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Understanding Forex trading

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Dartmouth NS
Trading Experience: Intermediate
Platform: MC, MC.Net, NT, TWS
Broker/Data: IB / IQFeed / Kids
Favorite Futures: Forex, stocks
bnichols's Avatar
Posts: 638 since Feb 2010
Thanks: 64 given, 460 received

Welcome to the forum. Having been an investor for decades and "active" for somewhat less than that, along the way I discovered personally I'm better off swing trading metal and energy stocks--stocks I've watched for a very long time--than trying to profit from derivatives, but that may change with experience.

While each trader's path is different there is good evidence traders share some common experiences, so for what it's worth here's mine.

I started discretionary trading Forex only recently (last 2-3 years) and for the last 12-20 months or so my circumstances have allowed me to study the currency markets and trade either with real money or paper (I'm afraid to say) 10-16 hrs/day, sometimes more. On weekends I read trading books, watch training videos and develop experimental autotrade strategies. I consider myself intermediate because even though it appears I'm beginning to have more & better days than losers discretionary trading short time frame spot Forex mostly because of increasing ability to manage losses, I still don't "expect" consistent profits (i.e., to be profitable over the longer haul), perhaps because I haven't been at it long enough to talk about the long haul. In the summer typically I turn on a 4H spot-Forex bot, pay my kids a percentage of any proceeds to monitor it and go on a long, much needed vacation.

With discretionary spot Forex trading there has been no one point (in particular no single approach or Holy Grail indicator I can point to) where I can say "this is where my fortunes changed for the better". In hindsight improvement may be steady but "changes" remain imperceptible. No matter how much theory I acquire by study & experiment it's necessary to put theory into practice, which has meant foremost overcoming habits & instincts that brought me to Forex in the first place and which at first inexplicably become barriers to profitability. These habits and instincts (to do with fear, greed, will to dominate, to be passive/aggressive when cornered) turned out to be amazingly stubborn & hard to control despite the havoc they wreak and my increasing awareness of them--more deeply rooted, aggressive and deceptive than any relatively nebulous or limp-wristed urge to make money can overcome.

Any success I'm having appears to be the result of changes in the way I think and feel, not in the tools I use or adoption of any particular strategy. While we need a good understanding of tools, techniques & instruments, increasingly it appears the more we learn about ourselves and the quicker we're able alter our basic nature as necessary--no mean feat--the sooner we will become consistently profitable. These days therefore I still study my mind as much as anything else, and when I hit a brick wall I look inward first and only then if necessary for a trading approach to mirror what turns up, potentially corrective of behaviour more than an alternative way to make money.

I continually backtrack, unlearning or relearning what I thought I knew since I no longer trust what I know--only profits. For example, long ago having rejected "unsophisticated" lagging indicators like stochastics and MACD in favour of "price action" and more complicated & fashionable indicators in the hope what sometimes improves bot performance might also help discretionary trading, I'm now exploring them again, mainly as defense against an exhausting habit of trying to "be in the market all the time" and a tendency to trade impulsively (which is different than e.g. quick reflexes when scalping), but also now to (re)acquire a broader perspective as an antidote to a fixation on microscopic price movement. This does not mean micro time frames are unprofitable or that I may not choose to interact with price movement bar by bar some day, but right now it's not a comfortable trading style for me; I find the approach too labour intensive, doesn't create a satisfying degree of order from apparent short time frame chaos. IMO the tools, methodology & time frame are not important--one can make money trading a system based on moon phases if one is able to stick to the rules. They seem to be simply a touchstone for whatever changes have occurred inside us to make us profitable and keep us happy doing what we're doing, far less important than realistic money management or even a good night's sleep, fresh air, diet and exercise. In other words for me unfortunately or fortunately discretionary trading remains, and may always remain, more art than science.

Persistent trial and error if anything may be the key in the beginning, together with the conviction that failure is not an option. Persistence requires we maintain enough money to trade with however, and unless we have bottomless pockets that's where paper trading comes in. As any aside, the notion of trial & error is subject to the proviso later stage one does not abandon a profitable system every time something new and shiny comes along unless profits are not necessarily the object. It takes much experience to devise a trading system & months to prove one--even one we purchase--and IMO life is too short to investigate everything that sparkles.

I've found as bluemele says it's possible for a live paper account (a broker-side paper account rather than a local Sim account) to become a proxy for the real thing psychologically, which IMO and perhaps as Nasdin94 and Eric j might allow is vital if paper trading is going to provide a worthwhile learning experience. It may take a while (months at least in my case) before paper trading becomes a valid proxy for trading with real money (can evoke an emotional battle similar to trading with real money, the battle necessary to expose emotion in order to learn to deal with it rather than remain controlled by it). The idea is to experience euphoria, ego-shattering despair of home runs (to deal with the "if only I'd been in that trade" trap) and margin calls and the spectrum of emotions in between without impacting the real account--never forgetting the margin call would have been as real as the home run--at least to the same extent we allow ourselves to be emotionally involved in a movie, say, and if only to practice suspending both belief & disbelief. The first step to allowing the transformation to take place (to paper trading as a proxy) may be simply as bluemele suggests: set out to grow the paper account. In my experience until you can grow a paper account significantly over a period of months of active trading starting with a balance equal to your real money account it's unlikely you'll be successful trading the real money account.

Regarding the experience of trading, I no longer expect discipline to replace emotion entirely; instead am trying to learn to keep emotions on a short leash to prevent the fact I continue to have emotions becoming another needless battle in itself.

The part above about starting with a paper balance equal to your real money account pertains to small accounts. In my experience the less money you have to work with the more difficult to grow the account for a number of reasons, emotional and practical. For Forex IMO the absolute workable minimum is $10,000, others claim $50,000, which may be unwelcome news for some. That doesn't mean smaller accounts can't be instructive--my sons appear to be learning that way, if so far not profiting financially. The main lessons of small accounts perhaps are: learning to think in probabilities, particularly in loss probabilities, rather than in terms of profit expectations, in particular that expectations have to be equally small or they will become one's undoing; to learn that strict adherence to informed money management rules is vital, unfortunately because a small account makes such rules hard if impossible to follow; and that methods involving multiple contracts, e.g. to allow for multiple stop/target strategies, are inaccessible to small accounts.

At this point in my career (trading short time frame spot Forex) it's comforting to approach the torrent of money in Forex as a raging river with treacherous shores. All I want to do is fill my canteen--not swallow the entire thing (quite possible in the imagination of new traders, the way one of the Chinese brothers in the old folktale--also a Grimm's Fairy Tale and REM song--swallowed the ocean). In other words, if I expect to capture every drop of profit--or even every significant price movement--I expect to be swept away & drowned.

The bottom line is, IMO if you have or can cultivate the ability to remain optimistic with low expectations, stay clear headed & confident despite what seem insurmountable odds, in the beginning nevertheless you can look forward to a lot of hard work, long hours and frustration--kind of like university all over again as others have said, the cost of which depends on one's ability to harness paper trading to the learning process.

Finally, if any of this seems unclear (or worse--pointlessly esoteric or naive ) then hopefully it will seem less so as time passes.

Edited to add: As a disclaimer to the above, IMO choice of broker tempers discretionary spot Forex trading experience. Mine has been affected by Interactive Brokers in that:
1. I'm restricted to leverage the order of 28 x rather than 100-400 x like some brokers who cater to small accounts
2. I pay by commission rather than spread
3. I can trade any number of units as long as the after-leverage $ amount per order exceeds USD $30,000 (unless I want to suffer tremendous spread penalty). In other words, I can exploit "multi-lot" strategies strictly based on account size without being constrained by conventional (100,000 unit) or micro (10,000) lot sizes.
4. IB's data feed is sampled, which if relied upon exclusively IMO so far may render precision tick-based techniques suspect if not unworkable.

Last edited by bnichols; October 15th, 2011 at 04:01 PM.
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