Money Matters, Simplified.
Top 10 Things a New Forex Trader Needs to Know
About to jump into forex trade? Look before you leap. Here are ten things you cannot afford to overlook.
Thu, 07/29/2010 - 14:52 by Anonymous
Although you are a trader and not an economist, being aware of the fundamentals and how they are driving currency prices is essential. One of the greatest trading adages is, “What you don’t know is cost to you.” Basically, the idea is that there is so much to know as a professional trader, and oftentimes what we have not learned yet is costing us money. Let’s take a look at the Top 10 things a new trader needs to know.
10. Never Risk More Than 2 percent of Your Capital on a Single Trade
I actually find that 2 percent is too aggressive for most traders because many new traders will have a string of consecutive losers, perhaps 3, 4, 5, or more in a row. Let’s a say a trader has 5 losers in a row. That’s a 10 percent drawdown to the forex account. Conversely, a risk of.5 percent per trade with 5 consecutive losers would be a drawdown of 2.5 percent, which is much more manageable.
9. Don’t Over-Trade
This single problem leads to massive blowouts in many new accounts. Instead of taking only quality set-ups, which don’t happen every few minutes, a new trader tends to over-trade by entering way too many trades, often entering less than desirable positions.
8. Plan Your Trades
Planning your trades is one of the most powerful ways to protect your account from a multitude of foibles that most new traders fall into. Planning requires patience, discipline, and self-awareness—all essential keys to long-term successful trading.
7. Don’t Buy Resistance & Sell Support
New traders who enter the forex market will oftentimes fall prey to buying at resistance or selling at resistance in hopes of catching a breakout. Statistically, from a quantitative perspective, this is a losing strategy that will yield negative expectancy over time.
6. Be Independent in Your Thought
Although it can be good to listen to financial news and read analyst reports, etc, it is imperative to be independent in one’s thought. Self-reliance and self-confidence are essential.
5. Learn the Basics of Fundamental Analysis
Although you are a trader and not an economist, being aware of the fundamentals and how they are driving currency prices is essential. Being aware of the fundamentals and what is currently driving price will also give you stronger confidence in your trading decisions.
4. Learn Interest Rates
Interest rates are the absolute key driver of currency valuation over the long-term. A basic understanding of interest rates including how they are set, and what influences their movement, is essential to anyone seeking to trade professionally in the FX Market.
3. Protect Your Mental Capital at All Costs
If your account suffers a drawdown, but you still have your mental capital, then it is completely realistic that you will be able to build the account back up. However, if you’re account takes a large hit, and it drains your mental capital, it will be very difficult to ever recoup the losses. A complete drain of mental capital is what causes most traders to quit trading.
2. Trading is a Profession
Trading is a profession similar to engineering, medicine, architecture, etc. It takes years to develop the skill sets necessary for ultimate success in those professions, and trading is no different. Be in it for the long haul, not the quick buck.
1. Price Action is the Best Teacher
New traders always want to know what books to read or which courses to buy in order to learn how to trade. Although there can definitely be some merit to these educational resources, the best teacher of all is the market itself. By observing price day after day, hours at a time, a trader will eventually begin to see the intricacies of how price moves and how it moves in relation to his or her particular strategy.
By Eric Kidder
