Sunday, September 25, 2016

12 Things I Learned By Being A Forex Trader

For the last 6 months, I've been a forex trader. I started this experience by curiosity, pretty hastily, to be honest, and ended it up abruptly (hopefully, you'll realize why by reading this article). It was by far one of the most exhilarating, exciting, emotionally consuming and useful (in terms of lessons learned) episodes of my life. It was also one of the most difficult endeavors I ever started, in terms of energy and effort.
What follows is a little list of all the things I learned during these 6 months. But before diving into it, a few introductory words, for those who have no idea what forex trading is in the first place. If you do have an idea about forex trading, you can safely skip the next two paragraphs.

Forex Trading – A Primer

Forex means foreign exchange rates, and forex trading means buying or selling foreign currencies in pairs. If public companies have shares that you can freely buy and sell on the market, then countries have currencies. That's the easiest way to understand a currency: it's the value of that country in pretty much the same way a share represents the value of a company.
Now, a company share value is an expression of what people agree to pay for it, based on a number of criteria: company performance, brand power, rumors and so on.
Consequently, a country currency is evaluated against another country currency, based upon a set of criteria too: the economical situation of both countries, political news, media manipulation and so on.
In forex, you trade pairs, like selling EUR and getting USD, for instance. There are a few major pairs, EURUSD being one of them, then there are what they usually call "crosses", or secondary pairs. In the majors, you find all the "big" players: GBP (british pound, also known as cable), JPY (the Yen), CHF (the Swiss franc) and so on. I only traded majors, crosses have usually a lower liquidity.
Very simply put, forex trading means you can do only 2 things with these pairs: you can either buy some, or sell some. Using whatever capital you want to invest, that is. If you buy, then you expect the price of your pair to be bigger in a certain amount of time. You call that: "appreciation". In other words, you expect to get a profit because you "predict" the price of your currency will be higher. If you sell, then you expect the price of your currency to drop. You call this: "depreciation". So basically, you will make a profit by "buying back" your pair when it will be cheaper then it was when you sold it.
Each trade is usually called "position". You open a position at a certain price, and set your attitude: if you buy, the jargon says you go "long", if you sell, the jargon says you go "short" (hence the expression of "heavily shorting" a currency, meaning selling it because of its imminent depreciation).
Once opened, each position will generate a profit or a loss, depending on your choice (long or short) and on how the market moves. Let's say you opened a long position on EURUSD for 100$, which gave you 80 EUR. The market goes up, so now for your initial investment, you can get back 90 EUR. If you close your position (also known as "take profit"), you are 10 EUR richer. Suppose the market goes down and your position is now worth 70 EUR. If you close your position (also known as "stop loss" in this case) you're 10 EUR shorter. You just lost 10 EUR.
In a nutshell, that's pretty much all there is to be known about forex trading, at least in order to understand the rest of the article,. Of course, these paragraphs are only scratching the surface (literally, the amount of information about forex is ginormous). There are a lot of other things to be known or learned, from technical analysis, (like candlestick charting, price actions, and so on), up to the trading mindset, (like avoiding revenge trades, sticking to a trading plan and so on). This post is not intended as resource for those who want to embrace forex trading (I'm not sure I want to write such a post now) but merely as a way to integrate this specific experience in my lifestyle.

Forex Trading – The Activity

The first thing you need to know about actually trading forex is that this is a 5-days-in-a-row type of activity. It starts Monday at 0:00 and ends Friday at 23:59. During this time, you are almost 100% connected to the market. There are few financial hubs involved in the process, and the most important are (for those trading the majors, that is): London Stock Exchange, New York Exchange and Tokyo Exchange. Forex trading never really stops, so as the world goes round, the price will also be influenced by the specifics of the prevailing financial hubs. The most important part of the day (traditionally) is the overlapping time between London and New York, because you can allegedly get the highest liquidity, hence the most predictable models.
There are 3 types of information which are influencing this market: technical analysis, fundamental analysis and news. Technical analysis tries to isolate recurrent or predictable patterns based on past behavior. Fundamental analysis tries to connect the major economical indicators to the value of the currency (from GDP variations, up to more obscure economical data). News are pretty much created by media and politics and these are the most "spiky" ones, meaning they are creating abrupt variations, making it easy to be caught with your pants off, so to speak.
I traded mainly on technical analysis. Meaning I tried to understand chart variations, different price actions and other representation models. Seemed the safest one for me. There are heavy advocates of the fundamental trading, as well as the news trading. In the end, it's just a choice.
Trading by technical analysis means also that I had to spend a lot of time studying charts and trying to create reliable predictions. In itself, this activity was very rewarding. I learned tremendously and many things I discovered during this process would have never entered my universe, without the risk taken to just dive in. For instance, I learned a lot about "harmonic patterns", which are a way to graphically isolate (in various patterns, like "the butterfly pattern", for instance) the behavior of the market. This stuff only can be applied in many areas of my life.
Now, you have a bit of an understanding of what forex trading means. It's time to move on to the actual lessons learned by being a forex trader.

1. You Can't Control Your Life, But You Still Can Take Some Profit From It

Nobody can control the markets. But there are a few who are taking a profit from them. That's one of the first "a-ha" moments any trader stumble upon. It's also one of the hardest to grasp.
In terms of personal development, that's another way to say that life is not fair. It never was, of course. But, in itself, that's not even remotely a reason to stop taking profit from it.
The illusion of control is one of the biggest lies our ego tells us. Just because we have a basic understanding of our universe, all of a sudden, we start pretending that we can control it. We start to believe that we can control everything in our lives. To some extent, we can. But the more we pretend we can control everything, the more the Universe is kicking our butts with unexpected events (in the form of what we usually call "crises").
The lesson: it's not about controlling the wave, it's about riding it.

2. Make And Use A "Stop Loss"

In technical terms, that means you have to create a specific point at which your losses will be stopped, even if you are around. It's the amount you're committed to lose in that trade. Many beginners don't use stops, and they usually burn their account within a few days (read: go broken).
In terms of life that means: nothing is worth everything. If you commit to a certain situation, to a certain project, or career, that doesn't mean you have to stay there forever. Make a short projection of what is the worst that may happen, in the worse scenario, and stick with your plan. If the shit really hits the fan, just leave. Don't wait until you're completely drained out. Or covered in shit (as I've been before, and not only once, because of my overcommitting approach).
There's another day tomorrow, you know that?

3. Pick And Stick With A "Take Profit" Point

In technical terms, it means you have to create a point in your position, where the potential profit will be automatically cashed in. If everything goes according to the plan, that is. Many beginners don't use "take profit" points too, and that also results in an accelerated depletion of their accounts. They think the market will move in "their" direction for ever. Of course it doesn't.
What does this mean in real life? It means you have to curb down your expectations. On anything. It's good to have some expectations, just to be able to measure your efforts, but don't hold your breath. Keep everything in perspective. And keep it transparent too. Don't let other people believe you're gonna be there forever (unless, of course, you do want to be there forever). Set a certain point in the future when you'll be able to say: that's all that I wanted to do with this job/relationship/experiment. Once you reached that point, cash in and move on.
In terms of personal development, having "take profit" points it's like saying: ok, I got my paycheck from this experience, now time to move on to the next one.

4. Control Your Emotions

Forex trading should be a very detached and cold activity. Alas, it isn't. We're human beings. Apart from the enormous amount of information that he has to process, a trader must also process and control his emotions: frustration, fear, greed, exhilaration. Those who can master this skill are usually the winners in this field.
What does it means in real life? It means that emotions, as useful as they are as a feedback mechanism, shouldn't be used as the sole foundation for your actions. A little bit of control must be exerted continuously on emotions. Not on how they are formed, but on how they are shaping your real life actions. Imagine someone acting exclusively on emotions. If he's frustrated, he yells, if he's happy, he jumps around. No concern whatsoever for his environment, or for the consequences of these actions.
Emotions are fundamental for our own psychological balance and a healthy expression of them is desired. But a life lived on emotions only, without any interest whatsoever for the consequences of our actions, that will be a very sad one.

5. Greed Is Bad

Closely related to the "take profit" lesson, but in a different way. Greed manifests in a trade when the trade is moving in the right direction, but the trader won't cash in, waiting for a bigger profit. Hoping the market will continue to move in his direction enough to generate a profit so big from this unique trade, that his entire life will be set (I'm exaggerating, of course).
Greed is when we never say "thank you" for what we have, taking it for granted. Greed is when we do nothing, but we expect everything. Greed is when we think we don't have enough. Greed is when we just won't stop unless we have more and more and more and more.
In the forex world, greed is one of the two reasons people are losing money (the other one being fear, see below). In real world, greed is one of the two reasons people are losing life. Livable, balanced life.

6. Fear Is Bad

In terms of forex trading, fear manifests the moment you close a transaction too soon, hence not getting enough profit from your trades. Fear makes you lose money by not letting yourself cash enough of what you deserve. I remember that many times I cashed in way before the trade has to reach my "take profit" point, just to be sure "I get something".
In real life, this translates into trust. Trust that you judged a set of circumstances well. Trust that you will be rewarded for what you are, not for your momentarily perception. Trust that things will eventually go as you stated.
As you may see, it takes a lot of work to balance greed and fear. Both are the engines of the forex trading world, and both are shaping our lives at a very deep, sometimes unconscious level, each and every day.
I'm not saying it's easy to strike a balance. But this experience made it so obvious to me that now I simply can't stop identifying greed and fear in almost any context of my life. Of course, some days are better than others.

7. Everything Takes Time

During a trade you may see a lot of swings back and forth. Stay with it. Before stabilizing on a trend, the market moves many times. As long as you calculated your risks right, and the swings are between your "take profit" and "stop loss" points, you really have nothing to worry about.
In life there are many ups and downs, but as long as you're in the right direction (and you trust yourself totally about that) you'll get there. You may have a lot of detours, a lot of stalled moments and sometimes, it may seem that the road is not leading you anywhere.
But, as long as you calculated your risks right, and the life swings are between what you can take for a loss and what you can swallow as a victory, eventually, you'll get there.

8. Take Risks

You can't play safe. There's no such thing as playing safe in the forex trading business. You should always cover your ass as much as you can, but avoiding risk all together will never work. The only moment when you don't risk in forex is when you don't have any opened position. Which, in other terms, means you're not playing at all.
It's the same thing in life. No risk equals no reward. But, as many of you are guessing, I didn't have to get into forex trading to learn that. What I really learned was something more subtle: the risk can be managed. Every risk you take can be calculated and can generate a certain set of results.
Another way to put this is: "learn to think in scenarios". If I risk that amount, this thing will happen. If I risk the other amount, another set of things will happen. The result will be mind-blowing: instead of feeling like an endless struggle, the life will start to feel like an off-road circuit. Very, very difficult, but manageable, if you pay enough attention to all the bumps and to all the possible routes.

9. Switch Focus

Don't get trapped in a single pattern or trade for the entire day. Every trade should have a lifetime. The longer you stay with a trade, or with a single way of trading (a.k.a. system), the deeper you'll sink a swamp of indecision, lack of orientation and, eventually, despair.
When you get too trapped into something, being it a relationship, a business, a forex trade, you lose balance. It's one of the most difficult things I had to reinforce through forex trading but it still pays off big time for me.
As of today, I get to work on 3 big areas: writing (on this very blog, or just books), coding (for WPSumo and iAdd, at the time of writing this article) and consulting (in areas defined on the Work With Me page). Whenever I feel trapped into one area, I switch. At times, I can almost feel my brains oxygenating 🙂 Note: right now the third area is managing another business, called Connect Hub, a coworking space and event venue, and my coding activities are limited to what it takes to keep the blog afloat.

10. Get Out Of Shit. Fast

Staying in a losing trade and hoping for the market to "recover" is the worst thing you can do. It's like staying in a relationship that proved to be wrong, and wait for the other person to change. It will never happen. Get out. Of course, there will be losses. But the sooner you get out of that losing trade, the smaller the losses will be.
For me, that was the first big moment when I realized forex trading is a very, very difficult business, and you have to embrace it with a very clear mind and attitude. I was guilty of clinging to the past. Like the past was holding everything that my present needed. Of course it wasn't true. The past is dead.
The only thing alive is now. If a thing is going downhill in your life, and you feel you are "just a victim of the circumstances", take a deep breath, cut the rope, let the rock fall and move again. Believe me, the loss you're gonna get, in financial (or emotional) terms, is peanuts compared to the slavery you would inflict upon yourself by staying in that stupid relationship, or job, or situation.

11. You Don't Have To Be Right In Order To Win

This a very difficult lesson. I'd say that this may be the most difficult of all. Because it challenges one of your deepest convictions, which is: you have to be right in order for things to move the way you want. But guess what, you don't need to be right. Because life in itself isn't.
How you really need to be is in "sync". Go with the flow. In forex trading terms, this is usually said as "the market is always right". For instance, you may have all the reasons to predict that the market will go up, and yet, the market goes down. You opened a bunch of long positions, based on the assumption that you're gonna be right. Of course, you're not. And you lose.
All you had to do in order to win was to go with the market. Or, if we're gonna use real life vocabulary, go with the flow.

12. Things Are Not Always What They Seem To Be

I traded divergences heavily. In technical terms, a divergence is an indicator of something "going wrong" with a trend. A divergence is formed when the price seems to go up, but the indicator tells you that this is not exactly right. I won't go into details about why this is happening, enough to let you know that, sometimes, things are not what they seem to be.
In real life, for instance, a business may show signs of going strong, with a lot of sales and good karma. But behind the curtain things are not so good: employees are ready to leave the board, or the intellectual property is much thinner than you thought, or, and that's the most common case, the product is already at the end of its life cycle.
The fundamental lesson is to always look twice at a process (being it a business, or a psychological process) before deciding you're gonna embark on it, one way or another. There might always be a divergence hidden way below the surface, waiting to hit you the moment you expect this the least.
So, if forex trading is so interesting, why did I give up? The short answer: because I wasn't prepared. The long answer: because I wasn't prepared, and my emotional control was way below the required standards, and because I couldn't stick with a trading plan long enough to make it count, because I got too entrapped and unglued myself from the normal life (yes, those guys with eyes almost closed, walking like zombies, I was one of them). And because I decided it was enough of a lesson for the time being.
Am I going to trade again? The long answer: provided that I have the right context, the right skills and the right attitude, I will certainly give it a try in the near future.
The short answer: yes. It's way too much fun. 🙂
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