Forex traders are not born, they evolve. Successful traders have many things in common. They have applied knowledge, developed timing skills, can recognize repeatable patterns and the ability to modify their trading strategies based on trial and error. Ultimately, through hundreds and even thousands of trades, a record is formed that is either a signature of success and survival, or one of extinction. But what the beginner forex trader should focus on are the paths that can enhance their progress and potential. Are there any guideposts based on the real-world experience of other traders?
In “Getting started” we show a good template for keeping track of your trading success. The initial 10 trades of beginning trader Ross, who is based in London and trading about $10,000 in a Saxo bank account is shown. Evaluating these results can benefit other beginning traders.
First, the ability to produce a detailed spreadsheet of the trading record shows a discipline that is admirable.
The record can detail a progressive trading strategy where leverage is increased in a phased approach (for the complete list of 50 trades please see the online version of this story at www.futuresmag.com).
This trader did not rush to initially put on big lots to satisfy ego. This trader’s initial performance shows a capacity to pick winning trades and we can see good sequences of wins. We can see that stops were put in, yet, no limits were put on. As a result, the key weakness is not staying in a position longer. This is common to new traders. Many more trades will be required to establish a database robust enough to predict future performance.
But we can conclude that this new trader has the right approach and will be able to evolve. Can we pattern a “getting started” strategy for others who are new? Let’s try.
A fruitful approach is to have an action plan for the first 50 trades (see the full table of 50 on the online version). Let’s group each phase as consisting of 10 trades. The first 10 trades should be at no more than 1:1 leverage. In other words, if a person has a $10,000 account, then a trade putting on $10,000 is using 1:1 leverage. The goal of the first 10 trades is to get a sense of what kind of trader one is. What kind of win to loss ratio do you have? Are you able to achieve consecutive wins? Are losses reasonable and are wins too small? Trading at a leverage of 1:1 also tests one’s patience. Winning trades at $1 per pip registers a lot lower on one’s scale of enthusiasm than $10 per pip.
The next phase of a trader’s goals is to test whether the first 10 trades were a run of luck or if they reflected some more robust results. After 20 trades, the results can be further mined with more predictive power regarding your future as a trader. If after 20 trades the results are stable, you can move the level of leverage up an increment to $2 per pip. If after 30 trades the trader has achieved winning runs of five trades in a row, he can increase the leverage to $5 per pip. At this level wins and losses are felt. A 25 pip net profits per day generates $125. At $5 per pip you can be prepared to take a leap to the level of $10 per pip and more. With 30 consecutive trades completed, you can start putting on $10 per pip trades. The challenge will be to determine if performance declines when more money is at stake.
Each trader has their own optimal zone of indifference, where they are not affected by the dollar magnitude of wins or losses. Put on $10 per pip for trades 30 to 40 and then repeat the same level for the next 10 trades.
Completing the first 50 trades with a phased approach as outlined above provides a controlled launch. The trader can reduce the risks of massive and sudden drawdowns resulting from too much leverage and concentrate on identifying strengths and weaknesses. A controlled approach allows the trader to answer: Can I make money in forex and can I do it consistently?
Abe Cofnas is president of learn4x.com LLC and author of Understanding Forex: Trading to Win. E-mail: firstname.lastname@example.org.