In this post I will be sharing my insights into how you can start FX trading even if you’re a complete novice.
My support team receives a lot of messages each week asking for my best advice. A lot of these questions are from people that want to get into trading FX for the first time.
I began my own career as a retail FX trader and was almost completely self-taught. The purpose of this post is to save you some time and help you avoid mistakes.
I will be covering the following topics:
- The importance of understanding the markets
- What fundamental analysis really involves
- How to apply technical analysis professionally
- Protecting your account with risk management
- Trading performance psychology
- What your trading improvement will look like
Trading the currency market is to be approached like any other profession or skill. If you want to master it you need deliberate practice.
This means that as you learn and perfect your skills you’re constantly assessing your results and looking for improvement.
I have seen many retail traders going around in circles for years with no improvement. They switch from one strategy to the next.
They spend days back testing but the live results never match the back tested ones. They then tweak the strategy or find a new one and go around again.
Searching for an external solution like this will never result in you becoming a successful trader.
If you’re not prepared for this then trading can quickly become frustrating and uncomfortable.
This is the first piece of advice I generally give to people. Focus on becoming a good trader yourself rather than searching externally for the secret system.
Understand The Markets
If you are trying to start trading then your first step is to actually understand what it’s all about.
For FX trading you will need to look very closely at the currency market. This does not mean staring at charts and looking for patterns.
Instead, you need to be finding out why the currency prices are moving. What is the reason?
Then you need to understand the importance of those reasons. What do other professional traders think about it?
Trading financial markets is a lot like playing poker. Imagine a giant table with all of the players sat around.
The only difference is that the game never ends. Players come and go and some make fortunes while others go broke.
But there are constantly new players coming to the table to join in as others leave. Each player is trying to take money from the game.
It is highly competitive and there are no easy short cuts or secrets to generating a consistent profit.
The key to winning at poker is risk management and your ability to read the other players.
You need to take advantage of those players that have lost their heads while being cautious around experienced players.
Most of the time the game is mundane and the goal is to just stay in and keep going. Every once in a while you will see a clear cut opportunity to make money.
If you are prepared and have a strategy then these are the times your money will be made. Trading FX works in the exact same way.
Most of the time there is no real opportunity to take money from the other players. It’s a case of watching and waiting for an opportunity.
This is only possible if you thoroughly understand the markets and how they play.
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.
Learning With The Correct Approach
To become a consistently profitable trader you will need to first of all study the correct approach.
I often illustrate the importance of this by using the analogy of learning golf.
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.
I have traded professionally over many years and also worked with some extremely great traders.
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. Very often they will focus only on technical analysis, for example.
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.
What Fundamental Analysis Really Involves
Fundamental analysis is often one of the most overlooked aspects by retail traders. There is a general misunderstanding about what it is and what it does.
You might think that it’s all about economic data or volatile news events. You may have also heard that trading these things is dangerous.
Perhaps the biggest myth is that fundamental analysis is complicated and requires a degree in economics.
All of these things are false beliefs. I know because I used to have them myself.
Unfortunately, most retail educators have never traded successfully. They don’t understand the topic to begin with.
It’s also very easy to create technical strategies that look good visually. An indicator that tells you when to buy or sell by changing colour is very appealing.
This type of trading system hints that no work is required in order to make money. This is another false belief.
Fundamental analysis cannot be boiled down into a sexy indicator or mechanical set of rules. It is dismissed in favour of technical strategies that appeal and are easy to sell.
The reality is that fundamental analysis is the study into the causes of significant price moves.
The fundamentals will tell you why the currency price moved in the way that it did. This will also give you clues about how they will move next.
It isn’t necessarily about economic data or news. Sometimes it is. Other times it is about politics or central banks or anything else that the markets choose to focus on.
Instead of thinking about fundamentals as complicated economics start viewing it as the art of finding out why.
Finding the reasons behind each move will open your eyes and you will start to understand the markets as a professional.
How To Apply Technical Analysis Professionally
Many retail traders believe that technical and fundamental analysis are conflicting. They believe that they need to select one and dismiss the other.
This belief comes from a basic misunderstanding of what each of these concepts does.
Fundamental analysis serves a very specific purpose. It helps you discover why the markets are moving and how they might move next.
Technical analysis provides absolutely no insight into either of those two things. Instead, technicals help you to find the optimal price for entering and exiting the market.
Fundamental analysis tells you why you should be buying it and also when to buy it.
Technical analysis will tell you at which price to enter and where to look at taking your profit.
Professional traders take note of each different price level. They will look to see where other traders have been buying or selling from in the recent past.
This gives them clues about where other traders might enter or exit the market again in the near future.
These levels can be very effective when you’re trading in the right direction.
There are many technical systems and indicators available and they all work in generally the same manner.
The most important thing is that you find one that you’re comfortable working with. It’s also vital to never try and use it exclusively.
I often liken technical analysis to the mirrors on a car. The mirrors are very important and will help you avoid collisions.
If you drive with only the mirrors then you will end up having more collisions and impacting your driving negatively.
They are only designed to complement the overall driving position rather than be the sole tool used for reaching your destination.
This same principle applies to technical analysis in trading.
Protecting Your Account 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.
Trading Performance Psychology
Another overlooked principle is that of trading psychology. This is possibly more overlooked than fundamental analysis and risk management combined.
The very word psychology sounds boring and clinical. This is in stark contrast to the easy to sell indicators and systems that retail traders are hooked on buying.
The reality is that even traders that operate with a professional approach sometimes lose. They also go through long periods of drawdown and frustration.
The reason that they can maintain their composure and pull it back is down to their performance psychology.
This is very similar to how professional athletes manage to perform at the highest level during intense pressure situations.
Your first task is to really understand how and why your mental game is so vital. The side effects of bad psychology are numerous.
Some traders find themselves inexplicably breaking their own rules and chasing the market to try and make back losses.
My biggest issue was always with the fear of missing out. I would buy at the highs or sell at the lows to avoid missing the move.
This almost always ended up with me in heavy draw down or losing money. If you fail to address trading psychology or try and ignore it then you will never make money trading.
The biggest tip for this is to start researching and practicing the art of mindfulness.
This means that you are consciously aware of your emotional state. When feeling nervous a normal person will just succumb to the emotion and react to it.
This leads to them making silly mistakes or bad judgement calls.
If you’re mindful then you will not get sucked into reacting. Instead you will recognise how you’re feeling and actually plan how you will act next.
This is huge for your development. Try it.
What Your Trading Improvement Will Look Like
To become a consistently profitable trader you must follow a professional approach. The key to this is working on each of the four concepts we have looked at in this article.
The biggest mistake you can make is only focusing on one or two of those concepts and neglecting the rest.
They are all equally important. They all serve different and specific purposes.
Once you have the approach down your next step is to 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. In fact, I wrote a whole case study on the process.
You will have ups and downs but your results will slowly but surely get better and better. Your confidence will be high and losses will not affect you.
To become a successful trader understand the currency markets. Apply a professional approach and practice deliberately to improve over time.
If you have any questions that I haven’t covered please leave them in the comments below. I do read them all and reply to as many as I can.