Posted by: joetradingplace | May 7, 2012

Education

Word Of Advice

Trading is a very challenging career choice, don’t let all the adverts fool you about teaching you to become a successful trader on a day course. Trading is like any other profession, you wouldn’t attend a day course to teach you how to perform brain surgery in your spare bedroom, so why do the same for trading. Learning how to trade is a process, never-ending and can’t be taught on a day course. You can learn to trade by either joining a trading firm (prop, hedge fund…bank), you can be self-taught (harder) or you can find a mentor (very hard to find)who is willing to teach you the ropes. Be careful out there when you look for mentors and tutors, coz some of them don’t even trade what they teach you, they earn their mny from teaching others not trading. I am not saying there are no good mentors out there…but be careful know how to separate the wheat from the chaff (asking for a live trading statement is not a crime).

A lot of new traders fail because they focus on their P&L column, they want to make a fortune before they even learn the art of trading, they usually get in the business without any business plan. We know that statistically, most new businesses fail in the first year, so don’t be a statistic, play your cards right and you will be good to go. develope a sound business plan, good money management and have the right mindset and the sky is the limit. Dont rush into depositing mny in your trading account, play with the demo or just a small account and put more hours into learning how the markets move. Learn a few patterns that happen more often than not, place your trades every time you see your setup, we are playing a game of probabilities here. Like i said before, don’t focus on your P&L column, focus on the process of trading, place your trades flawlessly and don’t let the previous outcome of your trade affect your trading decisions, all trades are independent.

Dont try to invent the wheel, you can easily take some simple trading systems from reputable trades from reputable forums and twick them to your own personality. Never jump from one system to the next, but focus on improving whatever system you have. Do your own backtest, I prefer manual backtesting, it takes a long time but its worth it.

When you decide to go fulltime, make sure that you have saved a lot of mny to keep you going for at least 2-3 years without depending on your profits. This will take pressure off your shoulders by fighting the market to try to make mny for the bills. Also make sure that you only deposit 30% of your capital to trade and save the other 70% just incase you blow the first account. A lot of traders give up after blowing several accounts and by that time they would have been closer to turning the corner if they had some more funds on the side.

If you place a trade and you can’t leave your computer or go to sleep, you are probably trading a bigger size than your psyche can take…reduce your trading size to a more comfortable size, even if it means trading 0.01p per point just do it until you become profitable and increase your position size as your account grows. Trading is 80% psychological and 20% technical, and you wonder why 95% fail, because they focus on the technical aspect of trading. The technical aspect of trading is simple to learn, but the psychological part takes a long time and can’t be learnt from a book, but from live day-to-day trading.

What Is The Forex Market?

 FOREX — the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world.

Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.

In the foreign exchange market there is little or no ‘inside information’. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.

Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with Forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.

Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell (“ask”, or “offer”) to a wholesale customer and the price at which the same market-maker will buy (“bid”) from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4238 a pip would be the ‘8’ at the end. So the bid/ask quote of EUR/USD might be 1.4238/1.4239.

This, of course, does not apply to retail customers. Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips (so in our example 1.4237/1.4239 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will “resettle” open positions (again collecting the bid/ask spread).

Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market’s 24 hours long trading day.

Risk Management Explained

Forex risk management can make the difference between your survival or sudden death with forex trading. You can have the best trading system in the world and still fail without proper risk management. Risk management is a combination of multiple ideas to control your trading risk. It can be limiting your trade lot size, hedging, trading only during certain hours or days, or knowing when to take losses.

Risk management is one of the most key concepts to surviving as a forex trader. It is an easy concept to grasp for traders, but more difficult to actually apply. Brokers in the industry like to talk about the benefits of using leverage and keep the focus off of the drawbacks. This causes traders to come to the trading platform with the mindset that they should be taking large risk and aim for the big bucks. It seems all too easy for those that have done it with a demo account, but once real money and emotions come in, things change. This is where true risk management is important.

One form of risk management is controlling your losses. Know when to cut your losses on a trade. You can use a hard stop or a mental stop. A hard stop is when you set your stop loss at a certain level as you initiate your trade. A mental stop is when you set a limit to how much pressure or drawdown you will take for the trade. Figuring out where to set your stop loss is a science all to itself, but the main thing is, it has to be in a way that reasonably limits your risk on a trade and makes good sense to you. Once your stop loss is set in your head, or on your trading platform, stick with it. It is easy to fall into the trap of moving your stop loss farther and farther out. If you do this, you are not cutting your losses effectively and it will ruin you in the end.

Risk management is all about keeping your risk under control. The more controlled your risk is, the more flexible you can be when you need to be. Forex trading is about opportunity. Traders need to be able to act when those opportunities arise. By limiting your risk, you insure that you will be able to continue to trade when things do not go as planned and you will always be ready. Using proper risk management can be the difference between becoming a forex professional, or being a quick blip on the chart.

Trading Psychology Explained

Trading psychology is the perception change that you go through once you are actively in the markets trading your own money. When trading on a demo account, it seems like it would be easy to make money and there seems to be no reason why you wouldn’t be able to start making money with a live account. Then, you make that first live trade and you start to feel indecisive about when to take profit, or cut your losses. You have just discovered the effects of trading psychology.

Trading psychology can affect your judgment while you are trading. There are two emotions in particular have been the source of ruin for forex traders over the years. Those two emotions are fear and greed. Fear will cause you to either not make a trade when the opportunity arises, or to close a trade prematurely without giving it a chance to be profitable. Greed will cause you to make trades that are too large or too risky, while trying to make massive gains. Greed can also cause you to try to wait for the “last pip” of a move instead of being satisfied with a “good run”.

The best way to combat trouble with trading psychology is by making a trading plan and sticking to it. Use well thought out risk management and don’t get in over your head. Remember that mastering your emotions will allow you to seize the real profit from the markets while emotions are high for others. If you can master your emotions and follow good risk management practices, you can be a successful forex trader.

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