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Over the past 12 months, more people have been drawn towards trading, possibly spurred on by the promise of quick profits with a low starting capital. There are many financial instruments that we trade in such as equities, bonds, indices, forex and commodities. Unlike long-term investing, if we are intending to trade these instruments over the short-term, we don’t need to buy and hold these assets. Rather, through the use of Contract for Differences (CFD), we can get exposure to all of these different asset classes.
Amongst which, the largest and most traded financial markets globally is foreign exchange, also known as forex. Similar to investing in other asset classes, we make money when the price of a currency moves in our favour. However, when it comes to forex, the price of one currency is always quoted in another currency. For example, if you are buying the EUR/USD, you are buying Euro using US Dollar (USD). You make money if the EURO increases in value relative to the USD.
Forex trading is sometimes seen to be riskier because of two main reasons. Firstly, forex trading is a zero-sum game. For one party to profit in their trade, another party has to make a corresponding loss. Secondly, most forex traders also utilise leverage to increase the size of their positions. This would mean that sudden market movements can cause your profit or losses to be magnified.
To better understand what traders can expect in forex trading, we spoke to a couple of long-time forex traders in Singapore.
One of them is Desmond Leong, the founder of The Forex Army, a trading community that provides free tools and guides for traders. Desmond is also the founder of Everest Fortune Group, a research firm that produces research and analysis to institutional investors and traders. We also talked to Jason Lee, a trader who is well-versed in using a macroeconomics approach to trade into commodities, currencies, equities & options. Jason is also the Chief Investment Officer at Quantum Edge Consultancy, where he helps companies with fundraising, investments and M&A opportunities.
Timothy Ho (Timothy): When did you start forex trading?
Desmond Leong (Desmond): I started in my first year of university. The general idea is that if I could master trading, I wouldn’t need to go through all those lectures and seminars anymore J
Jason Lee (Jason): I started investing when I was 19 years old, after getting inspired by reading a book. Unfortunately, I got burnt when I went into the stock market and placed my first trade during the financial crisis in 2007/8. I lost all my savings at that time as I used margin trading in my mum’s trading account.
After getting burnt badly, I was searching for answers and started to read many books to improve my knowledge. However, it was not enough, I realised there’s a lot more than I don’t know about the market, things like sector rotation, economic cycle, relationship between FX, equities, fixed income and commodities. Soon after I started to join courses to upgrade myself further to equip myself with more knowledge and strategies.
After 4-6 years of constant trading and a lot of mistakes, I was able to develop my own set of strategies. Not all strategies work on the same asset class, every forex pair or every stock. Each stock ticker has its own behaviour as the traders trading it is different and you will need time to understand it.
Forex was the last instrument that I went into and drawn me to it was the liquidity, low spreads, much lesser market manipulation, and much higher volatility. Those were factors that suited my trading strategy, allowing me to trade in multiple timeframes from positional trades to day trading. Each strategy requires a different set of analysis and, thankfully, I was able to adapt all these styles quickly and develop strategies.
Presently, I manage approx. about S$1.5mil in investments and hitting an average of 30% a year for my investors.
Timothy: Did you start with a demo account or a live account?
Desmond: I tested some strategies on a demo account for a short while before transitioning to a live account. I feel that the amount of experience you get trading a $1,000 live account is 100 times more than a $100,000 demo account — because you feel the psychological warfare of wanting to hold on to your losses, revenge trade and closing off profitable trades early, even if it’s just a small amount that you are trading. With a demo account, there isn’t any skin in the game.
Jason: I was a little gung ho and started with a live account. Demo accounts work for some people, but I am the kind that needs to have money on the line so that I can learn quickly. For me, having real (but little) money on the line, allows me to focus better, and would take the trades I make more seriously. After all, the feelings and the emotions are different when you are trading real money instead of virtual funds on a demo account.
A better way to start trading will be starting with a demo account, to familiarise yourself with the platform, try out some test strategies, then once you are more ready to focus further, put some disposable cash into the account and trade seriously. At the early stage of trading, you will always face losses, but always keep your losses small, so that when you found a winning strategy, you can scale up and cover your losses quickly.
However, while scaling up your trading account, you might face some winning streaks that make you complacent and started to scale up your account. It happened to me and caused me to lose quite a lot of my capital then.
Timothy: At the start, how difficult was it to consistently make profits from forex?
Desmond: It was difficult because I didn’t know where to start and whether a win I got was out of sheer luck or because I “cracked the code”. I didn’t keep a journal nor take a statistical mindset to trading and hence I couldn’t really tell whether I was making any progress.
I ended up going for all those lectures and completing my degree. I blew up about 7 accounts. I think I swore off trading at least 5 times during that time too.
I learnt 3 major lessons. Firstly, if you can do it with $1,000, you can do it with $10,000. This means, don’t jump in with a super large account if you haven’t built up the confidence to trade with a smaller account. It’s the same as how we teach our kids not to run until they have learnt how to walk.
Secondly, more indicators do not mean you have a better chance of being correct. I used to load my chart with indicators that were showing me the same results through a different interpretation (e.g. overbought on stochastic, RSI, MACD) — which led to a false high sense of confidence. This is usually the most dangerous, as it means you are starting to sprint full speed in the wrong direction!
Finally, don’t look for shortcuts. Always seek to understand what it is that you’re doing. I once bought a gold trading robot that touted its profitability and how it was essentially the magic bullet. The strategy was a black box — meaning I couldn’t see how it decided to take trades. The problem was it made good money for about three months and that led me to pump in even more money. When gold started to turn in September 2011, it continued buying all the way down (turns out it was profitable simply because of the bullish gold trend those past few months) and my account went up in smokes (along with my dreams of skipping lectures).
Jason: It depends on your strategy and your setup. Initially, it’s hard, but once you find the right set up, you will be able to repeat the trade strategy again and again. Many new traders usually make a trade based on feel, also known as their ‘gut feeling’, which is why they can’t repeat the same winning trade again. This basically means they don’t have a strategy or plan for their trades.
One important lesson I learnt was never to overtrade. Overtrading is not trading too much, but rather, trading over your mental limits. Some people may think that losing $100 is a lot, some people may not. But when you are trading and provisioning a loss that your mental capacity is unable to cope with, you are very likely to make emotional trade decisions.
Many people took trading as a form of gambling. It’s purely because they do not have a consistent set of strategies that are profitable. Their entries are always not consistent, depending on hearsay or rush into positions without doing their research or monitoring accordingly.
Timothy: Advice you have for anyone who is looking to improve on their forex trading skills?
Desmond: Hone your skills every day, and be humble and open to new methods. What I started with and what I have now are light years apart — many improvements come when my team members would tell me something like “Hey, this 78.6% extension seems to work eerily well. Think we can test it out?”
On top of running in the right direction, what would be equally important is to run like crazy from the wrong direction — they sound the same, but they are actually different. When you see an Instagram trader who posts snapshots of his profits (without ever showing the true P/L or whether it was even a live or demo account), always having a picture with his Audemar Piguet with a backdrop of his rented BMW — your alarm bells should be ringing. Is his offer to teach me how to achieve financial freedom for a cheap price of $3,888 too good to be true? It probably is. So run.
Also, don’t focus on the number of “pips” you make for your strategy. A trade with 100 pips of profit but risks 200 pips to get it, is not as good (in fact, statistically 4x worse) compared to a trade with 10 pips of profit but only risks 5 pips to get it.
Jason: It’s about learning from your lessons and usually, this may mean losing money first before making money. But like many failures that we experience in our lives, learning from our mistakes can also put us in a stronger position to succeed in the future. Do not afraid of losing money as a beginner, instead, you should be wary when you win. This is because markets always have a way to lure you into a bigger trap.
In trading, I utilise a trading style called Macrotrading, which means I will look at different markets, different asset classes such as FX, commodities, equities, futures, economics indicators to form a macro picture to provide a basis for the trades. Hence I would highly recommend young traders not just look at one single risk assessment factor to reduce risks.
Picking Up Forex Trading Require Time, Discipline And Commitment
While it’s a lot easier to be attracted to forex trading with the aim of quitting our full-time jobs so that we can trade full-time, the reality is that this is far from easy. As shared by both Desmond and Jason, it takes time to build up the knowledge required to be a proficient trader and the journey towards being profitable may also entail a very steep learning curve.
Aspiring forex traders must be mentally prepared that learning trading is no different from learning how to play a musical instrument or picking up a new language. It will require time, discipline and commitment to become proficient. Even then, there is no guarantee that you will succeed.
If you are new to trading, you can open a CFD account to start trading forex via CFD. In fact, it might make sense to open a demo account first so that you can be familiar with the various types of instruments that you can trade with, be it forex or any other asset classes. With IG, you can open a demo trading account and practise trading with $200,000 of virtual funds. The IG Academy, which you can access for free once you have a demo account, also provides a variety of content such as trading webinars and online trading courses that you can join to improve your knowledge in forex trading. There is also an IG Community that you can be part of to share and discuss trading ideas with other like-minded traders using the IG platform.
Once you feel a little more confident, you can proceed to open a live trading account with IG, though it’s also advisable that you start off with a small starting capital so that you don’t risk losing more than you can bear. By focusing on trading well and utilising risk management to ensure that losses incurred are within a comfortable limit, we can slowly become more educated when it comes to trading, thus giving us a better chance as we work towards becoming profitable.
We should also understand and be prepared for black swan events in the financial markets that cause the currency pairs that we are trading with to experience wild price swings. To better understand how volatility can affect your trades, you can download this free eBook written in partnership between IG and Bloomberg.