December 11, 2012

The Real Secret to Trading Forex Successfully

I'm not going to sugar coat the reality for you because neither will the forex market: trading isn't easy... but it can be an extremely rewarding and profitable profession -- if you're willing to put in the effort. A lot of beginners have been, and will be, told this by other experienced traders. Unfortunately, few have any idea exactly what kind of effort needs to be put in.

Beginner currency traders are bombarded with information on trading and it's not easy to filter the good from the bad.

Everyone throws around the old figure, "95% of all traders fail." Well, the real reason so many beginner traders fail in the Forex market isn't because they can't find that one, super secret, key to success. It's because they're putting all their effort into working toward the wrong goal in the first place: finding that one, super secret, key to success.

It doesn't exist because that's not how markets work.

Yet every day, a new thread always pops up on the forums with advice from someone who's convinced they've found the solution - that one combination that seems to "work."

A lot of people will tell you that you can find everything you need to trade for free on the internet. Just read the forums. To an extent, yes... but be careful.

After all, much of the knowledge that a doctor needs about the human anatomy is also available for free somewhere on the internet, in one way or another. The real problem with Forex forums is the lack of direction and consistency amidst all of the garbage being passed around on the internet forums and marketing pages.

It's like trying to learn how to perform surgery on a forum where about 10% of the members have actually done it before and the other 90% are experimenting with 500 ways to use kitchen knives accurately enough to cut a patient open without killing them.

Most of the people who come up with the latest FX trading "systems" are just trying to find a way to make consistently winning trades -- it's even more laughable when it's accompanied by a poll that asks, "Is this system profitable?" and you get a few hundred answering yes and a few hundred answering no. Do these people answering the poll even have any idea what makes a profitable trading "system" or method past the first ten days?

Normally, there'd be nothing wrong with a little free speech but this sort of viral ignorance is dangerous to your savings.

Worse, some of these people are trying to sell these same "systems" to unsuspecting newbies.

Right. The fool-proof formula to consistent trading profits consists of settings on a technical indicator. That's why every bank and hedge fund employs quantitative traders - to randomly change those settings until they can find the same thing a beginner on a forum stumbled onto at night.

How do markets work in a real world?

Humans. Humans who trade with intentions behind every move. Humans who program computers to do that. Humans who run governments and corporations needing to load up or dump a currency. In any case: humans.

Imagine that the price action on the forex pair you're trading is a member of the opposite sex. Your goal is to find a mate (a trade that trends in your favor) - making all of your recent losing efforts worthwhile. For the purposes of this metaphor, let's say your next attempt (next trade) could be one of three things:

1. A multi-year relationship -- maybe even a marriage -- that (in all statistical probability) will eventually end, but you'd still get years of worthwhile memories out of it (let's consider this a rare but big, profitable trade that caught a major trending move.)

2. A typical Friday night -- it doesn't turn out too bad, you enjoy yourself, but it won't make a big difference in the grand scheme of your life (these would be a typical winning day trade -- it won't last long, and won't make a big difference to your account balance... but you both get a little out of it.)

3. A rejection. These, unfortunately, happen very often. (Inevitable, but preferably small, losing trades.) They might happen more often to some people than others -- depending on natural ability, experience, and techniques used on the approach -- but it inevitably happens either way.

Unfortunately, just like marriage in recent generations, you'll probably even have to find the biggest of winning trades more than once in your lifetime. (A lucky few might catch the bottom of a flash crash but even those profits probably won't pay the bills through the kind of inflation headed our way.)

The problem with the "effort" that beginners put into learning to trade forex is that they expect to avoid #3 altogether by finding some sort of secret formula. Guess what, there isn't one. No one on Wall Street, in London, or in Hollywood for that matter, has that formula either. Not even someone on the top of a "World's Sexiest" list found that.

Anyone who tries to convince you that it exists is either lying or has a really poor grasp of reality. There's also a good chance they'll be single for a while.

It's not about finding a secret code, it's about dealing with humans.

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