The market can stay irrational longer than you can stay solvent.

John Maynard Keynes, (attributed)
English economist (1883 - 1946)

This section is a guide for the Forex trader on how to start becoming a professional Forex trader. I came out with those 5 basic steps that I believe are essential for anyone that is seriously considering getting in the business. These steps will get you ready to trade and get you ready to have the right approach towards the Forex trading business, so that you can avoid big losses, understand what does it take to profit from the markets and start making money.

1. Set Goals

Set goals four yourself, realistic ones, have a plan when you start trading. My personal goal is to make 40% of my account at the end of the month, take the profits out, donate 10% of the profits and enjoy life. That is a goal, and it is a realistic one for me. I am not suggesting you should have the same goals, but just think about it, it has to make sense. You are getting into Forex trading for a reason, whatever that reason may be. One can get into this because of the financial freedom that it offers, or the flexible trading hours offered by the markets, or simply because of greed and desire to get wealthy fast. Find out why you are here and then make a plan on how to get where you are saying you want to get. Some traders I know are very happy to net 5-10% at the end of the month and I think that should be the minimum to look for if you are dedicating your time into actively trading the markets.

2. What about Capital?

It takes money to make money! True, you need money to invest in anything, here you will have to find your comfort level, and that will change in time, along with your experience. Forex trading is trading on leverage so many brokers will let you start with as little as $25$ to play around. I think the minimum anyone will need to turn Forex trading into an income source is about 10,000 USD, simply because that will allow you to safely trade with decent risk management and safely trade with couple mini lots and become a player that can take 30,000 - 50,000 USD out of he market in a year. Again, it does not matter if you trade with 1,000 USD or 100,000 USD, the results will be the same as long as you can find your comfort level and control your emotions; I will talk about emotions during the Stop Loss section.

3. Always use a Stop Loss and use it the right way.

Stop Loss – Should we use a physical stop loss? Should we be using a mental stop loss? Where should the stop loss be placed?

What is a Stop Loss ? SL is an order that gets executed as a safety net for us and basically means that if price reaches that point, we need to immediately get out of the trade, or close the position we are in. Of course that will lead to a loss. Now this loss is a calculated number before we got in the trade and it depends on money management, strategy and of course the risk amount that we are capable to handle.
The reason a stop loss should be determined before we get in a trade and respected, is that  when we are in the trade and emotions, fear and greed kick in, it will be harder to determine and a lot of times can make us ride a loss for too long.  So, where do we place the stop loss?    

4. Don’t lose money! Get into a Trader's mentality; control yourself and your trade.

I know it sounds very simple but the first step in becoming profitable in your trading is to stop losing money! Stop taking low wining probability trades and start controlling yourself. There is no need to overtrade just to be involved in every move that happens.

This market is so liquid that if you manage the risk and don’t lose more money that you have to in a particular trade, you will profit!

Also, if you have a strategy that works for you and you are making money with that , stick with it , you don’t need to find new trades , some traders consistently make money using a strategy and give it back to the market experimenting on other strategies. That is wrong! We are fighters over there, but unlike banks and institutions, we are guerrilla fighters. We only take sides with the strong ones (bulls or bears) . If the market is undecided and there is a fight going on, we don’t have to participate. Stay on the sidelines, see who is winning (determining the trend) and then go in and take your profits.

Live to see the next fight, don’t risk more that you have to, if the market is unclear at that time, just stay out . Otherwise it becomes gambling and you may as well take some money and go to the casino. If you are serious about making a living trading, you can get to the point of working 4 hours per day, 5 days a week and make a lot of money, but you have to minimize the risk and be there to profit when the market is giving you a clear direction.

5. Risk Management and personal commitments.

To make money from Forex Trading you have to have a good money management system, there is no way around it. Forex trading depends on money management probably more than any other type of trading because of the leverage and the many factors involved in the movement if markets, that make the price action very hard to predict.  You have to remember that a price action can be justified or not and it depends on many factors. Sometimes the news and all fundamentals can be favorable for a currency and still that currency will drop like there is no tomorrow. If we are caught in one of those anomalies we can loose a lot of money. There is no need to always understand the market, or even worse, to try to fight it. Remember what Keynes was saying: "The market can stay irrational longer than you can stay solvent.”

Back to the Money Management, in my opinion you should take couple minutes and analyze a trade before you enter, decide how much you are willing to risk in that trade and here I recommend no more then 1% - 5% of your account. That means, if the market goes against you and reaches your stop loss, the most you can lose out of your money should be that amount. Also you should have your desired profit in place, see what obstacles will the price have to pass to get there and make sure that the risk/reward ratio makes sense for you to even take this trade.

Example: If you see (based on strategy xyz) that there is a short opportunity for EUR/USD at let's say 1.4060 and your stop loss should be placed at 1.4105 (see the stop loss section) to offer some protection, but 1.4000 is a major support for the pair as a round number plus whatever reason, then your risk to reward ratio is not all that great , you can lose 45 pips to win 55 .So you have to know those things before entering the trade.

Don't be greedy and remember that if you have 2% risk in place and you win let's say 70% of your trades at a 2:1 risk reward ratio, then you can take only 20 trades in a month and win 14 trades at 4% of your account, minus the 6 losses of 2% , draw the line and be up 16% of that account for that month. Repeat this every month and that is 192% of your money per year, assuming that at the end of the month you take all profits out and trade the same way next month!

 

Trading Hours and Market cycle

I personally trade about 4 hours a day, 5 days a week, and occasionally add major economic news announcements. That is about 20 hours of trading a week and should be enough for anyone to make a good living out of this including about one hour of preparation before trading the beginning of any session up until close, usually lunch time in London. You can see the market cycle below to help you decide what time you want to be trading and who is awake at that time.

Now something that very few traders know about, is that the Forex Market moves in a predictable cycle on a daily basis. If we can predict the market direction during this cycle, we will have an advantage over most traders, it will be like having the local traffic radio on while driving, letting us know where are the accidents and delays, so that we can choose the best route.

Daily Market Cycle: (Eastern Standard Time - EST)

5:00pm ~ 12:00am Ranged market.
12:00am ~ 2:00am Market prepares to breakout as we approach the London Open.
2:00am ~ 3:00am Market Reverses as traders from Asian markets take profits.
3:00am ~ 5:00am Market Trend Re-Established from the direction of the Asian Session.
5:00am ~ 7:00am Market Trend Continuation.
7:00am ~ 8:00am Market Reverses and we see some profit taken.
8:00am ~ 9:00am Market Trend Re-Established.
9:00am ~ 9:30am Market Minor Reversals.
9:30am ~ 11:00am Market Trend Re-Established and Continuation.
11:00am ~ 12:00am Market Minor Reversals and profit taken.
12:00pm ~ 5:00pm Ranged market.

Forex Trading secrets :

Now, if you are aware of this cycle that the market has on normal trading days, you can already expect those reversals and adjust our entries or positions accordingly .

One more important observation is that the US Session will trade in the opposite direction from the London Session and all 3 sessions, Asian, European and US will not go in the same direction!! For instance, if the Asian market goes in a up trend for a currency pair, reverses and then the London Session goes up as well ,then we will probably have a US Session in a downtrend. Keep in mind that this market cycle along with this observation, does not apply on big trending days when the market is moved by major fundamental changes, but it will work on about 80% of the other times. The rest of the 20% we can stay out of the market or use the fundamentals to position the trades with the major trend.

Trading can get as complicated as you want to make it for yourself. Try to keep it simple, and the easier it is the better. Technical Trading is very useful as far as understanding what happened on a chart, but that is all that it will tell you, what already happened; it is better to focus more on the market sentiment for guidance in the markets, and use the technical indicators like momentum indicators, moving averages, fibonacci etc. just to time your entry, and don't make the general mistake of building a strategy around indicators and technical elements. I know that there are plenty of books that tell you to do exactly that, watch whatever indicator all day, and I am telling you it is better to not read so many books and just use common sense! You will never make money in this market by watching moving averages cross or any other combination of indicators as your main reason to enter a trade. All that technical indicators provide is a great way to describe the past! A friend of mine was comparing the Forex markets with a big storm, a tornado coming our way, that technical traders will notice only at the time that is on top of the house.

Market Sentiment :

The market always tries to price in a major news a day or two before the actual release of that news, depending on the news of course. This price action is called Market Sentiment. For instance, if there is a overwhelming consensus that a central Bank will cut rates, then we should be looking at that currency at least a day in advance and try to follow the market sentiment, that will tend to price in this rate cut, before it actually happens. This is what the major players are doing and so this is what we should try to follow. Remember, that markets are run by fear and greed and so at the rumor that this Central bank will cut rates, most traders will overreact causing those big moves in the markets.