05 Apr 2017
How to Trade Forex & CFDs for a Living Successfully
Whilst we can't recommend that you become a full time trader because everyone's circumstances are different, the idea may have crossed your mind and if that's what you want to know more about how that might be achieved then read on. How do I achieve this? Is a question that most “wannabe” or part time traders will ask themselves at one time or another. After all it’s many people's dream to be their own boss and to spend their time doing something that they enjoy and can make money at. There is a simple straightforward answer to this question which is:
“ Make more money than you lose and make enough money to cover your out goings and overheads, whilst increasing your capital at the same time .”Now of course it's much easier to say those words, than to achieve the result they describe. But that description is the reality of what you will need to achieve consistently to successfully trade Forex & CFDs for a living. By now you will have had a chance to reflect on that statement. But don't stop here ! Please Do read on. Because whilst becoming a full time trader won't be easy and will require effort, application and aptitude on your part. It’s not an impossible dream. The good news is that help is at hand. Moreover there are steps you can take to help you achieve your goal.
Understand the MarketsYou could quite easily spend your whole life trying to understand the intimate workings of and drivers for the financial markets. And at the end of that process you might still not have reached your goal. Simply because every day can be and is a learning curve in the markets. However you don't need to know the minute details of each instrument, market,the participants and their intimate histories. Rather you need to know and recognise what's important in a given market and how that information affects price. To put that another way imagine you are waiting for a decision on interest rates and monetary policy from the Bank of Japan. You hope to trade Dollar Yen when the news is out. You might like to do hours of background reading about monetary policy and its relationship to the Japanese economy and don't let me stop if you do. However whilst that will be useful background information it may have little or no bearing on what happens to the price of Dollar Yen, when the BOJ news breaks. The things that will have an affect are likely to be factors such as how closely that news matches traders expectations, for the event and how those traders are positioned approaching that event. So if the market is mostly long Dollar Yen (that it is it expects the Dollar to strengthen and Yen to weaken) and it anticipates news, from the BOJ, that should weaken the Yen. For example a cut in interest rates or an expansion of QE. But it doesn't get that news. Then in these circumstances there is every reason to think that the Dollar Yen rate should fall rather than rise. As traders on the long side look to cut or reduce their positions. Whilst those that were short Dollar Yen and expected the Yen to rally, add to their positions and try to cause the longs the maximum amount of discomfort in doing so.
Power struggleAnimal spirits drive the markets by quite simply combining supply and demand, together with human emotion and sentiment. When supply is abundant prices can fall. Whilst when demand is in the driving seat, then prices will likely rise. Of course we can substitute the word buyer for demand and seller for supply. Or if you prefer go one stage further and use the term fear as a substitute for supply / sellers and greed as an alternate for demand / buyers. The ratio of Supply to Demand, of Buyers to Sellers, of Fear to Greed is what ultimately drives prices. Think about all the pulling and struggle for supremacy that takes place within a tug of war. Or all the pushing and shoving and battle for dominance that you see in a rugby union scrummage. These are both perfect metaphors for the constant push and pull of the marketplace. In both cases if one team is much bigger than the other, then that team will exert their influence much more easily. But if the teams are more evenly matched, then the team with the better technique will probably carry the day. As as a successful Forex and CFD trader you will need to use your judgement (technique) to decide which team you want to be on, at which point to join that team, and for how long.
The Trend is your friendOne way to do this is to spot a price trend, join it and stay with it until ends or changes. The header of this paragraph is a popular saying amongst Technical Analysts, who use charts of price and volume to predict future price direction. The phrase implies that joining a trend is a sensible thing to do. For many participants in the Forex and CFD markets trend following is a cornerstone of their trading strategy. Of course to join a trend you need to be able to identify one. But that need not be as complicated as it sounds. An uptrend can be defined as a series or progression of higher highs and higher lows in the price of an instrument. Whilst a downtrend is quite literally a progression of lower highs and lower lows in that same price. So for example if we are watching a particular instrument,over a series of 5 minute periods. And for each 5 minute period we note the opening price, the high price, the low price and the closing price. We are creating a record of the price action for that instrument. If our record shows that for 5 of the 6 periods we monitored the instrument over, we saw a new or higher high, accompanied by a series of higher low prices. Then we would have identified an uptrend in the price of that instrument. If we saw the opposite behaviour, that is lower highs and lower lows in the majority of the 5 minute periods in our study, then we have identified the existence of a downtrend. Of course what we need to determine is whether these trends will continue and if so for how long. This is exactly the reason that traders create and use charts and add indicators to them
Ten thousand hours ?Of course there is much more to Successfully Trading Forex and CFDs for a living. But the text above will hopefully serve to get you thinking about what's important to that endeavour and what isn't. Most important of all is the process of becoming an expert. Because that is how a successful (profitable) full time trader should be described. Experience is important and the old saying that it takes 10,000 hours of work to achieve this has some truth in it. However we shouldn’t automatically confuse experience for aptitude or ability. The influential Farnam Street blog makes this point on this very subject.
“Put another way, someone with 20 years of experience, might be repeating one year of experience 20 times.”Modern thinking is that we gain can expertise or deep knowledge of a subject or an ability, when we practice and concentrate really hard. Such that the practice pushes us to edge of our competence. It's at this point, that learning takes place, as we master, or gain an understanding of new skills and abilities. Furthermore that it is the setting goals, that are fractionally ahead of our current ability, working towards those goals, through practise, attaining them and then repeating the process with fresh goals that drives this deep learning. By focusing on the important and the essential and ignoring the peripheral, you can, in theory, greatly reduce that 10,000 hour figure. You will need dedication, of course and the time and resources for practise (more on that in a moment) To quote Farnam Street again
If you want to make it there (to expertise) the road is bumpy. It has to be. Only a difficult road will cause you to grow and learn. And you have to personally want to travel this road, because it will be long and if you can’t motivate yourself you’ll never get where you need to be.