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In a previous article, we wrote about some important things traders need to know before they start forex trading. Unlike investing in stocks, bonds or ETFs, forex trading is a zero-sum game. This means that for one party in a trade to make money, there is someone on the opposite side of the trade that makes a corresponding loss.
This is why some of us may feel that forex is a dangerous asset class to trade. To some extent, this is true since forex traders often also deploy leverage to increase their returns. As with all trades, the use of leverage amplifies both our potential gains and losses, depending on whether price moves in our favour or against us.
Read Also: 4 Things Investors Can Do When Stock Markets Are Declining
Just like picking up new skills or sports, we are bound to face some setbacks when we start forex trading.
In this article, we speak to Rayner Teo, an independent trader and the founder of TradingwithRayner. With more than 1 million subscribers on his YouTube channel, Rayner is not only Singapore’s most followed trader, but possibly, one of the most followed forex traders on YouTube in the world. You can read up more about how Rayner started in a previous interview we did with him.
Timothy Ho (Timothy): Thanks for chatting with us today. Let’s start from the beginning. How did you get started in forex trading?
Rayner Teo (Rayner): My first interaction with forex trading was in university. There was a trading competition organised by a broker in school and I decided to take part, thinking how difficult could it be? Within a couple of days of the competition, I blew up my trading account (it was a demo account), and this was how my forex trading journey started.
Timothy: How hard was it at the start? I am assuming you didn’t consistently make profits at the beginning?
Rayner: It’s really difficult to trade and the learning curve at the start was steep. At times, I wasn’t even sure what I was doing! I could stare at the screens blankly and I didn’t even know what buying or shorting a currency pair means. If I make profits from a trade, I wasn’t sure what it was that I did that went right. If I make losses from a trade, I didn’t know what I did wrong. My results were pretty much random and it didn’t make any sense to me at the start.
Timothy: If you don’t mind sharing, how much did you lose before you became profitable?
Rayner: I started young and had less money at that time, which worked in my favour. In nominal value, I would say I lost, at most about $10,000. But in terms of percentage, the maximum loss I suffered at one point in time was about 50% on my trading account. The main reason why I didn’t blow up my live trading account was that I understood and embraced the concept of risk management quite early on in my trading journey and that helped me a lot.
Timothy: What were some of the main trading principles that you adopted that helped make you profitable?
Rayner: There were a few key principles that helped me in my trading journey.
The first is that I understood what it means to have an edge in the market. What does having an edge mean? Simple. It means enjoying a statistical edge in the market. For example, if we go to a casino, we know that in the long run, the casino wins because the games and the maths is skewed in favour of the casino. When it comes to trading, we likewise want that same (winning) edge. If we play a game where each time we toss a coin and it comes up head, we win a $1, and if it comes up tail, we lose $0.50, then we have an edge in the market because the maths is in our favour. To be a successful trader, you need to have an edge in the market.
Secondly, if you want to make money from trading, you will need a decent capital size. You can’t expect to trade full-time with $1,000 in your trading account, nor can you expect to quit your day job and make $2,000 every month if you only have $500 in your trading account. If you want to make money in trading, you also need to have money to start with. So don’t quit your day job yet.
Finally, avoid being reliant on your trading profits for day-to-day expenses. If you are reliant on your trading profits to meet your living needs, you may make trading decisions that are sub-optimal. You don’t want to be in a situation where you are trying to force the market to pay you because you need the money to put food on the table and to pay the bills for the family. Otherwise, there could be an inclination to make less ideal trading decisions such as trading more than you should, revenge trading, widening your stop loss – and all these tend to lead to more losses rather than positive outcomes in the long run.
Timothy: What did you do to ensure you could maintain your edge in the market?
Rayner: I tend to favour robust trading strategies. This could be a strategy that seeks to exploit certain behaviour biases in other people’s behaviour. Trend trading is one example. Trends exist in the market because of greed and fear, and you can capitalise on it. For instance, if there is a recession, the equity market tends to decline because of fear while the bond market or other asset classes like gold may rise as people search for safe-haven assets to put their money in. This causes a trend and that’s the kind of robust strategy that I tend to favour.
The second thing I did was to trade multiple asset classes. I started with forex trading, but I also trade the US stock markets and ETFs. By branching out to multiple asset classes, I exposed myself to more trading opportunities.
Timothy: Any advice that you will give aspiring forex traders today?
Rayner: Start small. The learning curve for forex trading is pretty steep, and you will make a lot of mistakes and errors at the start. At times, you may have no idea what you are even doing. This is more common than many of us would choose to admit. By starting small – say $500, then the most you will lose is $500, assuming you don’t top up more funds. You can even see it as a relatively cheap tuition fee.
The second suggestion is to master risk management as early as possible. Risk management is something that would be relevant for the rest of your trading career, whether it’s a $500 account at the start, or a $500,000 or even $5 million account in the future. So master it as quickly as possible. It’s not that difficult and it’s one of the low-hanging fruit that you want to reach for at the start of your career.
Your Trading Journey Is A Marathon, Not A Sprint
Similar to the experience that Rayner has shared with us, when we start forex trading, we should expect to face a steep learning curve that may entail making losses, silly mistakes, and at times, poor trading decisions made based on instincts rather than proper analysis. This is common. It’s also why at DollarsAndSense, we think it makes sense to open a demo trading account first. Ideally, you should choose a forex broker that is licensed by the Monetary Authority of Singapore (MAS) such as IG to ensure that your broker is regulated in line with the legal requirement.
IG allows you to practise trading with $200,000 of virtual funds so that you can have a feel of trading and to try out the various trading strategies before you commit actual money to your trades. Like Rayner, even after you are confident enough to open and trade with a live account, it’s advisable to start with a small amount first.
Once you have a robust trading strategy in place, trading multiple asset classes is also another way to give yourself more trading opportunities. Like Rayner, we may start off with forex trading first but could expand into other asset classes such as equities and indices.
We can never know for sure if a trade will move in our favour or against us. This is why it’s essential for traders to adopt good risk management habits, such as having a stop loss in place on every trade and never risking more than a small percentage of our capital on each trade. This is unlike long-term investing where many of us may not have a stop loss in place, and may even invest more when prices dipped.
We should also understand and be prepared for how black swan events in the financial markets can cause currency pairs that we are trading 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.
Read Also: Rayner Teo Made His First Trade Without A Plan, Lost 8% And Quickly Bailed Out. These Are His Biggest Lessons. #MyFirstLoss
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