Essential tips I never really found in books.

ONE: Beginners luck exists in trading, often plays to your advantage, and then you crash.

In my first trade I made 600 points trading the dollar — around $600 in half an hour. Several times thereafter I was able to repeat the success, making $200–300 every third or fourth trade. But my success was very quickly exhausted. One bad trade after the next, I was running on losses that dug deep into my profit and began to eat at my balance.

What many beginners master, which to their credit many advanced traders lose sight of, is that ultimately there is a 33/33/33 chance of any financial instrument trending up, or down, or remaining flat at any given time during trading hours. This fundamental home-truth is the reason why most beginners experience an air of success, ultimately harming the zen of ego.

A beginners primitive knowledge on how trading works is dangerously similar to gambling. Treating the market like a casino will cause it to react like a casino, and in that sense, rest assured, the house will always win.

TWO: It takes momentum to for the market to trend UP. And it takes momentum to bring it DOWN.

UP (yellow boxes) vs DOWN (blue boxes)

It takes a huge amount of transactions i.e. buying and selling to create the fluctuations in a market. This is called volume. In the currency market, an average 5 trillion dollars is traded daily.

Think of a financial instrument as a boulder. The more volume that is traded, the heavier it becomes. Then imagine the market to be an infinitely long staircase in an unrealistic universe. It naturally takes more effort to carry the boulder up the stairs than down.

Although this analogy is not theoretically accurate of how markets should move — one observable trait of trading financial instruments, particularly currency, is that upward trends are often ‘long’ — they appear like long gentle slopes which resemble climbing a staircase. Downward trends appear far steeper and happen quickly (usually with less ‘rest’ points). This is quite reflective of the human aspect. With a 500% increase in the number of traders in the foreign exchange world over the last ten years, it is no wonder that panic sell-offs drive this analogy.

Remember, when markets stop trending up, they are not neccessarily going to trend downward. Nor the other way round. There is no reason for a market to move to a down / up trend unless there is momentum to carry it either way. When the bulls (buys) and the bears (sells) draw equal, the market will remain flat!

THREE: Indicator-abuse and death-by-indicator will kill your enthusiasm before killing your profit.

If you were raised in a rather large extended traditional asiatic family, you will know full well that a high influx of opinion is confusing, annoying and often contradictory. Indicators are a blessing and a curse. ‘Death by indicators’ is a term I will coin here.

If you’re waiting for all the stars to align before you make your move, then forget it. I’ve yet to feel any affection for extravagant indicators, and I have found simple averages and volume analysis to be particularly useful for trading on the exchange market.

Never underestimate the laws of simplicity, especially the law of averages. Both are your best friend. One of the most useful and most popular indicators I have come across — the MACD — is a convergence/divergence short-term/long-term indicator which has been used in a handful of ways.

Remember, the market is dependent on two factors only: 1) Market Sentiment (bullish or bearish or flat?), 2) Price Momentum (how fast is the market moving?). And it can be analysed in two ways: fundamental analysis (market news, reports, employment stats, inflation, housing market) or technical analysis (candlestick analytics, indicators, trend analysis).

Take this screenshot with a pinch of salt (averages are not strong indicators on their own), but you can see here how a good visual MACD indicator can be so powerful (dotted circles). And even so, you can see how basic moving averages can too be a powerful tool (albeit not as early as the MACD signal). In a nutshell? Master the basics and get to know averages!

USDCHF, looking for the crossover using simple technical analysis: Below is the MACD Indicator — Red line is the signal line. Blue is MACD line. Above is short-term (3-day) in Light Green, and long-term average (30-day) which is the Light Blue line.

FOUR: You are only as good as you are today. The last game counts for nothing.

Accept change. Smooch with and relish volatility. Each trading day is a different market wearing a different gauntlet. There are several moods which determine tomorrow, which I can categorise as such:

  • Either a continuum of previous day’s trend in both sentiment (direction) and momentum (acceleration),
  • Or sentiment is persistent but the momentum is ceasing (indecision usually signified by a doji or spinning top candle with short wicks). This applies to bullish, bearish and neutral trends,
  • Or trend reversal. This is the interesting part as it can either be the death of the current trend to flat out, or an inversion of the current trend (e.g. from bearish to bullish or vice-versa).

Trade in your days with the attempt to determine the mood of the market. If you cannot get a feel for the market at all… wait for the market to let you in.

FIVE: Opinionize everything. Forget about buying trading signals sent by so called economists — it’s already too late! Say no to auto-trading algorithms. Think sentiment. Zero guarantees.

If there was an algorithm which actually makes profits persistently which was available to purchase, everyone would purchase it. If everyone purchases it, the market will swirl in to turmoil. Therefore nearly all algorithms used by hedge-funds, trading banks and investment firms are proprietery, secret, developed by weird professors in flip-flops and floral shirts. Also it is highly likely that any algorithm used would have a strong learning element, is usually high-frequency with milisecond advantage paid for by the nose, and adaptive to changing market conditions.

And your advantage? Trading, at a very low frequency (i.e. 30min — 4hr, 1-day, 1-week), cannot be captured in a formula. Market conditions are subject to a vast number of factors underpinned by economics (employment, housing, elections, natural disasters, bailouts, war and so on), and economists are often exposed to as much noise as you are. It may be so that economists employed by large banks offer a closer insight due to early-access to research, but having had some exposure for a few years to market publications within a trading and wealth management bank, and having read the odd publication by so called ‘leading economist’, I’ve found them to talk a lot of common sense — which, given their inflated salaries, is rather underwhelming! Relax. It’s not rocket science.

SIX: Stop-Loss. Protect your crown jewels. Your capital is like blood. It is quicker lost than made.

I’ve read a lot of nonsense which complicates where to place your stop-loss. You’ll come across the 1% rule quite often — i.e. place your stop losses on trades risking no more than 1% of your total capital at any one time. Some quote 5% for a high-risk trades. But all the traders I’ve read and observed ignore one key aspect of how to determine your stop-loss, which is to ask yourself: does it hurt?

If your capital is $3000, and you are risking $300 on a trade, that’s 10% of your total capital. The question you need to ask is, does losing $300 on one bad trade hurt. If it does, then you need to lower it until it does not. That’s the basic rule.

Of course you need to be careful to leave enough capital to cover your temporary losses incurred during volatility — hence why the 1–5% rule is there as a sensible guide. But each trade is based on the market mood. If the market is bipolar and about to make a reversal, your stop losses may be wider than usual due to high volatility as the bears and the bulls battle it out.

A downer is to have made the correct call on the direction of the reversal after investing your time in fundamental and technical analytics, but then being cut short because you set your stop-loss too low. An excellent way to determine your initial stop-loss is to learn to draw support and resistance, and to be in constant watch of your stop-loss. I personally don’t like to use trailing stop-loss. I like to, if I can, adjust the stop-loss manually with the trade, but on a busy day where I may not be able to keep a one/twice hour watch on my trades, I will resort to a trailing stop of about 10-pips to avoid digging too deep in to profit after say, gaining 50-pips profit.

SEVEN: It’s about being PROFITABLE. If that reads to you as ‘it’s about making money’, you’re better off not trading.

The best bit of advice easily gotten but hard learned is to switch your ‘profit’ column from view -> deposit currency to view -> points. I read a book by a successful trader based in Essex called Anna Couling, who suggested repeatedly to opt-out of a money-oriented view of your profit. To instead focus on points and pips.

After all, if you are trading in the forex market (or similarly in the stock market or commodities), if you are making 10-pips on $10,000 with a 1:50 leverage, or 10-pips on $100,000 with a 1:50 leverage — the difference is only a matter of scaling up your strategy!

Once you have a technique where by your losses are less frequent than your profit, and your strategies are generally consistent (with some flexibility to accomodate for market-mood) — you can confidently scale up. To start with, stick with something affordable that will take your focus off the money, and work on getting regular positive returns.

EIGHT: There’s no shame in watching your trades. And a lot of excitement is not a good thing.

When the desert arabs travelled with their herd through the heat, trading camels three-hundred strong with a ton of goods distributed across their caravan, can you expect them to keep a close watch? Trading is still no different. Forget about what people might think of it. If you want to keep a close eye on your camels, so long as you’re well fed, hydrated, and not getting bored, then there’s no shame at all. Why, it’s merely normal. Of course with the invention of the stop-loss, this is different for everyone. It depends on your trading personality, your time, your interests. In fact, the best way to attain a good intuition for the market and trends in general is to expose yourself to as many candlestick charts as possible.

On excitement — if you make regular profitable trades but still feel abnormally surprised or exhilerated, then that could indicate a lack of confidence. Making a profit should be an expected outcome, or at least not particularly exciting. Hollywood likes to make trading seem more melodramatic than it really is (although the year 2007 might have something to say about that). In truth, day traders would rather have more joy in other activities life has to offer! Perhaps the same cannot be said for high-frequency traders.