The Challenges faced for Beginner on how to trade Forex
Updated: May 10
Trading the currency market is to be approached like any other profession or skill. Deliberate practice is the way to go to Master it. This means that, as you learn and bring your skills to perfection, you're constantly assessing your results and looking for improvement. I began my own career as a retail Forex Trader almost completely on my own and self-taught. The purpose of this post is to save you some time and make you avoid mistakes.
- The importance of understanding the markets.
When you start trading, your first step is to actually understand what it is all about. You will need to look very closely at the currency market.
Looking for patterns and staring at the charts on the screen for hours and hours means nothing. What you need to be finding out, is what is the reason and importance for the currency prices are moving.
Trading financial markets is a lot like playing poker with a massive table and all the players sat around.
The only difference is that the game never end, players come and go, some make fortunes and others go broke.
And constantly, new players are coming in the market and each one of them are trying to take some money from the game.
The competition is very high and there are no secrets or shortcut to generating a consistent profit. The key to winning at poker is risk management which i have talked about in my previous posts and the ability to read the other players.
You will need to take advantage of those players that have lost their heads while being cautious around experienced players.
If you are prepared and have a strategy, then theses are the times your money will be made.
It's a case of watching and waiting for an opportunity as most of the time , there will be no real opportunity to take money from the other players.
- Viewing the Market as a Person
The market is just a collection of people all trading against each other.
Each of these people have emotions and react to various events.
Collectively, this results in currency prices moving in line with these emotions and reactions.
When people become positive or greedy then prices will rise but if they panic and get nervous prices fall.
This means that the market has a collective personality and collective emotions. If you can read this collective person then you will identify opportunities.
The opportunities mainly lie in knowing how the market will react to specific events that occur.
This is a vast subject but there are a few general rules to get you started.
The first rule is that the market hates uncertainty. Anything that throws the economic future into doubt will cause panic and negativity.
The second rule is that the currency market relates most things to interest rates. If some event occurs they will always ask how it might impact the future direction of rates.
The third rule is the reaction of the market is directly correlated to how surprising an event is.
Big events that were kind of anticipated won’t bring a reaction. The reaction will have occurred at the time the market started anticipating it.
Big events that were a total shock to the market will generate huge reactions and moves.
Having these three rules as your foundation and then building your knowledge around them will put you in good stead.
When you see news or economic events unfold you will get better at predicting how the market might react.
Your goal as a trader is to become highly proficient at spotting these opportunities. This is how you will make money.
- Adopting the correct approach
To become a consistently profitable trader you will need to first of all study the correct approach.
If you try to become proficient at golf by using a baseball bat to hit the ball you will not make any real progress.
That would be the wrong approach. The correct approach would be to acquire a set of golf clubs.
You then need to understand the basics behind using the clubs and the principles behind being a successful golfer.
Once you are on the right path you can then focus on deliberate practice within this proven approach.
Every single trader that managed client capital used the exact same approach. I believe that all professional traders use this approach in various forms.
I also believe that anyone not using a professional approach or only using part of it will never become a successful trader.
There are four distinct concepts that you need to study and practice in order for your approach to be considered professional.
These are, fundamental analysis, technical analysis, risk management and performance psychology.
Most retail traders lose money. In fact, a 2015 study found that only 34.2% of retail traders made money over a quarter.
The reason for this is that they don’t include all of these concepts in their approach.
The reality is that all of the concepts must be included in order to operate like a professional trader.
This gives you a much better chance of making money in the long run.
- Protecting yourself with Risk Management
Risk management is often mentioned in retail trading education material. However, it is never really a focal point.
It is also totally misunderstood by many people.
You have probably heard people telling you to only risk 1% on each trade or to always use a risk reward ratio of at least 2:1.
The idea behind risk management is to avoid losing all or even a significant portion of your trading account.
This is obviously beneficial but professional traders do not approach risk in this one dimensional manner.
Instead, they focus on the root cause of all risk rather than specific risk taking activities.
For example, rock climbing can be considered risky. The level of risk is different depending on who is doing it.
A professional climber with 25 years’ experience and all of the appropriate safety equipment might be climbing a cliff.
A complete novice with no safety equipment might be climbing the exact same cliff in the exact same conditions.
The risk is not equal. One climber has a much greater chance of falling despite the activity being the same.
There is some risk in the activity itself but there is also risk based on the inexperience of the participant.
If you don’t really understand the markets and the approach taken by professional traders your risk of loss is higher.
You cannot expect to generate the same return as a skilled professional trader with years of experience after just a few weeks.
This would be considered insane in pretty much every other profession or activity.
Learning and practicing in line with a professional approach is actually part of a sound risk management strategy.
It is probably more important than simply making sure you only risk 1% on each trade.
You will have ups and downs but once you have the approach down your next step, then employ deliberate practice. This is the act of setting targets and then working to achieve them.
There is a massive difference between merely practicing something and practicing it deliberately.
Deliberate practice always seeks improvement. It constantly looks at different ways in which to improve results.
It never stops trying to become more proficient and finding new ways to boost performance.
If you’re measuring your performance then you can manage your performance. This means that you can improve it, incrementally, over time.
Forget searching for indicators or systems. Instead, seek to improve yourself and your own trading performance.
When you do this your trading results will improve gradually over time. Don’t expect riches overnight.
Trading success looks very different to how the movies portray it.
If you have any questions please leave them in the comment below.