Summary of “Forex for ambitious beginners”: Learn to invest and trade in forex i.e. currency market with a solid base to avoid mistakes made by beginners; this is what you will learn when you read Forex for ambitious beginners.
By Jelle Peters, 2015, 228 pages.
Note: This guest column is written by Sébastien, author of the blog Investisseur en Herbe
Chronicle and summary of “Forex for ambitious beginners”
The foreign exchange market (hence the name “FOREX”) is the market that has grown the fastest over the past 20 years. There are nearly 4000 billion transactions every day!
This is because the trade in currencies has become increasingly popular thanks to several factors:
- The development of the Internet allows people to trade from home.
- More desire to take risks. The “new” traders are ready to take more risks. The aim is to obtain a return on investment as soon as possible.
- The start-up costs are very low. Forex is available to everyone, even those with little initial capital.
- Low costs. It is cheaper to trade forex than equities because brokers do not take any commissions other than the “spread”.
- Business hours. Unlike other markets, which are only open a few hours a day, Forex is open 24 hours a day, 5 days a week, so you can trade at any time except on weekends.
You have probably heard stories of young traders who, though they only started with small amounts, became millionaires, fairly quickly. That’s not what you will learn from Forex for ambitious beginners Even though some have been successful in this way, we have to stay level-headed.
Forex for ambitious beginners aims to teach you a reliable system to earn money on the forex market. This system won’t make you rich quickly. Even as a decent beginner, you will make mistakes that will cost you money. It will be up to you to learn from it.
Forex for ambitious beginners is not intended to make you rich but rather teach you how Forex works. It will teach you key strategies and how to manage your capital. The objective of Forex for ambitious beginners is to give you a clear introduction to the Forex market.
Part 1: How Forex works
Forex, as it exists today, has been around since the 1970s. In the past, the gold standard was used to determine the value of a currency. We set a weight of gold that corresponded to the value. The exchange of coins and banknotes for gold was certified by the State.
With this system in place, the value of a currency was very stable. There was no fear that it would lose value since it was directly related to the value of gold. In turn, currency exchange was also easy since the value of the currencies was always the same.
In the past, the price of gold was far less volatile than it is today. It was whilst the First World War was fought that Western countries abandoned the gold standard. The United States followed suit afterwards due to the Great Depression of 1933.
In 1944, after the Normandy landings, the Allies met at Bretton Woods to address how the world economy would be restructured after the war. This was when the IMF was founded.
The United States reintroduced the gold standard into its monetary system, which effectively linked all other currencies to the dollar. In turn, they are connected to the gold standard via their parity with the dollar. As a result, the US dollar became the international reserve currency, which is still the case today.
However, in 1970, due to the increased cost of the Vietnam War, the United States was forced to abandon the gold standard, which ended the Bretton Woods agreement and the monetary stability that had provided the link between the most important currency and the gold standard.
Despite this, the dollar remained the reserve currency. Since then, international monetary stability has been closely linked to the stability of the US dollar. This was the start of the era of flexible currencies. The price of currencies is now set by the free market.
The term “Forex” is an acronym for “foreign exchange”, otherwise known as the foreign exchange market. It is the largest financial market in the world. It is a self-regulated market, which means that orders are not placed on the exchange, but are placed by the participants themselves. There is no supervisory authority. As Forex is a market without a central exchange or supervisory authority, it is open 24 hours a day, five days a week. It remains open as long as there are banks to deal with currency orders.
Until fairly recently, the main players in the foreign exchange market were banks, multinationals and governments. But in recent years, a powerful new player has come to the game: the individual trader. Initially, Forex was mainly used to ensure that the international monetary system worked properly. Today, 70 to 90% of the volume of orders comes from speculation, which means people who try to make money through currency exchange. It’s the same for other financial markets.
How are exchange rates determined?
In Forex, the value of one currency is determined in relation to another currency and they are exchanged in pairs. For example, the euro against the dollar, which is indicated as EUR/USD (euro/dollar). When demand for the euro increases, the rate of the EUR/USD pair will do the same. When demand declines, the EUR/USD follows suit.
All currencies are quoted against each other. This means that it is possible to trade hundreds of currency pairs on the forex market. The most important currency pair is the EUR/USD.
A currency pair is represented by the code of the two currencies separated by a “/”. For example: EUR/USD, GBP/USD, USD/JPY,… Currency codes are made up of 3 letters. The main ones are:
USD = American dollar
EUR = Euro
JPY = Japanese yen
GBP = British pound
CHF = Swiss franc
CAD = Canadian dollar
AUD = Australian dollar
NZD = New Zealand dollar
The first indicator corresponds to the base currency and the second to the currency of the ” counterpart ” or ” quotation “. The base currency is the one you bet on when you buy. If you sell, you bet on the counterpart currency.
When you buy or sell a currency, you open a position. If, for example, you think the euro will rise against the dollar, you open a buy position on the EUR/USD pair. If you think the opposite, you open a sell position on the same pair.
The difference between Forex and equities
The main difference between shares and currencies is that if you own a share of a company, you become one of the owners of the company. In forex, all you have is money. A position in Forex has no specific value. With some shares, but not all, you may also receive dividends.
The share price of a company that is in good financial position is likely to increase over the long term. The price of a currency pair will generally fluctuate rather than rise over the long term.
Forex is, therefore, a speculative market rather than an investment market. You can make money if you trade on the rise or fall of a currency over a certain timeframe.
Another distinction is that Forex traders rarely take the currencies they buy. Forex is not based on material ownership.
Lastly, the equity market costs more. You need more capital to buy a share. This means small investors tend to trade in this market. For example, with 1000 euros, it is not worthwhile to buy shares, plus there are management costs and brokerage fees. However, with the same amount, you can really profit from forex.
The specifics of Forex
As already mentioned, the advent of the Internet allows private investors to easily invest in the Forex market. Forex offers different lot prices. At the outset, it took 1000 dollars to buy a lot on the EUR/USD.
Now brokers offer micro-lots, which allow you to buy a lot for 10 cents in dollars. So you can buy a lot for 10 cents of dollars. This means that you can start to trade forex with as little as 200 euros.
”Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected” – George Soros
Part 2: How to trade Forex?
Your first account
In order to learn we have to practice. So if you want to make profits, you will have to make a few mistakes. Of course, you don’t have to lose everything. With micro-batches, as described previously, you can start with a small amount of capital.
On the forex market, it is possible to earn a lot of money. Shrewd and talented traders can earn a lot of money quickly, even if their initial investment is modest.
The capital required will depend on your objective. For those who only want to try to trade a little, a small capital of 200 euros will be enough. With the use of micro-lots, you will be able to give yourself time and learn from your mistakes. If your objective is to make enough of a profit to live on, an initial capital of 200 euros will be enough to determine if you can be profitable on a regular basis. However, if you start with this amount of money, don’t expect to become rich and leave your job after 3 months.
Many beginners lose their start-up capital.
This is because it takes time to find a suitable strategy for you to trade. The same is true when you learn to manage risk. You will also have to deal with a variety of psychological hurdles, such as how to manage your frustration when a position you thought was a winner loses out.
You will need to develop the discipline to close a position at the right time whilst your emotions would like to recoup your losses. And you have to be able to remain calm and rational, particularly when the pressure is on. These are the essential qualities needed for a skilled trader.
Before you start, you need to realise that to learn to trade profitably takes time, money and a lot of patience. Don’t start with money that you can’t afford to lose.
Obviously, it’s impossible to live from an initial investment of 200 euros. But you can get an idea of how profitable you are, or aren’t, and it gives you the time and opportunity to learn
To choose a broker, you will need to look at the adequacy of the platform they offer you as a trader. It must be user-friendly because you will spend a fair amount of time on it to monitor your positions. Another aspect is to consider the customer service of the broker. Are they easily reachable? Is it friendly and available?
It is also important to consider the financial regulatory authority that has given a platform the licence to trade. A broker who is regulated by a widely recognised authority is more trusted.
Do you need to start on a real or demo account?
You will not be able to learn how to earn money with the use of a demo account. The psychological aspect won’t match the reality of the actual thing. You will be exposed to situations that will not be easy to manage psychologically. Just as you don’t learn to surf on sand, you don’t learn to make money on Forex with a dummy account.
However, a dummy account can be very useful to acquaint yourself with a platform or test new strategies.
All it requires is for you to find a broker you like and open a demo account with them. Or if you want to jump straight in, open a real money account and invest a small amount of money in it.
Manage your money
The lack of experience of how to manage your investments is one of the main reasons why new traders quickly lose their start-up capital. If you decide to go in from the start with big sums of 2,000 euros, with open trades positions of 200 euros each, you will quickly waste your time and money.
Rule n° 1: Survival
Your main objective is to stay in the race (in fact it’s the 2nd, the first is to earn money). You will not be able to avoid trades that lose and, if your funds run out, you will not have the chance to recoup those losses.
Therefore it’s essential that for each trade you know what your average risk/return ratio is. That is, how much you risk in order to make X% profit. This will allow you to know how much money you can invest in a position and how much you expect to earn. A common rule used by traders is never to put more than 2.5% of your capital into each trade.
Part 3: Understand and anticipate price fluctuations
The practice of fundamental analysis is to gather relevant information from various sources and determine what a currency pair will do. It means that you have to take into account all the factors that can influence the economy, such as production capacities, employment information, GDP, etc. This type of in-depth analysis can help you understand price fluctuations from the past and may help you to anticipate those in the future.
A competent analyst must take financial news into account. He will then have to reach his own conclusions to try to anticipate the market’s direction. The value of currencies is directly linked to the economic conditions of the regions that use them, so the economic situation has a significant impact on the value of currencies.
However, fundamental analysis has a weakness as it fails to take into account market sentiment. This means a trader who bases their strategy solely on fundamental analysis may often find that prices don’t go in the direction suggested by economic data.
Similarly, a trader who relies solely on technical analysis, with no regard for financial information, may have the same type of problem. Currency pairs can become very volatile just before and after important economic news. Technical indicators can’t predict this sort of variation.
The most successful traders use both fundamental and technical analysis together.
Technical analysis aims to anticipate future price movements through the analysis of historical price fluctuations. The more efficient trade strategies are frequently built on technical analysis.
In addition to a graph, a technical analyst uses tools called “technical indicators”. These are mathematical formulas applied to past movements, the results of which are then compared with the current price. Traditionally, these indicators were calculated by hand. With the latest technology, they are instantly available on exchange platforms.
We might assume that prices fluctuate randomly but, generally, these movements follow distinctive patterns.
To carry out technical analysis, you must use Japanese candlesticks to read the graph. These graphs contain more information than a line or bar graph and are more user-friendly. They accurately represent all fluctuations in a currency pair over a given time frame.
What was the highest and lowest price, at what level did the price close and the size of the fluctuation. The colour also clearly indicates if the price has gone up or down.
One fact upon which fundamental and technical analysts agree is that prices do not move in a completely random way. If that were so, there would be no reason to study the news or charts. Fluctuations in a currency pair are triggered by human activities. Traders, banks, governments, …
All of them open positions on the forex market. It is the reasons behind these deals that determine the direction of a currency pair’s price. Although peoples’ actions are ambiguous and often dictated by emotion, they are not random. In the long term, these actions are rational, as everyone tries to make money on the foreign exchange market.
Part 4: Strategies to trade Forex
Trade the trend. A trend is defined when the price moves in a well-defined direction. In an upward trend, prices reach ever higher peaks. It’s the opposite for a downward trend, prices continue to fall. Of course there are fluctuations in the opposite direction, called “retracements”, but the overall direction is very clear.
The reason to trade the trend is simple: try to open a position when the trend starts and hold it until the trend turns around. Simple in theory but not easy to achieve. In reality, you will have to open lots of small trades that will lose before a trend is revealed.
In addition, it is crucial to not check out of the trend too early, so that you can earn as much as possible from it. It’s a psychological challenge to stay with this philosophy, as you lose money in lots of small trades so that you earn big money on the right one.
The trading range is valuable when prices fluctuate between two clearly identified levels. It requires you to open positions to take advantage of weak market fluctuations.
You can only ascertain that a market is in a range once this range has lasted a certain time but some pointers can help you spot a range in advance.
- After a period of high volatility, currency pairs frequently return to the range.
- Standard ranges are more prevalent on currency pairs with similar interest rates set by their central banks.
- The more closely the economies linked to the currencies of a pair are interdependent, the greater the chance that the pair will experience range movements. Such as the euro and the Swiss franc.
- – With the help of a graph, identify the range movements from the past. Identify their duration and magnitude. This may allow you to determine if a new range is on the way.
Scalping is when you open a short position for very little time. The goal is to generate lots of small amounts of money. Positions do not remain open for more than two minutes.
This is not a strategy for novices. This method is fairly stressful as it only takes one failed trade to undo an entire day’s profit.
The breakout strategy is to take a position when prices “break” a significant level. It is a common strategy for beginners because it is easy to understand and use. You only enter the market when the price goes out of its “channel”.
There are two types of breakout:
- – The continuation breakout: the market continues its trend after a period of consolidation.
- The reversal breakout: the market is reversed and the price shifts in the other direction.
Reversal breakouts are more unusual than continuation breakouts, simply because trend reversals are more infrequent than trend continuations.
Trade economic news
Some economic news, such as the release of US employment figures, can have a profound impact on the markets. The most important currency pairs are usually very volatile just before and after these announcements. If you develop a trade strategy based on economic news it can be a real adrenalin rush and potentially very profitable.
As a rule, the bigger the difference between the announced figures and the forecasts, the bigger the impact on the market. The direction the market will take is impossible to predict and is not important. You have to wait for the first signals and go with it.
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” Warren Buffett
Part 5: How to become a successful trader
If you trade in the markets it’s like a game of psychology against yourself. To be successful in the forex market, you need good preparation, a willingness to work hard, tenacity, discipline, self-awareness and a little bit of luck.
Find the type of trade that best suits you
The first step is to define your goal. It must be realistic, you must be grounded. To determine the goal, you must consider several criteria:
- Time: How much time can you devote to forex?
- Time to study forex: You will need time to develop your knowledge of the foreign exchange market. The more time you can devote to it, the sooner you will improve.
- Money: Last but not least, how much can you afford to invest?
Most traders lose money. To trade in the Forex market can be very stressful emotionally. Success is not only down to a good strategy. Everyone has their strengths and weaknesses. If you know them it will be advantageous in your choice of the market you trade in and the type of trades you choose.
Within the traders who lose on forex, there are two or three categories that can be identified:
- The players: They trade as if they are in a casino. The hope is to get rich overnight. Positions are opened without a lot of thought, too much money is bet on one deal, the reason they buy is greed and they sell in panic.
- Those with no structure: These traders do think, but lack structure, as they do not follow a system. They understand the way the market works but trade in their own way. They don’t learn much because they have no system in place to allow them to spot their own mistakes.
- Schizophrenics: They are knowledgeable about how forex works and have a good trade system available. The problem is that they don’t use them. They are similar to a person who is kind, calm and collected until they get behind the wheel of a car and become an aggressive maniac.
A trade system that works is not just a strategy. It is also about individual choices and a bespoke strategy. To create a system that is right for you, you need to know yourself well: your strengths, weaknesses, preferences. You must see the way you trade as a business and you are the owner.
If you are to trade successfully, it is important to know when to open a position. This is where technical and fundamental analysis can be very useful. A set-up is made up of several technical and fundamental criteria that must be in place before you open a position.
The majority of new traders lose money.
It’s not because the trade in currency pairs is difficult, but because it appears too easy. Lots of people are tempted as they think they can get rich quickly without the need to study the market or to part with much money. With this mentality in place, they don’t bother to identify the strategies of successful traders and fail to learn from their own mistakes.
Quite simply, most traders do not make enough effort. They search for videos of set-ups on Youtube, along with some information on the Net and think they have all the skills required to win! In practice, a good set-up, although important, only represents 10% of the knowledge needed to win on the markets.
These are some of the main factors why you need to put a good set-up in place:
- It compels you to figure out the best entry points.
- It won’t let you open a position when you do not understand how to analyse price movements. (Although this rule is often bypassed).
A set-up provides a context for the situations you are in search of. You need to find the set-up that suits you, which may come from another trader, but it is a system in which YOU must have faith.
Knowing when to exit a position is as important as knowing when to enter it.
You can find a lot of information on the Net to know when to open a position, buy an asset,… but you can find very little information to learn when to stop a position.
- Stop-loss to limit losses. It’s important to maximise profits but also to minimise your losses. All traders lose on some deals but every pound saved on a trade that loses is as significant as every pound gained on one that is successful. Before you open a position it’s important to reflect on the reasons why and to put the required stop loss in place.
- Exit to secure and optimise profits. As it’s impossible to win on all trades, the important point is to maximise the profits on the ones that you do win. Generally those new to the game take their profits too early, rather than take the risk that they lose their profits. A simple way to solve this problem is to define your objective in advance. You can choose, for example, to close the position after a certain period of time: an hour, a day, a week. Time targets have their limitations but for some people, this is the best solution. Another method is to gradually increase the stop loss to cover a certain percentage of the gains already made.
- Scaled exit points. Some traders don’t open a full position from the start. They only put on a certain percentage (for example 30%) and wait to see if the price heads in the direction they predict. If this happens, they open a second position, then a third.
In a successful trade system, full attention must be paid to money management. Even if you’re a very talented trader, if you don’t follow financial management rules, at some point, you will end up broke.
When you determine the size of a deal you want to put into place, the most important considerations are:
- Protect your trade capital.
- Evaluate your expectation of profit.
- Be prepared to adjust how you trade to optimise profit expectations and minimise risk.
If you lose your equity, you are finished. It’s crucial that you protect it. To achieve this, you need to be aware of your trade win percentage, the profit/loss ratio of a position. As your capital increases or decreases, you must adjust the size of your positions.
Evaluate your system
As successful as your trade system may be, you can always fine-tune it. Initially, the chances are that your system won’t be perfect. If you evaluate it and rectify its weak points, it will improve the results. It’s not just a question of whether the amount of money you have is bigger or smaller.
Trade performance is the most valuable information you can obtain from your own system. To get a clear idea of the performance, several statistics need to be looked at. Among them, the expected possible profit from current deals, the increase or decrease of your capital and the percentage of successful trades.
- Expected possible profit from current deals is the most critical information to know about your trade system. The more trades there are, the more accurate the figure. The expected gain is calculated when the total net profit is divided by the number of positions.
- – The increase/decrease of your trade capital is obvious to see since it is the amount left on your trade account. It is advisable to monitor it from time to time to check what level it’s at and that it’s in good shape.
So that this is done effectively, you need to evaluate all aspects of your system and the system as a whole. If you trade regularly, your system needs to be checked once a month. To keep the analysis easy, it would be helpful to keep a trade record, where you record each position and its outcome.
The margins between a win or a loss are often very small. Without a doubt, some trades will lose. The difference between successful and unsuccessful traders can be attributed to a few things. To build a successful system, you have to understand and embrace the risk.
You need to realise that there are certain times when you shouldn’t trade: when you don’t have the time to make the right decisions, when you are tired or drunk, when you’re not in the right mood, if you have had a personal tragedy and are distracted, basically any situation that prevents you to give it your full focus.
There will be times when you can’t trade: the birth of a child, if you start a new job, you split up from someone, you’re ill or you have money problems.
Consider the worst case scenario, and ask yourself if you will be able to handle it. If it occurs and you are not mentally prepared for it, the impact will be even greater.
Part 6: Forex quiz
The book ends with a quiz to test you on what you have learnt from it. This will allow you to gauge if, on paper, you are ready to trade.
Book critique of “Forex for ambitious beginners” :
Often we just think of equities and real estate as investment strategies, but Forex can also be a profitable and enjoyable way to invest.
Forex for ambitious beginners is the first book I’ve read on how to trade, and it gave me a good foundation to get started. In a simple and well explained approach, it tackles the essential elements required to allow you to make a profit when you trade.
The explanations on how to read a chart are also useful if you wish to invest in areas outside of Forex. However, in this summary, I haven’t touched on the various specific and technical methods it proposes. That said, in my opinion, perhaps a little pompous for a reader who is merely curious in the subject.
However, in my opinion, for someone who doesn’t have a great interest in how charts work, this may be a bit much to take on board.
For those who wish to learn how to trade currency pairs, Forex for ambitious beginners is a book I recommend.
- Easy vocabulary
- Quiz with explanations of the answers at the end of the book Forex for ambitious beginners
- Forex for ambitious beginners isn’t too long
- Lack of images to supplement certain explanations
- Some technical explanations are a little too mathematical
Rating by Sébastien Moureau from the blog Investisseur en Herbe
My rating :
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