New forex traders often mistakenly try to master technical analysis as a first step in preparing to trade, and often they will use as many technical indicators as possible, leading to frustration because the list is extensive and many are not appropriate to currency pairs. For example, all of the volume-related indicators are useless for forex because in the spot market, volume data is not available.
Additionally, new traders frequently ignore fundamentals. Technical traders must know the fundamentals just as fundamental traders need to know the technicals even though it is not the primary driver of trading decisions. But most importantly, new traders neglect to observe carefully their own patterns of trading. Without self-awareness, the forex trader’s probability of success is severely restricted.
Getting started in forex for many people begins with a demo account or the use of mini forex contracts. Without guidance, the results of a demo account cannot be reliably transferred to real trading; and mini-contracts, while at first appealing for those traders wanting a quick start with small capital, offer wider spreads that quickly eat up capital. Such accounts do not provide a realistic transferable experience and new traders should use less leverage, not more.
Is failure inevitable? No. Successful forex trading is possible, but the path requires a process of learning that has distinct central features, evolutionary phases and a central logic of action. By “success” we mean the ability to survive through losses and surprises. Long-term success takes skills in adapting to changing market conditions because the market will cull unfit traders. Some traders may have enormous skills in identifying direction and find comfort in longer-term trading objectives. Other traders may be better suited for short-term trading. Every person needs to discover what special skills give their trading a natural advantage.
One of the most common experiences for new traders is being wiped out quickly. Avoiding deep losses is equivalent to a tree avoiding its central branch being cut. The tree will survive, even thrive, when minor branches are cut. Losses can, if properly evaluated, become the impetus to improved total performance. While losses are unavoidable, many new traders lose because of ignorance of fundamentals, placing too-tight stops and trading against the trend.
How does one graduate to higher levels of success? Intelligence, which in trading is not about predicting market moves, but about observation. Too many traders do not understand or evaluate their own trading record. How can you shape trading objectives in the absence of a complete understanding of the strengths and weaknesses of your own performance? In “How am I doing,” a trader’s history is tracked as a moving average (MA) of pip accumulation. This MA can be applied to any period of time. Here we see three curves. First a pip accumulation curve that measures simply pip values accumulated in sequential trades. The second is a seven-period MA (MA of the previous seven trades). Finally there is a 21-period MA of the pip accumulation of the previous 21 trades. This chart provides a visual of the stability of the trader. A trader who accumulates pips in his trades and is consistent will have a chart with a sloping upward curve. A trader who is not consistent will have a chart that looks unstable. By detecting when the seven-trade MA pip accumulation crosses below the 21-trade MA, the trader can be alerted that there is a decline in the skill level of the trader. The benefit of tracking performance this way is that it provides a visual of instability in the performance. While a trader generally knows how well he is doing, with the aid of performance analytics, such as the pip accumulation curve, that knowledge is quantified and allows for a more thorough understanding of the dynamics of the trader’s performance.
Each trade creates an opportunity for profit and loss and a trader must compare his performance against that backdrop. A trader should measure the progress of the curve vs. the profit/loss potential of each trading period. Using this measure will allow him to know whether he is getting the best of the opportunities the market offers.
Abe Cofnas is president of learn4x.com LLC. E-mail him at learn4x@earthlink.net.
