Forex Education | Acknowledge the Risks
Take a moment to reflect on your daily activities. Supposing you set out to buy a car, pay for a service, a vacation or something important that requires a larger amount of money. You will always actively search for the best offer. Usually, you would devote some time to learn more about the object of your investment.
I will elaborate further with the example of the car. Firstly, you read about the car, and research more about the features the car possess. Secondly, you will read more about consumption and maintenance costs. All of this research will be in aid of assisting you in the price comparison process. You then proceed to locate a good dealer, where you go to test drive the car. Afterwards you are better informed in your decision making as to whether it is feasible to purchase the car.
As I mentioned earlier, there are risks associated with forex trading. Therefore, it is imperative that you understand and assume the risk from the beginning. In consequence, if you choose to not empower yourself with the knowledge you need, you may find yourself blaming others for your loss.
The risk does not apply to traders only, but also to money managers and investors whose funds are managed on their behalf. As long as you are somewhat directly or indirectly involved in this industry you will be susceptible to making a loss.
Some consider this to be the biggest risk associated with this industry. I will elaborate further in a later chapter a little more about the kind of risk traders take. You need to understand and accept that you can potentially lose money while trading Forex. It is not something specific to Forex Market, but to trading in general.
Once you enter this industry, similar to any other business, you must take into consideration that you may lose sometimes; money. This is not necessarily negative. Losing all your investment is potentially possible. Even professional traders lose money, however, they are adequately prepared for this loss. They use high probability strategies which give signals when to enter a trade or stay out of the market. Combining them with money management strategies is the key for obtaining the best results out of a series of trades. Moreover, a professional trader uses advanced analysis of price projections and fundamental overviews that aids an understanding of the evolution of the price. They also utilize tools such as stop loss, trailing stop and take profit to help them exit the market at specific prices and levels. I will provide more clarity in the following chapters.
Nevertheless, this should not worry you or stop you from trading. It is a fact, yet as long as you acknowledge it, you will also learn that there are methods you can employ that will help diminish your losses. Reading this book and especially this chapter, you already work at diminishing your chances by more than 30% of losing your entire capital.
By the end of this book you will lower your chances to lose your investment by 90%, as a beginner. Statistics show that 45% of beginners tend to lose their investment in their first month, another 20% in the first three months and 15% lose their money in their first 6 months. Therefore, there is 90% of a chance you can become a trader that earns money trading Forex.
In my opinion, there are three big reasons that cause traders lose money. One of them is the market moving in the opposite direction after taking a trading decision. In this scenario, there are moments when the market is unpredictable despite your effort to use knowledge from prior experience and analysis.
When a trader loses money, this doesn't have any impact on the balance and the strategy of the trader. It is a loss expected to occur and included in the strategy. As you will see, each trading strategy has a probability of success between 0 and 99%. There is no strategy that will give 100% probability of success. The remaining is negative probability that informs a trader as to how often he should expect to lose.
Let us take a closer examination at the following example: A trader uses a Fibonacci combined with an oscillator in his strategy. Before they begin trading real money, they will want to calculate the probability of success for this strategy. After a period of time, that trader realizes that out of 100 trades, the strategy gives 65 profitable trades and 35 losing trades. In this case that trader learns that out of 100 trades he will get 65 on profit.
This is a very good scenario. Even if this trader uses a 1:1 money management, he will still end up in profit at the end of the 100 trades. The only thing the trader will be unable to ascertain is which trades will win or lose. An extreme example is to lose the first 35 trades and thereafter make 65 profitable trades. There is little consequence to the order of the trades. A trader may expect to lose 35 out of the next 100 trades.
The next reason is actually the worst out of the two. New traders, entering the forex industry are usually unprepared for what happens next and subsequently miss out on two important things. They lack the knowledge and trading experience to be able to adapt and expect the unexpected. These two are connected and we will tackle them separately to shed more clarity.
Lack of knowledge
A lack of understanding and knowledge about trading in general and the Forex market specifically is one of the biggest challenges a trader has to overcome. I can compare a lack of trading knowledge to the experience of throwing yourself into a very deep pool without any swimming skills. Or yet better throwing yourself wounded in an aquarium full of piranhas.
Trading on the Forex Market and especially leveraged financial instruments, such as CFDs, became risky as a result of marketing emphasis carried out by many scam brokers. I will expound on this issue in the final chapter of the book. They continue to promote this industry as being extremely accessible and profitable to anyone without applying any effort to gain more knowledge.
This is extremely sensitive. Everyone has the potential to make money, however, they first need to acknowledge the risks and learn the basics to make better informed trading decisions. This will help a new trader increase their probability to close a trade on profit and not with a loss.
A trader is as good as the strength of their understanding of the industry. From my experience and that of professional traders that their results or performance correlates to the time and money they invest in themselves. It matters very little whether you decide to become a part-time or a full-time trader.
Every trader needs to understand that the amount of money they gain from the market will be in proportional to the patience required to learn as much as possible about the market. Averting major risks that would result in a loss of investment should become one of your goals. It doesn't matter what you want to achieve by trading Forex, it doesn't matter if you want to trade for yourself or give your money to a money manager. It is mandatory to learn the basic skills, especially understanding how the industry functions as well as assuming the risks.
I have observed that the most successful traders also worked on their personal development. They paid for seminars, workshops, subscriptions to forex news providers and books along with other resources. This enabled them to remain updated on new strategies and global market news. As a result, they were constantly learning and the capacity to adapt to market changes faster than many others who did not invest in their learning and updating their knowledge.
First time traders refer to the internet or books for Technical Analysis, Fundamental Analysis, and Money Management as their primary resources. In addition, they become attached to the notion of discipline and psychology as key factors in their day to day trading. Therefore, as a result, they believe these elements are enough to qualify them as good traders. Moreover, traders should factor into their training is their ability to expect the unexpected or what others term; Acts of God.
Some of them are not related to nature, but their effect is as unpredictable as those ones. I can give you a recent example. Approximately three years ago SNB (Swiss National Bank) decided they would do whatever it took to increase the EURCHF currency pair above 1.2000 and from that point defend this level by all means. And this is what they did up until 2015.
This decision was taken because the Swiss Franc was gaining a great deal against the Euro and other currencies. The Swiss Franc was considered, and it still is, a safe haven. In the same category are found also the US Dollar and the Japanese Yen. When the global economy is not thriving, investors and big players in the forex Market, tend to buy safe havens.
Taking into consideration the fact that the economy was not yet recovered from the crisis started in 2008, other bad news was piling up. Countries close to defaults, bank crisis, low interest rates and still the economy were not recovered, safe heavens were gaining. US Dollar, Swiss Franc, Japanese Yen, Gold and Silver along with US and German Bonds were gaining fast. In this situation SNB took measures. Everything worked as planned. For more than two years the 1.2000 price level of EUR/CHF was unbroken and SNB undefeated by speculators.
583. At the beginning of 2015, the economy worsened for the European Union. The Euro began to drop rapidly against all other majors and the pressure increased exponentially. For several months the SNB maintained its position in defending the level. However, there were other factors they could not defend for that duration.
The Central Bank's balance sheet showed an outstanding increase of foreign currency. This meant that it has bought euros each time the price was getting closer to that level. So in January they announced that it became too expensive for them to maintain that level and they will pull out of the market.
As I told you, there were factors, but few traders were smart enough to stay out or buy the Swiss Franc in the situation given. Most traders bought the Euro and sold the Franc. When the announcement was made, the market gapped down more than 2000 pips and dropped more than 3500 pips, reaching 0.8300. A sizable number of investors not only lost their money, but they were also in debt to their brokerage house.
As you are aware, there is only one way a trader will lose more than they have in their trading account. When the market opens with a big gap, over the Stop Loss or Stop Out levels the balance will be negative. Depending on the type of contract, the trader will be required to pay the brokerage house. This is also what occurred in this situation.
It was severe that some brokerage houses became bankrupt because they had to take money from their clients to pay their liquidity providers. Money they did not manage to make at the end. The best example is Alpari UK, a brokerage house that recently closed its operations. This is one of the most recent examples that had a potent impact on the market sending shock waves throughout different countries and alerting investors regarding counterpart risks.
Consider what would happen if you entered a trade and the electricity suddenly cut off for several hours, leaving you unable to modify or view your transaction. This would be catastrophic if in that duration of time the market unexpectedly went the wrong way than you initially predicted. Or the same scenario occurred with your internet connection.
Joe Ross, a well-known trader shed some insight on these unforeseen events using an example of a situation that happened to him. He opened a position on Corn (he also traded commodities among other types of financial instruments), he stood up from his computer to use the bathroom. But he wound up in hospital where he lay unconscious for weeks because of a disease he was unaware he had.
A trader, I coached to become overconfident after several good entries that were profitable and decided to open another position, but this time without taking any risks. He too left his computer for a few hours. When he returned home in the afternoon he made a loss twice larger than what he gained up until that last transaction.
Any dangerous Act of God like floods, tsunamis, tornados, earthquakes or any other of this sort can have great impact on the evolution of one currency. No one can forecast such events, therefore they are to be considered extremely risky for a trader. To add to that, hack attacks or technical problems with trading charts or a brokerage house system.
These are examples of the risks a trader may encounter. However, the possible losses do not depend on the trader, but on the circumstances. An experienced and skilled trader is aware of these challenges and takes them into consideration when entering each trade. An experienced trader is prepared and will always have a backup solution.
Recently written trading books have featured trading psychology and emotional management. I admit, these two elements are very important and they are key factors that could curtail a trader resulting in a loss of investment.
On the other hand, emotional and psychological discipline has been exaggerated, making trading seem far more complex than originally intended. I would agree that the trading experience can yield many unexpected factors. A trader can become anxious, angry, happy, annoyed, hopeful or full of regret during one single trade.
Many have tried to find answers for these splurges of emotional imbalances. Moreover, they have attempted different methods to control these bursts of emotions with the motive of becoming better traders.
I have done the same. I am unaware of any traders experienced or professional who has not experienced all of the listed emotions. Every trader has made a mistake at one point or another even when their initial state of objectiveness was altered by the emotions which piled up with each tick of the market.
When I began trading I lost my investment because I lack the ability to cut my losses earlier, moreover, I began to cut my profits too early. From the start I was a skilled Analyst. I possessed good accuracy on price forecasts, but I lacked confidence in my analysis to allow the price to reach the take profit level. 630. Although I had more experience as an analyst, I did not have enough experience as a trader.
I lacked self-control, in consequence I was weighed down by negative feelings. After months of losing or remaining on break even, I decided to take a break. I continued conducting analysis, committed to learning as much was possible about the forex industry. I also became more interested in my personal development. For a few months this became my main focus.
Two months later, I began to trade. I felt as if I had developed into a different person. I began to trust my analysis and became less emotionally involved in the trades I placed. I could not comprehend what had changed. I questioned why my trades had drastically improved since the break.
Asking the question “Why’ before I endeavor to accomplish any goal has not only brought clarity but given me direction. I benefited from the process of writing a short list to define what I wanted to achieve. I became less emotionally involved with the money I had in my trading account.
From this point I came to the conclusion that there was one single obstacle I needed to overcome to become a better trader and that was my emotional connection to my money. An individual’s relationship to money can be a huge hindrance to their success.
The behavior of friends, relatives or even the loved ones come into question when money is introduced into the equation. Our decisions are strangely impacted by our financial situation at the moment of trading. When in dire financial position traders tend to be overly risk averse and focus predominantly on mitigation of potential losses. But our insatiable desire to make more money increases the moment we begin to make big profits even when we surpass the need to make extra income.
As long as we remain emotionally invested in our money it will be challenging to progress into becoming a more professional trader. Many personal development books and studies also touch upon the subject of money. Although, there exists numerous strategies for enhancing one’s wealth. However, I encountered a strategy that stood out the most.
By paying close attention to wealthier people we can gain interesting perspective into their habits. Not only can we benefit from learning from their habits, but we can also emulate them especially their emotions towards money.
Bill Gates, Warren Buffet, George Soros, Steve Jobs, Donald Trump and many others created opportunities to ensure they worked at their passion without paying too much attention to how much money they could earn. The money they made was a result of their ability to fuse work and passion. Unlike most individuals, they did not crave to make more money nor allow greed to consume them. The better results and good feedback they achieved, the more value they wanted to bring to their organizations. Money has been just a bonus.
Applying the same strategy to trading will help to curtail negative emotions such as fear, greed and anxiety. All of these factors are also strongly correlated to your goal. What do you hope to gain from Forex Trading? This is a subject we will discuss in the following chapter.
In an effort to explain how the brain works when these emotions are triggered, or what physical exercises you have to do when you feel them is a waste of time. Controlling these emotions may help on for a short time, but for a longer stretch of time they may return and impact your trading strategy.
I will describe in more detail how to set realistic goals and the best way to detach yourself emotionally from your trades and your money. In consequence will then understand how simple it is to trade like a professional and disciplined trader, without gaining a degree in psychology, medicine or yoga instruction.
I may have incited fear into you in the previous and I am glad if I have succeeded at it. This is maybe the only book you will find that is written openly and straightforward about the risks trader has encountered in their daily trading experience. Risk is something that each and every one of us is familiar with. We all take risks daily in some shape or form.
There is a risk associated with crossing the street, driving, eating, flying and even with sleeping. As children our parents may have warned us of certain risks, but as we grow over the years we become desensitized to these fears or risks. The same mentality occurs with risks taking in trading.
Once you fully understand the risks involved, it becomes easier to model different scenarios and create a corrective action plan thus avoiding unnecessary losses. My aim is to not only show the positive side of Forex Trading but give you more insight into the dark side of the business. By so doing I hope to help you find answers to the question - Why Forex?