books about online stock trading, forex, futures, stock investing, market, trading systems
How to Get Started
Back to contents page

The largest part of the theoretical materials regarding the FOREX market—including the main aspects of the theory of fundamental and technical analysis and also the general information—is not included in this book. The theory of speculative currency trading can be studied using the existing special literature. Before starting to study my trading method, you must familiarize yourself with basic issues of the business in which you are attempting to participate or are already participating. Because my trading method is different from the others that I call traditional ones, the theoretical preparation for my students has to have a specific character. For preliminary preparation on the trade theory, I recommend studying the following four issues:

•  History and development of the FOREX market.

•  Currency market participants, their roles and mutual relationships in
the process of trade.

•  Technology and terminology of speculative currency trade.

•  General principles of fundamental and technical analysis.

The main efforts should be focused on studying the technical analysis key issues. The main focus should be on the following two subjects: Support and Resistance Theory and Retracement Theories (Dow and Fibonacci). My method uses only a relatively small part of the general theory of technical analysis and virtually does not employ fundamental analysis at all. However, I do not think it will hurt you to gain some knowledge of subjects that you will most likely not need in the future. On the contrary, this knowledge should help you not just with better understanding of the offered method but internal market tendencies as well.

INFORMATION, DATA FEED, AND TECHNICAL SUPPORT

I don't have any special or particular requirements for computer software, charting programs, or data sources of real time and delayed market quotes and other data. Moreover, my trade method requires only minimal data means. That's why any service (even the cheapest one) delivering real-time market data might be sufficient. It has to have the ability to create charts, a set of main technical indicators, and a minimum set of graphic tools for drawing trend lines, support, and resistance lines. As far as I know, such a service can even be received at no charge from some Internet sites. Long-term analysis requires more sophisticated software, which can be found today on the market at a relatively inexpensive price and with quite acceptable quality.

I didn't do any special research on this subject and cannot offer you a comparison analysis of today's informative services and charting programs. I just want to mention that for the purpose of analysis of long-term charts, including daily, weekly, and monthly charts, I'm using SuperCharts by Omega Research and data feed of the Bridge/CRB. This software doesn't envisage any real-time mode, and the data is loaded from Bridge/CRB daily at 11:00 p.m. GMT, after the end of each trading day. I am entirely satisfied with this service; it fulfills the requirements of my trade method, and I recommend something similar for your usage.

DUMMY TRADING

Before making the final decision to participate in real trade in the FOREX market, the majority of beginners go through the learning stage called dummy trading. This presents a virtual market game, with only virtual capital at risk. Mainly, this is the stage when a newcomer makes a final decision about whether to participate in real trading. His final decision is usually based on the results of such dummy trading. Considering such a training method as a necessary element for the beginners, I must emphasize that the results received in virtual dummy trading are different from the real results of the same traders in the real market when someone deals with real capital. The differences are always not in favor of the real trade. The psychological factor is mostly responsible for this. The risk of losing real money influences the trader in the most negative way, triggering errors, some of which he was successfully avoiding while trading his dummy account. Therefore, I would like to warn you not to be very hope­ful and overexcited if the results of working in the real market entirely coincide with the results received in dummy trading. The negative factor built into the trader's psychology will reveal itself anyway. In order to reach a positive result in real trading, you must develop methods of lowering the psychological loads in the stressful situations of real trading. Do­ing so will constantly train and strengthen your psyche.

The majority of FOREX dealer and broker companies today offer online trading, which presents an optimum solution and a big advantage for the majority of independent traders. Most of those companies also allow virtual dummy trading. In this regard, I have only one recommendation: It would be better to have a dummy trading account with a dealer or a broker you are planning to work with when starting real trading. This way, you generally will be able to evaluate the quality of the service; get used to the manner in which your orders are filled by the dealer; and get used to the peculiarities of this particular on line trading software. If you can independently determine the initial amount of the virtual account, it is desir­able for this amount to match the size of the real investment you have planned. Such an approach will allow you to achieve the closest proximity to the real situation you will soon have to deal with.

Establishing a Trading Account

FOREX market has some certain specific characteristics; without knowing them and taking them into consideration, the eventual suc­cess in speculative operations could be doubtful.

After the preliminary preparation stage is fulfilled and you think you are ready to participate in real trade in the FOREX market, you must choose a broker or dealer company to conduct your investment operations. You must also determine the size of the initial investment that you will have to transfer into the trade account opened with the chosen dealer company. (Criteria for choosing the dealer company are presented in Chapter 3). As is well known, this market has few specific characteristics; without considering them, success in speculative operations is doubtful.

Unfortunately they are totally beyond the trader's control. Those pe­culiarities result from conditions characterizing the FOREX market and from historically developed practices and rules followed by all the participants. Some specifications on the FOREX market include high volatility of main currencies; the possibility of trading under conditions of low-interest margin; and relatively high minimum contract value. These conditions are initially considered to be advantages and mainly attract investors into the business. However, they also have a negative side and can be considered as an additional source of risk for a trader. Everything depends on the point of view of the observer, as in the well-known example of the half-empty and half-full glass.

I don't have any doubts that, because you have made the decision to participate in the market, you are sufficiently informed about its advantages. My task is to point out some hidden risks and dangers. Some mistakes made mainly by novice traders during the first stage of their careers are described below. They are connected with insufficient initial capital or its incorrect distribution and management. First, the beginner should be warned about two possible mistakes that are typical and usually made at the very beginning of the trading career.

UNDERCAPITALIZATION RISK

Insufficient initial capital invested into trade is the first mistake made by a majority of newcomers, and it often turns out to be their last mistake.

I have witnessed many cases of full loss of capital invested into currency operations during the first month, weeks, days, and even hours. The invested capital is lost before a novice trader has time and an opportunity for learning.

This happens for a few key reasons. At the beginning of a career, a new trader has neither sufficient knowledge and experience nor the feeling of danger or risk limit that should not be surpassed. Also, at the very beginning, there are some errors that could be avoided with the proper set up before conducting business. One of the frequent initial mistakes is in­sufficient investment in trading operations. Consider the condition when the average daily oscillation amplitude of the main currency in a percent ratio is comparable to the margin offered to the currency investor by banks, dealers, and brokers. (It is common nowadays to provide the trader with such a condition when the initial margin does not exceed 2 to 4 percent of the size of the contract for the daily trade.)

If the currency oscillates 1 to 1.5 percent on a daily average, the loss of a larger part or even the entire trading account within just a couple of days is possible. I must mention that most novice traders partially realize risks they will have to deal with on the currency market, but are not always capable of precisely formulating and evaluating them. Therefore, they often undertake incorrect actions for lowering them. Logical thinking dictates that the simplest way of lowering the risk of potential losses is by investing the minimum possible amount into trade. At the same time, the idea and the plan are to increase the investment later as the necessary experience, knowledge, and skills are acquired. From my experience, this approach to lower the risk is virtually ineffective and even harmful. The situation reminds me of one of my favorite anecdotes: A commission arrives in a psychiatric hospital to inspect the facility. The commission members see an empty swimming pool into which the patients are diving from the diving board. The commission members ask one of the patients why they are diving into an empty pool. The patient answers that the hos­pital administration promised to fill the pool with water immediately after the patients learn how to dive.

Usually, most novice traders partially realize the risks they will have to deal with on the currency market, but they are not always capable of precisely formulating and evaluating these risks.

In the same way, many novices try to lower the risk of losses while they are expecting to acquire sufficient practical experience, in order to invest larger amounts later on. They don't understand that a small trading account actually increases the risk of losses. By artificially decreasing the initial investment capital, it is impossible to lower the risk. This is because the size of the trading account and the risk degree of losing some part of the investment capital are not proportionally related. I will illustrate this statement with a simple example. Let's assume there are two accounts. One of them has invested capital of $5,000 and the other $50,000. All other things being equal (such as minimum contract size of $100,000), the initial margin equals 4 percent, and during one trade only, one minimum contract is operated. It is clear that only after two or three unsuccessful transactions (each resulting in a loss of an average of $1,000), the smaller account is practically inoperable and requires replenishment in order to continue participation in the market. See Figure 2.1.

The larger account in this situation remains absolutely sufficient for further operations. Restoring the loss is easier than in the small account. Equalizing the chances to win with large and small accounts is possible only by proportionally decreasing the minimum contract size for a small account owner, or by the same proportional limitation of loss size. It is practically impossible to accomplish either of these options.

The size of the trading account and the risk degree of losing some part of the investment capital are not proportionally related.

The minimum contract size for everyone who works with a good dealer should not be below $100,000. It can be said that this amount is a minimum standard for small individual transactions. By putting short and tight stops, the trader increases the chances the stops will be triggered more often and the total loss will consist of many small losses.

Sometimes, novice traders gradually add money to the trading account. By replacing the losses on the market, they keep the small account instead of immediately investing the large sum in order to lower the risk. As a result, considerable amounts are often lost, invested into the market in small portions. One of the main reasons for these losses is insufficient capital at the moment when it is most required. Therefore, the most frequent disadvantage is insufficient initial investment.

The trading account (to the degree possible) should be sufficiently large, in order to correspond with market conditions and provide the required security and flexibility in making trade decisions. The trading account is a working tool for the trader. It should correspond not only to those tasks that each trader sets for himself personally, but also to those business requirements under which he will have to work. It is not worth trying to lower the risk by artificially decreasing the initial invested capital. This target should be achieved in a natural way — primarily by trading the contracts of the minimum possible size at each given moment, until the time when the trader acquires sufficient experience and self-reliance.

The trading account is a working tool for the trader, and it should correspond also to those business requirements under which it will have to work.

OVERTRADE RISK

The second mistake made by a majority of newcomers can be attributed to the overtrade risk. This problem is sometimes directly connected to in­sufficient trading capital. Quite often, though, the problem does not have any relation to this. Rather, it can be explained by the trader's lack of knowledge of the main principles of money management, which means insufficient ability to control someone's trading capital. A trader's trading capital is his tool designed to earn money. In the first place, the trader has to take care to keep this tool intact, because its loss or damage will immediately result in the inability to continue his trading operations.

YOU MUST DETERMINE THE LIMITS OF YOUR RISK IN ADVANCE

Overtrade most often reveals itself when the trader (hoping to receive the maximum possible profit) acquires an oversized contract, risking the larger part of his trading capital in just a single transaction. In case a market starts moving against the trader's position, possible losses can exceed the acceptable limit. The result can be irreparable damage to the working

capital, bringing the trading account to a condition unusable for further trade. The account will be unusable in a timely manner in the future, due to the impossibility of covering those losses that occurred during just one transaction. Under current conditions, many banks and dealers offer their clients margin trading terms at a leverage ranging from 20:1 to 50:1 (and even higher). The initial margin as an industry's average is only 2 to 5 percent. Considering the average market activity during one day, it is easy to lose half or even a larger part of the trading capital. In order to avoid this occurrence, it is desirable to use certain margin self-limitation and not to use more than 5 to 10 percent of the trading capital during one trade. Traders should establish their individual limitation for the margin, and possibly keep this limitation not below 10 to 20 percent as compared to the size of the trade contract. In other words, for each $10,000 to $20,000 of the size of your trading capital, only one contract of $100,000 should be traded at any time. See Figure 2.2.

This is the minimum for a majority of the dealers. More details on the problem of overtrade will be presented in Chapter 11.

From the very beginning, it is useful to remember that there is no capital so large that it is impossible to lose during speculative operations in the FOREX market. The risk of losing part of or the entire investment capital is always present where there is the possibility to earn. The currency market is not an exception to this rule. In order to earn, the trader must take the risk of loss. In risking, though, traders must determine in advance the limits of their risk. They should never risk all or the largest part of their trading capital at once. They should risk only that part whose loss they are sure will not result in catastrophic consequences for their trading accounts and the resulting inability to further participation in trading.

Smarter trading The art of day trading Trading Chaos Sane Investing In An Insane World