Trading the Forex and CFD markets is not an easy job as there is no direct path to success. Success might come with years of preparation, and a great deal of tolerance for risk.
Initially, you need to decide whether you want to be a fundamental trader, a technical trader, or a combination of both. By being a fundamental trader, you must pay close attention to the markets by doing research and having some working knowledge of the fundamentals of major countries. This includes knowing GDP, interest rate curve, growth potential, inflation, and employment data.
If you prefer to analyse charts and become a technical analysis trader, you should take a course and familiarise yourself with technical analysis. This will help you determine which type of technical trading suits you best – breakout trading, pivot points, Fibonacci analysis, RSIs, etc.
Once you determine your trading style, you must examine your financials, including how much of your net worth you are willing to risk. This includes the maximum amount of money you are willing to lose and not impair your lifestyle. Opening a demo account with an online broker is recommended, so that you can practise trade entries and exits, which will help you become proficient with stop, limit, and market orders.
Stage 1: Beginner Trader
- Very optimistic;
- Full of excitement and overconfident;
- After a few initial successes, looking to make money daily;
- Revenge trading;
- Searching for books and signals from other traders;
- Searching for a Holy Grail, and indicators;
- No idea of stop-losses, confused with price whipsaws;
- Capital risk at its peak;
- Ignoring or trading the news blindly;
- Losing money every day, burning initial deposit;
- Sweating every time a trade is taken;
- A lot of screening time.
The beginner trader usually has little to no understanding of the market structure. This includes the concept of the interrelationship between markets within an economy. Price charts can be seen as nothing more than some coloured lines and squiggles that look more like abstract art rather than meaningful information.
Once the trader starts to observe, read, and study price charts, the mess will begin to resolve itself into something more meaningful. On a positive note, novice traders use a lot of screening time which helps them transcend to stage 2.
Stage 2: Developing Trader
- Reading books, visiting trading webinars, being careful about trades;
- Still losing money, but losses are getting "smarter";
- Using stop-losses, but still over-trading;
- Realising that demo trading is a necessity;
- Screening time still high-constant;
- Starting to visualise every trade before it's taken;
- Hunting for self-understanding;
- After many burnt accounts, trading on live accounts again;
- Realising the Holy Grail lies within;
- Going through a tough learning phase, every mistake is costly;
- Not quitting means continuing to the next stage;
- Still affected by psychology.
Reviewing the markets on a regular basis, soon enough, you'll notice a particular market behaviour that appears regularly. As you focus on this pattern by backtesting, you'll spot more and more instances of it. Your confidence in the pattern grows, and you decide to take a trade the very next time it appears. As you enter the trade, your stop-loss is hit almost immediately, and you have taken a loss capped to your stop level.
As you study this pattern further, it appears several times again, and it works. So you decide to trade the pattern again, and you once more take a full hit on your stop-loss.
Most traders go through this problem, and few understand that this is all part of the win-loss ratio. Most don't understand that a loss is an inevitable part of any trading strategy, and there is no such thing as a 100% win rate. Many fail to understand the "loss" cycle, how long it normally lasts, and how to identify it. Instead, they keep entering trades and getting burned.
Stage 3: Part Time Trader/Consistent Trader
- Learning to specialise in one or few particular pairs;
- Losses cut short;
- Scaling the in/out technique is also used in trading;
- Trading mostly on higher time frames;
- Starting to accept losses as a logical part of the job, but still disappointed with losses;
- Starting to gain money more consistently;
- Risk calculated before profits;
- Correct lot size used;
- Revenge trades possible, but not exaggerated;
- Trying to use proper risk management;
- Profitable more often than not;
- Using a proven strategy, stopped searching for the Holy Grail;
- Not afraid to lose even if during losing months;
- Sometimes feeling pain, sometimes, euphoria;
- Patience becoming a virtue.
The trader uses experience to improve the outcome of Stage 3. They determine what styles, techniques, and tactics are effective. In doing so, they begin to ask themselves: What do I want to achieve?
This kind of trader needs a "scientific method" to develop a trading plan that incorporates risk and trade management. With a unique trading plan and strategy, they develop confidence because of prior testing and experience that it is consistently profitable.
As they accept full responsibility for their trades, including losses, they ultimately learn that losses are inevitable and unavoidable. They examine losses to determine whether they were made by mistake. If not, they simply shrug the loss off and go about their business confirming the overall win rate, as per strategy.
Stage 4: Professional Trader
- Mostly profitable;
- Realising that proper money management is the key;
- Religiously following the risk plan;
- Able to handle institutional accounts;
- Mastery over emotions;
- No euphoria over profits;
- Never thinking a trade will be 100% profitable;
- Always accepting losses;
- Not trying to play smart on the market;
- Calmness and coolness when trading;
- Accurate price analysis;
- Trusting own guns.
At this stage, the trader knows exactly what to look for, patiently waiting for the right opportunity. If the opportunity presents itself, they will act decisively without hesitation. The professional trader also knows they are not always right. As they analyse price movements and firm their conclusions, when market behaviour changes, so does their tactics. They are aware that market movement is the ultimate truth and do not try to outsmart it.
Cheers and safe trading,