There’s nothing like a nice visit to the dentist followed by a nasty head cold to make for a less than enjoyable week. But it is nice to once in a while take a break from trading and reflect upon other things. For me I spent some time reminiscing about how I got involved in this trading business. Let’s see… Several years ago I shared an office with a fellow (let’s call him Robbie, not his real name) who spent most of his time reading news and keeping me from doing what was my job. One day he came up with yet another wonderful get rich quick scheme. He discovered this thing called Forex and this was going to change his life. He showed me what he’d found online and explained in careful detail how I could make money by trading currencies. Hmmm…now this sounds very intriguing.
My curiosity piqued, I set about researching this thing called Forex trading and tried to learn everything I could. In the meantime Robbie had opened up a demonstration account and started online practice trading currencies (mostly at work). One of the things I discovered was that you could be a lot more successful with Forex trading if you joined a group and received trade signals to help improve your chances of making profitable trades. Robbie didn’t care for this idea because this involved spending money, something he had no need to do. He was going to teach the market a lesson on his own. Well, as you might guess, his demo account did not perform very well, and, after opening a live account, he managed to blow it up in a very short time. And probably very well because after that I was able to get more work done as currency trading conversations became a thing of the past. I however remained curious about this Forex trading business and wanted to satisfy my curiosity. I had no short-term intention of opening a live account because, after all, who can make sense of all these crazy charts and scribbling and price changes and what all. You needed to be a voodoo practitioner or something to make any sense of it, right?
Fast forward several years – I continued to follow currency markets and all things financial in general, but it wasn’t until a quite unexpected and forced early retirement made me consider trading as something I could do with my newfound free time (not to mention the nice side benefit of supplementing one’s pension). So I opened up a practice account, and, surprise surprise, I managed to lose lots and lots of the play money contained therein. Of course I knew what was wrong; I needed help – a support group that had signals would be just the thing. And unlike Robbie, I was happy to spend the money because what I stood to gain far outweighed what it would cost. Well… My first foray into signals groups proved disappointing. Not to worry, for I continued to research and look for information and forums and strategies and whatever I could find that would turn all this around.
One day I found an interesting article on Trading Pub that described an interesting strategy that had something to do with this thing called Nadex and something about sausages. Okay sounded yummy so I opened up a Nadex demo account and dabbled with this new flavor of binary options trading. Of course, I had absolutely no idea what I was doing, but that didn’t seem to matter to me because this funny strategy seem to work. Okay, now I’m hungry for more, so I joined this group called Slick Trade and jumped headfirst into live trading on Nadex. I followed the strategies they had to offer, and I took their signals. Wow! I’m really making money here! This is really great! And then it happened… greed got the better of me and I discovered that losing lots of money could be much easier and faster than making lots of money.
Yes, I know the trading group stressed caution in terms of money management, but apparently I knew better than they did and continued to risk too much and had mixed results. About this time I was chatting with another member of the group, one of the staffers who called Nadex signals. He stressed to me the importance of learning as, otherwise one could only be a follower, not a trader. This made an impression on me, and I really took his message to heart. But even though I was beginning to make sense of these things called candles, and pips, and trend reversals, and support and resistance, there was still so much I didn’t know. Happily that was about to change. I had the good fortune of being a part of a group that placed great emphasis on learning. And for me at least, I found out, that learning was more important than earning at this time…
One of the things that puzzled me was this Nadex indicative price and why is it different from the Forex spot price? The answer I discovered is that the Nadex “indicative” price is actually an index and is not to be confused with the Forex spot price. Taking the last 25 MID quotes (the average of bid and ask), drop the highest five and the lowest five quotes and average the middle 15 MID quotes and that is the indicative index. Of course, this only matters for those contracts held until expiration. Can be frustrating for those times when the contract wasn’t a winner because it expired one or two ticks out of the money. Something to remember with Nadex expirations – to expire in the money means that, for a buy position, the indicative price must be GREATER than the contract price. For a sell contract the price must be equal to or less than the indicative price. And yes I lost at least one trade that I thought was a winner but unfortunately wasn’t because it was a buy contract that settled EQUAL to the contract price. Not greater. There…that was easy.
As time went on, despite the fact that I was learning more about charts and currency pairs in this that and the other, I continued to feel frustrated taking my own trades. It seemed that no matter what type of Forex trade I opened (long or short) it always seemed to go against me. I saw that my profitable trades increased in profit very slowly while my losing trades lost money very quickly, despite being of equal lot size. When I would close a rapidly losing trade, the price would change direction and start moving rapidly the other direction. GRRRRRRRRR!!!
This was usually followed by the breakage of large quantities of office furniture. In time I came to realize some of what I was doing wrong. The fact that trades I was taking were going against me right away should’ve been telling me that I was not in sync with the market – I was opening new positions when other traders were taking profits. To become better synchronized with the market I needed a better understanding of the overall trend in which the market was moving. One good way to double check the strategies I was using was to pay attention to the daily chart, using a 33 and eight day moving average to determine the trend. If price is above the 33 moving average then take buy positions, if below then take sell positions. Use the eight moving average as a jumping off point, wait for price to pull back below the eight moving average to enter a sell, and above the eight moving average to enter a buy.
In time my trading improved (which did give me the opportunity to replace lost office furniture), no doubt to improved methods, but just as important, the mitigation of emotion when placing trades. This for me was the hardest obstacle to overcome and indeed, I still struggle with it, albeit not as severely as I once did. Something I found that helped was to initiate my live trades in my demo account. You can imagine how less stressful it is to watch your trade go immediately against you in your demo account rather than in your live account and how much more calm and relaxed one can remain knowing that they were successful in protecting their earnings and reducing risk. And speaking of reducing risk, one of the things I’ve discovered as time progressed and I learned to mature as a trader, is that I gleefully take smaller lot sizes than I was inclined to when I first started trading. How much less frustrating it is to risk 1% to 2% of your account than to risk 5% or even more. But then that should come as no surprise, because everyone in this business again and again emphasizes just how important it is to manage your risk. For me personally, protecting my account is paramount. Those pips were hard earned and need to be protected, not given back to the brokerage. Sounds simple, right? For me that was a lesson hard learned, and I will expand more on that in my next column.
So if you’re new to Forex trading or just interested in learning more, consider becoming a member of Slick Trade. You’ll get access to strategies, educational materials, and the helpful support of other traders just like you.
Have a good week, and thanks for reading.