is taken do not, at any time, reverse the trade direction for future trades
• Trade Economic News Announcements – yep, you did hear that right, News Announcements
• Use a 3 minute chart for trade entries
• Place trades 3 minutes before the time of the news announcement
• Decide your exit level (profit) before placing the trade
• Decide your stop loss (risk) before placing the trade
• Never place a trade without placing a limit order and a stop order
• If one currency pair trade triggers, immediately close the other trade
   

And my Foolproof, Fantastic, or Foolish conclusions:

Foolproof?

• If there is a foolproof system would someone please e-mail it to me straight away, I want to live a life of luxury in the Bahamas!!!  Of course the system’s not foolproof, human nature is not foolproof, so how can a system devised and operated by humans be foolproof either? I’m sure you already know there is no ‘Holy Grail’ of trading.

 Fantastic?

• When the system works it feels fantastic (or is that greed/emotion I hear talking?)
•  When it doesn’t work it feels anything but fantastic and can quickly drain confidence.

 Foolish?

• Maybe, maybe not:
  • There are many experienced traders who ‘Trade the News’ successfully. It’s not for me though, I’m averse to white knuckle rides!
  • If you don’t know precisely what you’re doing, then you’ll get burnt. If you do have the knowledge and experience to ‘Trade the News’ it can be profitable.
  • Personally, I would never now place a trade close to any major news announcement and certainly never ever just 3 minutes before.

 Did I trade the system?  Yes, I did.  After all, I was taking my first step into the currency trading world; I’d paid for this information, so unless I tried the system how was I to know what the outcome might be?  I did follow the demo/paper trade advice though – I’m not foolhardy!  The results were very hit and miss and it did not take me long at all to decide the system was definitely not for me… and probably not for many other people either, truth be told! I found it a complete rollercoaster ride and profitable trades were a matter of luck, not skill; more like gambling than trading.

So did I waste my money paying for this system?  Not in my view, because: 

1. It got me started on the journey to becoming a currency trader and it cost me less than £50.00!
2. It stressed the importance of knowing and being comfortable with a trading system before placing any trades.
3. It engrained money management and risk calculation in my mind right from the start
4. It gave me hands-on, real-time experience of slippage, gapping, whipsaws, volatility and fear!
5. And… laugh out loud; it did all that in the space of a few minutes.  

It explained a few very basic things very simply and acted as a catalyst to learn more

Without that little manual I would not be writing this post.

Where’s the trading analogy this time then?

I can’t find a link to shoes this time, but I can liken it to a sport I participate in.  I ride fast thoroughbred horses and because riding is a high risk sport, I make sure I participate under the correct conditions, taking all the necessary precautions.  It’s taken me years and years of learning, practicing, asking questions and practicing some more, to become confident in my riding skills. Riding demands that you understand your current capabilities and do not exceed them, for you can put the horse, yourself and other people at risk of serious injury if you do not understand your own skill level.

The same goes for trading:  First you must learn, then practice, ask questions, practice some more, build up your confidence and learn to understand your current capabilities.  Then, just like riding, you keep practicing, keep asking questions, keep learning… build your skill level and don’t take unnecessary risks. That way you will hopefully not put your trading account at serious risk.

10 Forex Rules of Risk Management for Equities Traders

1. Be Logical not Emotional

• Decide your rules to enter and exit trades
• Decide your rules to exit losing trades
• Write your rules down
• Always adhere to your rules
• Before you place a trade:
• Know your profit target
• Know your loss limit
• Understand your strengths and weaknesses
• Build on your strengths, control your weaknesses

2. Trade, don’t Gamble

• Don’t sell after a period of selling
• Don’t buy after a period of buying
• Don’t take overnight trades (you can’t control what happens)
• Don’t trade at major news announcement times. Volatility at major news times can blow your trading account
• Don’t ever trade without a Stop Loss

3. Use a small ‘lot’ size until you’re comfortable with your results

• Build a buffer bank
• Stage lot size up slowly
• Stage lot size down when your strategy doesn’t respond

4. Don’t Add to Losers

• You can wipe out your account waiting for the market to come back to you

5. When in doubt Get Out!

• Immediately
• A flat is a good trade, nothing was lost

6. Have a Daily Loss Limit

• Ultra conservative – 0.5% to 1% of risk capital
• Conservative – 1% – 2% of risk capital
• Experienced Conservative – 3%

7. Don’t increase your lot size to recoup losses

• The table below shows why you should not increase your lot size (and therefore your risk) to recoup losses.
• A recommended amount to risk at one time (not per trade but at any one time) is no more than 3% of the account balance.

 So in percentage terms, you can see that the higher the percentage of your trading capital you risk, the higher the percentage return you need to get back to where you started!

8. Don’t Overtrade

• Set a daily goal
• Stop trading when you reach your goal
• Keep your lot size the same throughout a trading day

9. Be Disciplined

• Do your homework (your research)
• Plan your trade
• Trade the plan
• Focus on the trade, don’t get distracted
• Keep a trade journal
• Analyse your journal to identify learning points

10. Be Careful of your Computer System

• 
• Don’t trade if you notice problems with your system or data flow is slow
• Have a check list and if something is wrong don’t trade

I really hope this helped my equities trader pal. The same rules of risk aversion and money management apply to Forex as they do to trading equities, commodities and even chicken feet! The most important rule to learn is: decide your tolerance to risk, decide your risk aversion rules and….. Don’t bend your rules. Your trading account will thank you for it.

I send my thanks to my Twitter trading pal; it was a great idea for a blog. If you like to trade equities see http://350trader.com/

What Exactly is My ‘Job’?

I’m in the process of buying a new car and went along to visit the car dealer just recently to choose the model, colour, trim etc., etc., and, oh yes, fill in all that paperwork the dealer needs you to complete to get the car of your dreams.  You know the stuff: name, address, date of birth (oh no, got to give the real one for a change girls!) name of employer.….. name of employer?

That threw me; I no longer have an employer, I’m free of bosses, I’m my own boss now.  But the paperwork needs an answer and it has to know what my job is.  So I asked myself, what is it I do?  How do I categorise my ‘employment?’  A broad description could be ‘I work in the financial sector’ but that’s just far too broad.

Am I a currency analyst?  Not really, the term analyst doesn’t tell people what it is I do on a day to day basis.  These days, when people ask me what my job is I answer: I buy and sell money in the foreign exchange markets, and by my reckoning that makes me a currency trader or foreign exchange trader.  Foreign Currency Trader is what went down on the paperwork and
having to think about categorising what I do for a job made me wonder how I got involved in currency trading in the first place?

Now what follows is an account of my very first tentative steps to become a currency trader; I do not recommend that anyone starts their journey as I did, every individual who decides to embark on trading currencies (or anything else for that matter) must be prepared to undertake and be responsible for their own due diligence.

How I Arrived Here

The world of corporate internal communications had just decided it could do without my services and made me a handsome offer, one I couldn’t refuse, to go and try out pastures new.  I now found myself with plenty of time on my hands but with nothing much to occupy me.  A little project is called for I thought, but what?  Something that was going to provide me with an income would be good; the corporate parting handshake was not going to last forever.  Now what do us girl’s do in this situation?  Communicate of course; we were born to do it, where would social networking be without us??  Get onto the internet then, I thought, update your social network profiles; rekindle internet contacts; find out what people are up to and what ideas are floating around out there; go onto Google and search for anything related to money, working from home, home businesses etc., etc. and that’s where I stumbled upon foreign currency trading – literally stumbled, as a Facebook friend had pointed me in the direction of StumbleUpon.

I came across a lady who was telling me I could trade the foreign currency markets from my home computer and she had a ‘foolproof’ system for doing this.  I was intrigued, money to be made, not just money though, foreign money.  I’ve always loved foreign money, such fun to use on holiday, all those weird banknotes and coins, and the fun of working out what it would cost in ‘real money’.  (Real money for me is the British Pound; your real money is your own country’s currency).  I’ve always kept some coins from foreign trips, just to remind me of the visit. Now I could work from home, buying and selling foreign money from my own computer – what a great idea!

I sent off for the system and eagerly awaited its arrival, not as a PDF document but a published, printed and bound manual.  I had researched the lady, I’d researched the publisher, and I’d decided the price for the system was both sensible, affordable and, more to the point, an amount of money I was prepared to risk loosing if it didn’t work out.  After all, I knew absolutely nothing about trading foreign currency, so how would I know if the system would work unless I tried it.

There’s a little analogy here of course, unwittingly, without being aware of it at the time, I’d utilised a small part of risk management, by deciding if the amount of money I was prepared to spend from my available resources was an affordable risk against any potential future rewards – my risk to reward ratio in other words.  In this case I didn’t know what the rewards might be, but I did know how much money I could afford to lose and not worry about it.

Not necessarily a conventional start to a currency trading career then, but if the shoes fit in the first place, then why not fly in the face of convention, at least you’ll be comfortable on the journey girls. You can read more about my journey to trading forex at my blog.