7 Surprising Things I Wish I Knew Before I Started Trading Forex
You’ve heard a lot of success stories over the years about traders and their ability to make money pretty much out of thin air by “only” placing the right bets on the markets. So you start looking into it — articles, blogs, forums, books, apps, gurus… — and you quickly find yourself overwhelmed by the sheer amount of — often conflicting — information you can find online!
We’ve all been there.
But you still need to do your research and spend quite a lot of time learning about Forex before you start investing, as learning through experience is a tough b*tch when it comes to Forex trading!
The objective of this article is to hopefully take some months and a few rookie mistakes off your learning curve, and to give you some pointers concerning what to research and what knowledge you will need to develop to become successful.
So without further ado, here are 7 things I wish I knew before I started trading:
- The single best time to trade forex is…a LIE.
Most resources will tell you that the best time to trade is during the London/New York overlap and other times of high market volatility.
If the answer was this simple… everyone would be doing it!
The truth is this approach is wrong for most traders. It ultimately depends on what kind of trading you are doing. Times of peak market volatility might be good for some strategies and not so good for others.
If you are a range trader, trading during lower volatility times instead of high volatility periods will increase your success rate, as range trading works best if a price is moving within relatively narrow ranges and is not breaking through the resistance or support levels. Also, you should avoid trading when economic data is coming out. The best time for range traders to trade is during the quieter Asian (Tokyo) session.
Breakout traders are the ones who can benefit from volatile markets, so the best time for breakout trading is during the famous London/New York overlap, and also during the opening hours of the London session.
News traders should obviously time their trades around news releases. The more volatile the news the better. Usually, the biggest moves are created when the US data comes out. Why? Because the US dollar plays a role in just under 90% of all forex transactions. The most volatile news report for the US is the NFP (Non-Farms Payroll). The NFP is usually released on the first Friday of every month at 8:30 AM New York time.
As you see, timing is everything in currency trading. To devise an effective and time-efficient investment strategy, it is important to understand how much liquidity there is around the clock to maximize the number of trading opportunities during a trader’s own market hours.
To track this easily, I recommend a free tool to see forex market trading hours at a glance and their respective volumes, adjusted automatically to your time zone:
This tool will also help you know when not to trade…
2. Avoid trading during the Witching Hour.
Traders always ask when is the best time for trading but often forget about the other end of the spectrum. A penny saved is a penny earned so it makes just as much sense to be curious about the best time…to refrain from trading! No?
Certain times can be especially challenging to make money in the forex market. These times include the days before, during and after a major international holiday, such as Christmas or New Year’s.
Major bank holidays in the United States, the UK or Europe can also adversely affect trading volumes, often leading to sharp moves in thin markets that can trigger Stop-Loss orders… but more about that later…
For most traders, the following are among the worst times to execute forex trades:
- The Witching Hour. The loneliest and scariest time in the forex market is when the sun is just rising in Tokyo and traders in Sydney are drinking their first cup of coffee. The time between the New York close and the start of trading in Tokyo has always been a time when investors avoid trading if possible. During these two hours, forex trading volumes can decrease to just 2% of peak turnover. Thus, liquidity is super low. Consequently, the spreads get very high and any transaction completed during that period can influence the market disproportionately. It is during this time that many stop-losses get triggered and flash crashes happen more frequently.
- Sunday Afternoon Opening. The market opening on Sunday often carries an element of surprise, especially if a major geopolitical event happened over the weekend. Forex currency pairs tend to gap up or down during the start of the Sydney session. Also, dealing spreads are typically so wide that you would usually be wise to wait at least until the Tokyo opening to get a better idea of what the market is like.
- Wednesday Rollover. In the middle of the week, there is a tricky rollover commission that surprises many novice traders. What is a rollover? If you hold a position open on a weekday night, normally your broker charges or credits interest to your account. This interest is called a “Rollover”.
But unexpected charges are not the only factor that you should watch out for. Indeed….
3. 77% of forex traders lose money.
You may have come across the popular estimate that 96% to 99% of traders lose money. While this can sound a bit extreme, this figure has been out there for many years without being substantiated by hard facts.
With the European regulations that came into effect from the 1st of August 2018, brokers are now required to communicate on their marketing messages what percentage of their clients are losing money.
This has made it easier to compile the following graph based on real figures from 31 CFD brokers.
It turns out that the losing account percentage varies from 66% to 90%. And the average percentage of losing accounts is actually 77%.
As you can see in the chart, the broker with the lowest losing accounts is eToro — only 66% losing accounts. FXTM, on the other hand, has the highest losing account percentage — 90%.
Obviously, these numbers change over time, but interestingly enough eToro has managed to stay at the top for a long time. It’s a bit surprising considering that eToro is more geared towards beginner traders than other brokers. And beginner traders should make more mistakes than experienced traders, right?
Apparently, they have some secret sauce up their sleeve.
eToro clients’ success seems to come from eToro’s Social Trading feature. They have the biggest and most motivated community of investors who share their knowledge with everyone who follows them. Beginner traders can also copy the trades of successful investors. And judging by the numbers — this system actually works!
So beware… get plenty of experience through demo accounts and then start small until you are able to secure regular profits. A few tricks to get you started…
4. If the oil prices go down, so does CAD against JPY.
Canada is a major producer of oil, so the Canadian Dollar is affected by drops in energy costs. Japan, however, imports nearly all of the oil it consumes. This means lower oil prices boost the disposable income of the average Japanese household and help businesses increase their profits. From June 2008 to Feb 2009, the price of oil dropped by 70%. The Canadian Dollar lost 30% against the Japanese Yen during this time. Oil prices tend to be the leading indicator of CAD/JPY price action with a whopping 80% positive correlation between the two factors.
Another example of a positive correlation between a currency and a commodity is gold versus AUD. This means the value of these two instruments is generally moving in the same direction. This is due to the fact Australia is the 3rd largest producer of gold.
Many other correlations exist and can give great signs for trading ideas. Knowing these correlations will take you one step ahead of the masses and will give you the confidence to jump in the trade if the trend is strong.
However, this is not the only knowledge you need to be successful…
5. You can lose your money even if you win the majority of your trades.
If you are not disciplined and are prone to panic and rash decisions, then perhaps forex trading is not for you. If you are in it to make a quick effortless buck, then forex trading is definitely not for you.
In the beginning, most traders have a hard time controlling their emotions. Every loss is a chance for them to start doubting their judgment and strategy. They end up giving up what they had planned and jumping from one tactic to the next, without giving proper time for their strategy to bear fruit.
Forex market is a marathon, not a sprint.
The ugly truth is unless you have a lot of spare cash to risk — and no, your entire life savings do not qualify — there is no way to win a lot of money on the market in a quick and safe way.
More generally, in trading, great profits don’t make a great trader. In fact, if you want to succeed in Forex trading, making a lot of money should not be your main focus!
Your (or anyone’s) percentage of winning trades (also known as win rate or win/loss ratio) is a deceptive indicator. You could be winning 5 USD on 10 trades and lose 2,000 USD on one, which would translate into a 91% win rate but a 1,950 USD overall loss! How could that be considered a positive result?
Rather, you should consider your wins against your losses, and focus on having your equity curve rise slowly but steadily over time. And yes, at first, it’s more about losing little when you’re wrong than about winning big when you’re right.
Now you ask “this all sounds logical and peachy but what does it mean in practice?”
Ever heard about Risk Management?
Risk management is the most important success factor for Forex trading… but also the least used! Many traders choose to overlook risk management because of the perception that the more risk you take, the more money you make. Well. This is a questionable consideration because it is short-sighted. The truth is, if you do not manage your risk, you will end up losing your money at some point.
The smart way to make money on any market is to accumulate rewards over time while controlling your risk.
How do you do this? Glad you asked.
Limit your exposure by trading small lots.
Don’t open a real account with a trusted broker and start trading big. Make a small deposit instead and start from there. To build it up, invest in knowledge. Develop chart analysis skills and learn how to trade based on your forex trading plan. If you managed to grow your account from 300$ to 500$ over 6 months, then you can start investing more.
Limit your exposure by diversifying your portfolio.
If you sell CAD/USD and then buy USD/EUR, you have technically bought USD twice, which means you are more exposed in case the USD plunges. Remember to diversify by buying and selling different pairs… whose movements are not correlated!
Limit the number of trades you place.
One or two trades a day is enough when you’re starting. Spend more time analyzing at the beginning and never enter trades you’re not sure about as it will be harder not to become emotional if they don’t turn out as you expected.
Limit the use of leverage.
Through the use of leverage, traders are able to invest a small amount of money and trade much larger deal sizes. While this is a wonderful tool to boost profits, if the trend moves against the investor, leverage magnifies losses the same way it would magnify returns. Indeed, using a 1:50 leverage means that a 2% adverse move could wipe out all your equity or margin. Any trader should be aware of this risk whenever thinking about using leverage.
Limit your losses by using stop-loss orders.
Do it every time you open a position. The last resistance line is a good stop level when you’re selling, or the last support line when you’re buying. But it doesn’t end there. Stops can be used not just to ensure that losses are capped, but also to protect profits. To benefit from this double-protection, you will need to adjust/tighten the level of your stop-loss using trailing stops whenever the price moves in your favor.
Beware though…
6. Big news events will get you…And wipe out your trade!
Volatility jumps before important announcements and the drastic movements can hit the
stop-losses, resulting in lost trade and investment.
When you use stops for exits, keep your levels in mind as you will have to widen them just before news announcements. In cases where you cannot manage your stops tightly around news announcements, the best bet is to leave your stops wider over those periods.
If you are trading on lower timeframes, widening your stops could substantially increase your risk. In such cases, you may decide to close the position before the announcement as even if the announcement is in your favor, the price generally whips up and down at least a few pips before taking direction.
If your stop is anywhere near the price just before the news, chances are you will be taken out no matter what the result. Just be aware of relevant announcement schedules and factor these in when deciding whether or not to take a trade.
In order to avoid panicking when some losses occur you need to realize that…
7. Quitting your job for forex trading might not be the best idea.
Ever heard the saying “Don’t put all of your eggs in one basket”? I’m sure you get the drift… but keep reading anyway :)
Ever dreamt of working from a hammock under a coconut tree while sipping margaritas, whiskey sours or whatever your favorite poison is? We all have.
I’m not saying it’s impossible.
I’m just saying this reality will not be picture-perfect (at least for long) if trading is your only source of income.
I met a trader in French Polynesia back in 2017 whose income stemmed from his trading activities. Granted he was working from paradise, but his daily stress was palpable. Why? Because he NEEDED it to work out. When trading is no longer an optional source of revenue, it becomes a lot harder to keep emotions at bay and reach the calm mindset needed to win on markets over the long-run.
So don’t go and quit your day job just yet — as it ensures your bills are paid at the end of the month — until you’ve managed to find or develop an alternative regular source of income, other than Forex trading of course.
These were the 7 things I wish I knew before I started trading forex. They could potentially save you thousands of dollars and countless hours of precious time! So, if you’re new to forex trading or know someone who is, don’t hesitate to share these tips with them!
