Less risk is better when it comes to investing.

Forex Trading Basics

“The meaning of life is to find your gift. The purpose of life is to give it away.” – Pablo Picasso

Forex market is the largest and most liquid market in the world. Often it is this size and liquidity which draw investors and traders into it. However, it is also the most efficient market. This makes it the most difficult market to consistently outperform the peers. Having said that, it doesn’t mean it is impossible to make money from it.

It was by coincidence that I started trading forex a couple of years ago. However, I have been investing in stocks and exchange traded funds (ETFs) since the dot com days back in 2000. There was an old saying that forex is a zero sum game and trading is the most difficult part of investing. It is a zero sum game because whenever there is a winner there would be a loser at the other end of the trade. For example with AUDUSD, the party who is long in AUD makes money when the other party who is short in AUD (long in USD) loses. The net economic gain is zero between the two parties.

I started trading forex with the intention to test out the option strategies I read from research reports and what I have learned during my academic studies. Strategies such as butterfly, straddle, and strangle etc. Names would appear to be confusing and meaningless to most of us. The results were mixed on per trade basis with a small overall positive returns. I thought to myself maybe it’s time to develop my own strategies. In 2015, I simplified my trading strategies, improving and adapting them along the way. The performance has also improved and the portfolio returned +187.9% in 2015 (almost tripled in value) with a win percentage above 80% for all the trades done. All these were achieved by focusing on only one currency pair. For the same period, S&P 500 only returned +1.38%. The enclosed below is a return graph calculated by the broker on a time weighted basis for 2015.

FX returns 2015

Performance was automatically calculated by Saxotrader (the broker) on their web portal. Past performance may not be repeated and is no guide for future performance. Past performance does not guarantee future results.  As Saxotrader has not consented to the inclusion of the above graph for the general public, it is not liable for these statements under any applicable laws.

Then I decided to write a book on forex trading and share my experiences with people who are interested in learning forex trading.

In this book, I have covered topics such as broker selection, risk budgeting, trading strategies, risk management, trading psychology and time management etc.

My trading strategies may have evolved over time. However, there are still some basic rules I follow up until this day and these are my guiding principles.

The Ten Commandments of Trading
1. Risk Only What You Can Afford To Lose
Trading is a risky and it usually involves leverage. Only risk what you can afford to lose. Never put your lifestyle on the line.

2. Trade What You Understand
Both markets and financial instruments are complex in nature. Trading is very competitive. It is better to be a specialist and trade selectively than to follow the crowd and trade everything under the sun.

3. Liquidity And Transparency Are Important
Choose a currency pair which is liquid and transparent. Never trade a currency pair which is artificially controlled by the government or central banks.

4. It Is Only A Profit When You Close The Position
Unrealised profit is not real and unfortunately unrealised losses are. It is always a good idea to take a small profit, raise cash and live to trade another day.

5. No One Has 100% Win Percentage
No one is right all the time. Period. Deal with your losses and don’t let them balloon out. You have to learn to take losses to survive in this game. Sometimes it is a good idea to take small losses in order to avoid even bigger ones.

6. Taking No Position Is Also A Position
It is ok to sitting on cash and do nothing. Cash is the king. You have to be patient to make money. That includes waiting for the right trading opportunity.

7. Margin Of Safety And Dollar Cost Average Are Your Friends
Margin of Safety would help you to improve your win percentage and dollar cost average can save you from a losing position.

8. Leverage Is Like Water Use Wisely
Leverage is like water, it can float the ship and also sink the ship. When you are on the right side of the trade it magnifies the profit, and unfortunately if you are on the wrong side it can really hurt you with big losses. When greed speaks to you, be content. When caution speaks to you, listen and deleverage.

9. Nothing Beats A Good Night Sleep
Both market and trading are uncertain and anything can happen. If you are losing sleep about a position, close it. Listen to your gut feelings.

10. Trading Is A Marathon Not A Sprint
Trading is about taking small profits consistently and avoiding big losses. Do not be greedy and hope to hit it big overnight. Enjoy the journey and learn along the way. You will be rewarded as time goes on.

Trading is different from investing. Trading focuses on small price movements resulting from the imbalances in the liquidity in the market whilst investing is about discovering undervalued assets and holding them for long term. Trading is about taking small profits frequently and at the same time managing losses. It is important to improve the win ratio in order to be profitable in the long term. Margin of safety and dollar cost average are great ways to improve the win percentage.

It pays to be a specialist in one or two currency pairs rather than a generalist and trading everything. It is important to select the right broker and keep the trading costs low.

Trading can be both physically and mentally demanding, therefore it is important to live a balanced lifestyle. You need to look after your body and spending time doing the things you enjoy. Do not burn yourself out from trading. It is a marathon rather than a sprint. Take your time and enjoy the journey.