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.
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.
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.
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.
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.
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.
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.
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.
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.
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 trading room 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 currency pairs – 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.
