The idiots guide to online trading.

Don't do it if you have no money to risk, simple.

Sorry, You're no idiot, of course, but if your reading this, perhaps you are curious about trading.

To begin, this blog is in the context of Forex/CFD retail trading.

Most traders will lose money. The statistics are out there.

The stark fact that about 80 percent of new traders fail to make money when trading the stock market is true. Therefore, over time 80 percent lose, 10 percent break even and 10 percent make money consistently.

So, as my friends keep asking, why do I still write about it and more importantly promote trading.

The simple reason is that it is here to stay and more will try it. Therefore, why not try to speak frankly about the risks and how to potentially navigate the pitfalls.

Before I waffle on, note that retail forex traders are a very small part of the $trillion a day industry.

So, when brokers and others try to promote it as:

The Forex market is the biggest financial market in the world, bigger than the stock, bond, and commodity markets. Forex market daily activity has seen an increase from US$ 1.2 trillion in 2001 to US$ 6.6 trillion in 2019. The global Forex trading market is worth $2,409,000,000,000 (that is $2.4 quadrillion). Blah blah,

They are talking about the banks and institutions that trade, not the individual, known as a retail trader.

The truth,

In 2016, it was reported that retail foreign exchange trading represented 5.5% of the whole foreign exchange market ($282 billion in daily trading turnover).

Joe Mecane, the head of execution services at Citadel Securities, said in an interview on Bloomberg TV in 2019. Individual investors made up just 10% of the market's trades in 2019.

So, its easy to be influenced by data and we need to be precise. Retail trading is a totally different animal than institutional trading. Institutional traders buy and sell securities for accounts they manage for a group or institution. Pension funds, mutual fund families, insurance companies, and exchange traded funds (ETFs) as an example. They deal with big money and have their fingers in many pies, not just forex.

The reason I am highlighting this point is that if you want to start to trade you’ve got to realise, it’s a punt or gamble in the short term. It’s not an investment, it’s speculating price movements in a given period of time.

Once a new trader starts to digest this, it becomes easier to identify what they must do to succeed.

One of the reasons I left the industry recently was because I was increasingly disturbed by some of the marketing practices of certain brokers trying to bring in new money. Don’t get me wrong, all businesses need new clients but its how they attract them that is important.

Get rich quick rhetoric or stating its simple to enter the markets, is one reason most regulators clamped down on the retail brokers, making them display the average losses of their traders and reducing the amount of leverage they can offer, in recent years.

If a new trader, realises that trading is somewhat complex at the beginning, but if prepared to put in the work, they will begin to move in the right direction.

There is a common belief by trusted commentators that there are three basic principles to successfully trading.

Knowledge + Experience + Effort = Success

Everyone wants to succeed when trading the market, but few are willing to put in the time and effort to achieve this. I’m not saying you need to be a Harvard economist; I’m saying basic skills are required.

The big issue with the industry, not all brokerages, is they want your business now and their marketing is aimed that way.

This is earnings season, where top companies announce their recent data. Headlines read like this.

Which direction will Amazon go?

Big company, attracts interest, right? If, you have no idea how to trade, how are you going to even open a position? When are you going to open it, how long are you going to trade it??? You get my point; basic skills are required.

To be successful in trading the market, you need to do what most new traders don't do. This may seem like a simple-minded view, but I will explain. How does an inexperienced newcomer work out from the overwhelming load of information out there what they should be doing?

From my first-hand experience most consistently, successful traders follow simple steps:

Step 1: They acquired knowledge. The basics of executing trades, closing them, stop-loss, reading a chart with basic indicators etc.

Step 2: Once they had acquired that knowledge, they develop it by practicing.

Step 3: They begin slowly and adapt their strategies dependant on what they are looking to achieve. They have a plan.

If you’ve read any of my blogs, I usually highlight a demo account to register at the end. I know that new traders need to follow the basic steps highlighted above but also, the psychology of the beginner is one of eagerness. Obviously, a demo account will not make you money, so eventually a mixture of practice and small risk in real time trading is the fastest learning curve.

Another interesting statistic is 80% of all new retail traders quit within the first two years. Why? Losses, lack of funds or developing of gambling habits. I’ve been doing this for decades and still learning new things every day. So back to my point, if a newcomer is enticed by the marketing of get rich quick, its easy etc. they have come to this for the wrong reasons.

If they were told from the start, the risk is big but there are ways of mitigating risk and a successful trader is more than happy with a 1% return per day, would they have started in the first place?

If the adverts, by the marketing departments highlighted risk to reward and stated that with knowledge you have a better chance of gaining, using informed decisions, wouldn’t that be better?

lack of knowledge is the biggest reason to fail. Not about the future fiscal policy of a Government or projected sales of the new Apple phone, lack of knowledge as to what this all about. Short price movements, open, close, exit.

Many people refer to themselves as traders simply because they buy and sell online. When questioned about how they analysed the stocks they were buying or selling, many claim they read reports on websites, and occasionally looked at online charts. Great.

When questioned further, they reveal that while they had a rough idea of the fundamental information, they needed to assess a stock, they had little or no idea what they were looking at when it came to understanding how to interpret a chart. And none had a plan or understood anything about money management. How much to risk on a trade, how to hedge etc.

A good trader understands the importance of developing a trading strategy, how to analyse an opportunity, why they are buying and selling or leaving it alone, and how they will enter and exit the trade. Just as importantly, they also implement strong money management rules, such as a stop-loss and the size of their position to ensure they minimize their investment risk and maximize profits.

Unrealistic expectations about trading the market. Biggest killer!

In a bull market many are profitable mainly through luck rather than good knowledge. Sheep often get eaten by the wolf, so having a strategy and exit plan is paramount.

Trading the markets involves different levels of risk. Yet most people attracted to the market are willing to take higher risks, believing they are equipped to trade after watching a few YouTube strategies, hosted by some kid that never walked the trading floor. Many new traders seek out instant gratification, diving head-first into the market using complex strategies they don’t understand in the hope of profiting fast and big. Sadly, most lose on trying to fulfil their unrealistic expectations.

This quote really hits the nail on the head for me about trading retail forex.

"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." — George Soros

The psychology factors affecting the trader.

No matter why you trade, learning the mechanics of the trade is the easy part, the hard part is understanding the psychology -

Firstly, if you are in it to make quick money, it won’t happen, if you have little money to speculate, you should not do it at all.

To trade Contracts for Difference (CFDs) or Forex offers risk, big risk, you are using leverage with no experience. However, on the upside, successful traders who have a plan and commit to learning, practice, and realistic expectations, make good money.

I repeat again, try it with a demo, its free and only commit when you have a bit of extra cash you can afford to lose to speculate.

Interesting fact.

Traders with a higher-IQ tend to hold more mutual funds and larger number of stocks. Therefore, benefit more from diversification effects.

It’s very obvious to tell why traders fail. Often trading decisions are not based on sound research or tested trading methods, but on emotions, the need for entertainment and the hope to make a million dollars with little effort and little capital.

That’s why we always offer choices of either investing or trading or both on this blog!