FOREIGN EXCHANGE TRADING: The Golden Rules
by Nikolay Pariev
published by PROEKT – EDEM with the help of Smashwords
© Copyright 2011 Nikolay Pariev
© Translated by Anna Belokonova
© Cover design by Alexander Shevchuk
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PROEKT – EDEM & Smashwords Edition, License Notes
This ebook is licensed for your personal enjoyment only. This ebook may not be re-sold or given away to other people. If you would like to share this book with another person, please purchase an additional copy for each recipient. If you’re reading this book and did not purchase it, or it was not purchased for your use only, then please return to Smashwords.com and purchase your own copy. Thank you for respecting the hard work of this author.
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by Nikolay Pariev, published by PROEKT – EDEM at Smashwords
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Contents
4. Seven steps towards professionalism
5. 45 reasons why traders cannot earn money
7. Example of a system with positive assembly average
8. Successful trading algorithm
9. Psychological difficulties you should overcome
10. How to manage the funds properly?
11. How much time does a deal require?
12. The difference between successful and unsuccessful traders
13. Aggressive or conservative approach? Which one is better?
14. 40 more successful trading rules
17. Professionals training before trading
18. Further advice for improving trading discipline
19. Does The Holu Grail exist?
Introduction
The goal of this book is to help an ordinary person to earn money in
the foreign exchange market using not theoretical but practical
knowledge. Nowadays books and magazines on exchange trade contain a
vast number of various methods, approaches and theories relating to
the subject in question. But the majority of them present rather
fragmented information and describe just a single, separately taken
trading aspect. These are fundamental, technical or psychological
trading aspects of financial markets. I barely know the sources which
would contain everything that the trader should know and be able to
use in order to earn real money in the real market. Very often having
read a book on trade the trader (including myself) tries hard to put
all the advice given in it into practice but in fact for some reason
the result turns out to be quite different if there is a result at
all. Being a practicing trader and at the same time earning my living
by trading, I will try to do my utmost so that this book represented
the complete truthful view of the real trade life without
embellishments and unverified approaches. I will try to include in it
all the details of trade process, even the tiniest ones, which are
often omitted but which are crucial for gaining stable and long-term
profit month by month and day by day. The book shows the
particularities which are absolutely ignored by those who are not
practicing traders and very often even by those who have been
practicing for quite a long time but keep sticking to wrong trading
principles or have simply missed out these vitally important details.
I want to tell you in the first place that everyone can learn to earn
with the help of trading. This process resembles a process of
learning to drive a car or rather a motorcycle. Every normal person
can learn to do it.
If you start learning to drive a motorcycle at
a very high speed, not wearing a helmet or a protective jacket, you
have rather small chances to complete your learning process
successfully. But you can start learning very carefully, at a low
speed (that is to start trading with a small round lot) or rather use
a computer simulator at first (a special trading tester). Then,
despite the procedure being rather risky for the nonpros, you will
quietly and steadily increase your speed of earning money in the
foreign exchange market. The desire to earn quickly not only leads to
frequent losses but it also breeds in trader a lot of vicious habits
in the very beginning of their career.
So, ladies and gentlemen, we start our trip to the real world of financial markets. It is a high-speed world where, according to the statistics, about 90% of beginners fail because of their neglecting very simple rules. When learning to drive a motorcycle the similar rules would include fastening the seat belts or putting on protective helmets. And sometimes we just overspeed and that leads to the loss of control over the situation and the loss of a capital.
My career in trading
Four years ago I worked as an engineer in a design institute engaged in construction arrangement. This job, as well as all the previous ones (I had five jobs all of which concerned construction), used to give me the feeling of discomfort, absence of the possibilities for self-realization and a suppressed desire to feel free. I always wanted to do self-planned things, to earn the money I really deserved, I wanted my job not to be restricted by anyone and to depend only on myself. By that time I had never heard of such a profession as trader and I had been completely unaware that such a business could bring money. Later I found out that this profession does not require having bosses, getting up at 6.30 a.m. and all the other things that people often consider obligatory. Traders themselves sometimes call trading the last free profession. Many times I came across Internet articles on trading which described it as one of the most prestigious and well-paid jobs apart from illegal businesses. But the most important thing was that such a job was available for everyone notwithstanding your educational level or financial background. The older generation who lived in the Soviet Union consider trading to be a mere lottery, full of risk and uncontrolled. In fact it is not true. If you know all the rules of this profession and if you have a trained mind and substantial hands-on experience, then you will find out that trading is the same as riding a bicycle.
You could spend a lot of time explaining to a person who never in their life rode a bike that it is not dangerous. In this activity the risk simply does not exist if you practice regularly, if you don’t show off and take special safety measures (for example, little children mostly learn to a ride a two-wheel bike using spare wheels at first). But all the same, this person would find a great number of reasons why it is impossible to avoid falls and why he would not be able to manage it etc. It is common knowledge that you can learn to drive a car only through constant practicing. In trading as well just theoretical knowledge is not enough. It is crucial to have a daily practice with the help of special trade trainers called testers. You can also use demo-accounts but such a method is about ten times as time-consuming as testers.
One day having returned from work in the design institute I came across an interesting web advertisement. It was saying about earning rather substantial amounts through foreign exchange trading. That advertisement was placed by one of broker companies and contained an invitation to come to a free seminar in the company’s office located in the city centre. Something subconscious made me enrol in the seminar immediately, especially when such seminars were run by many brokers free of charge. In the course of the seminar I learned the basic market participants and definitions and I also found out a lot about Forex daily turnover, simple analysis methods and operating platform organization. After that I attended several more seminars and a number of trader meetings in all the five companies I knew in our town. I was doing all this in my off-duty time. I downloaded from the Internet a Gbyte of various economic materials on trading and on topics related with it and I also bought 8-CD video guide Foreign Exchange Trading from A to Z. All this helped me a lot in future, though not in the very beginning but later when I began to face certain difficulties while having real trade practice. Unfortunately, or rather fortunately, human brain doesn’t perceive theoretical knowledge in isolation from hands-on experience. The best way to understand something is to start doing it. Only facing real difficulties the trader gets an impetus to perceive the information given in books. But the right books can help the trader to make fewer mistakes, to lose less money and not to get confused but their own illusions.
This is how I became a financial market trader, though it was rather a subconscious desire that had been dwelling inside me for a long time but for some reasons could not become fulfilled before. Several weeks after the introduction seminar I opened my first demo-account and began to practice my trading skills on it. Strange as it may seem, the beginner’s luck principle really worked and I was trading successfully right from the outset. That is why, without pausing to think, I decided to open my first real account. I gained about 300% profit on the $100 account. I just stuck to the trend; that time I knew nothing else and for that reason I didn’t feel scared. I didn’t carry out money management and played for the biggest round lots. As it turned out later, my earnings were a mere luckiness. However, I didn’t have time to buy an all-purposes laser photocopier which I extremely needed. It is not worth mentioning that on the first trend reversal I lost my account. According to the statistics, in about 90% of the cases account discharge takes place during the first three weeks of trading. But when adhering to the conservative strategy, experienced traders hardly ever face the discharge (the loss). Therefore the rule #1 is that big round lots (more than 5% of the capital in a deal) will not increase your profit but will only undermine your psychological health. The only way is to use positive assembly average which appears when an average profitable deal is bigger than an average losing one or the percentage of profitable deals is rather high. You will achieve high percentage of profitable deals only with substantial forecasting experience. That is why it is vital to observe the following rule: you should give the profit the opportunity to grow to the maximum. The other way to multiply the profit is capital management but we will discuss this issue later.
Besides, I took the distant course in Financial markets analysis and assets management in Moscow. The course was very brief, it lasted for just two months and there was no practice. But they send me by post a certificate proving that I attended a certain number of lectures on certain subjects and got a qualification. I studied all the main indicators, the principles of MTS (Mechanical Trade Systems), candlestick analysis and basic fundamental market analysis. However, this course didn’t include money management and trade psychology, and these aspects turned out to be much more important then everything I had studied before. This is the main drawback in trader’s education and that time it was very widespread: the focus was made on price tendency forecasting but money management and profit/loss assembly average were completely ignored, not to mention psychological training. By the way, later in the course of my practical Forex trading I found out that psychological aspect in trading can be excluded in many cases with the right choice of a round lot. The lot should be comfortable for the trader and it is also very important to switch to smoother medium-term trade where a deal is valid for up to three days. A bit later, after having taken the distant foreign exchange courses, I was also mastering stock and derivatives market trade (currency options). In future the currency options market gave me a perfect medium-term trade experience. It expanded my trade reality which was limited to day-trading only. Incredible as it may seem, being only a beginner, I started earning money almost at once at the options and American shares market. Surely enough, I was lucky. In three summer months of 2009 I managed to earn 400% profit on starting $300 on the deposit (that is to say, $1270). Unleveraged American shares also gave a very interesting result – the account was upped from $1000 to $2500. The profit was gained during economic recovery after the crisis in 2009. All this took place in the same month. It was that time when, having overcome my fears of the unknown, I decided to quit my engineer job and to dedicate myself to foreign exchange trade. That successful period became a turning point in my career.
Having left the previous working place which didn’t give me enough time to be engaged in what I really fancied, I started to work out my own trade system and to draft a plan for achieving my trade goals. At first this period was rather difficult like everything worth in our life. Almost simultaneously I had to gather capital, to formalize my trade system, to carry out daily manual trade testing and to trade on the real investors’ accounts. Besides, I managed to find the time for taking part in trader contests. The number of participants of those contests sometimes reached 1700 people. Twice I was lucky to appear among the winners and several times I was among the top-ten. I also participated in contests where the trade was performed with the help of futures exchange instruments. Some contests’ goal was not to earn but to discharge a deposit. One of them was called Moose-hunting. The benefits of such contests cannot be overestimated because they give traders the unique opportunity to see the backside of the exchange trade. Only in the course of such contests when the trader’s goal is to lose money, he unexpectedly notices that the tally is constantly rising and instead of the desired losses he gets permanent profits.
I got a part of my invaluable professional experience through working with investors who put up in beneficial ownership in the foreign exchange market. This is the best way to learn how to manage vast amounts of money. Working for the investor enables the trader to master disciplined trade with small risk. It happens because the investor acts as a supervisor and doesn’t give the trader the opportunity to hyperspeculate or to lose more than was agreed upon (usually it is about 30% of the deposit). The moment the trader starts to “abuse” the investor’s account and bear losses, the investor is likely to withdraw his account from the incompetent trader and to pass it to a more reliable manager. The point is that the majority of traders in this case would probably say that they just had the misfortune to encounter an inadequate investor. In fact, it was them who have acted wrongly. The more competent the investor is, the more carefully he approaches the risks. Very often he can withdraw the account without waiting for the maximum 30% drawdown. Therefore, beneficial assets ownership is the best way to discipline the trader and every trader who is eager to become a professional will have to deal with it sooner or later.
I currently earn money only by trading. It has become my profession. At the moment I manage the capital worth approximately $20,000 and that is not the limit. I regularly gain 10% return on this capital and it is shared fifty-fifty with my investor. My goal is to raise the investment capital equivalent to $100,000 or more.
I can foresee that some of you will not find much difference between trading and other jobs in terms of the conception and the amount of profits. But it is not true. In financial markets you can manage unlimited amounts of money from numerous sources in case you trade successfully. It is not difficult to run several investment accounts simultaneously or to manage dozens of investors’ assets on one joint account using PAMM (Percentage Allocation Management Module) system. The use of reinvestment while upping an account enables you to increase your monthly profits almost infinitely. Another advantage is the possibility to make an agreement with the investor according to which you will be able to register the profits on a weekly basis which is unavailable for the majority of other professions. Trading has only one drawback which can be though called an advantage – you ought to be very responsible. There is nobody you can delegate your responsibilities to. You don’t have bosses and other people to shift the blame to. The trader is the only one responsible for all his profits and results.
To my mind, there are a lot of advantages in being my own boss. Now I have more free time for self-development and getting to know better the world we live in. I have more free time to go in for my favourite sports – basketball and bodybuilding. I have free time for studying various subjects I appreciate much, especially those which we can benefit from in real life. Many people who are not engaged in trading are not aware that this job enables you to work less and to make money work for you instead. A number of people also consider trading to be a mere game rather than a serious profession. I feel sorry for such people because they are not only mistaken, they miss the great opportunity to manage their time and their lives. Football is also a game but it doesn’t prevent a lot of football players who treat it seriously to earn millions of dollars annually. This is a challenge for the supporters of non “game-like” professions. They are supposed to be very useful for the society but they apparently don’t bring much economic value into the market.
Why Forex?
It seems to me that you would be eager to know the advantages of being a Forex trader. Speaking about the disadvantages, you can get acquainted with them on various Forex forums. The traders who hyperspeculate and ignore all the trade safety rules often gather there to lament that the Forex should be blamed for everything, or a cunning insider moving the market, or the designer of the trade system.
Now, the advantages of the Forex market!
High rate of return. Forex trading is the most high-yield legal business.
High liquidity rate. Opening and closure of the position is available at any time of day within several minutes. Thanks to the huge turnover, the volume of the transactions is almost unlimited and, unlike in the other financial markets, even large deals can be made at the same price.
Lucrative leverage conditions. The bank credits Forex transactions using trading account assets for security. For getting a $100,000 credit the sum equivalent to $1,000 is to be reserved (so-called 1/100 leverage). If the position is opened and closed within a day, the interest is not charged. If the position “crosses” the midnight, the annual interest equivalent to 1-5% from the contract value (the difference between LIBOR rates for the traded currencies) is drawn from or accrued to the account.
Quotation changes predictability. During quite a long period of time all the quotation changes generally follow the trends which can be identified and used for forecasting. The existence of trends is allied to the fact that currency rate changes are determined by basic economic factors.
Confidentiality. All the information on account opening, value of an account, transactions and their results is confidential.
Stable currency investment. The money on trading accounts are placed in US dollars. Opened positions are regularly converted into USD in accordance with constantly changing quotations.
The funds are kept in a trustworthy European bank. Trading accounts are opened in reliable European banks.
Profit in USD. The profit from conversion transactions is fixed in stable currency, USD. This enables the trader to use the gained money on the territory of any country.
Transaction safety. The Forex is free from risks concerning buying, transportation, storage and disposal of the goods as well as production, sales, customs formalities etc.
10. Full investor's control. The investor fully controls his funds. The appointed trader carries out Forex transactions and provides the investor with exhaustive information on the account balance and all the opening positions. Investor may transfer the profit from the trading account to his own account or to close the account at any time (providing that there are no opened positions).
11. Independence from the situation in the country. Forex trading is completely independent from the governing institutions and bureaucrats' power abuse. It is impossible to arrest an account or to ban the work on the Forex in any ways.
12. Comparatively low initial investments. You can profit from Forex investments by opening a $100 account.
13. Organization simplicity. Accreditation, licensing, getting any permissions and quotas are not required. For starting the work you have only to sign the agreement with a company providing access to the Forex, to appoint a trader and to open a trading account. The work can be started right after the account is opened.
14. Minimum cost value of work organization. The cost value of work organization is determined by cost value of opening an account, funds transfer and conversion, if needed. The investor doesn't bear any other costs for carrying out the first transaction.
15. Minimum transaction costs. For getting access to the Forex the company charges commission (brokerage) equivalent to $25 for one round lot. Brokerage is charged after the transaction is completed notwithstanding its duration.
16. Twenty-four-hour operating mode. The Forex operates twenty-four hours every day except week-ends. Positions can be opened and closed at any time. Significant quotation changes take place from 3 a.m. to 23 p.m. MSK.
17. Operation two-sidedness. Profit-taking is possible both when the rise and the fall of the quotation.
18. Flexibility. It is very easy to start and to stop working on the Forex. The operations can be suspended for any period of time. You can also withdraw the profit or close the account without bearing any losses which is not possible while being engaged in any other business.
19. Minimum investor's time expenditures. Having appointed a trader, the investor gets the opportunity to supervise his actions with minimum time expenditures and almost without interrupting his usual work. The entrepreneur can do his main business, to go on a business trip or on holiday.
20. The possibility of investment diversification. Having a rather valuable trading account, it is possible to open positions simultaneously in different currencies which enables the trader to reduce the risks with the help of diversification and hedging.
21. Forex is a perfect competition market. The Forex is a loose market and it is not subject to any regulation measures. Due to the vast turnover, even the biggest investors like central banks or investment funds when joining their powers can cause only short-term quotation changes.
Seven steps towards professionalism
Now I would like to give you an example of the usual path every trader takes before they master this potentially most high-paid and prestigious job. This path is exactly like the one I took myself. You should always keep it in mind because on your way towards success you will face a number of psychological difficulties which can avert you from your dream.
#1. Ignorant trader
This is the first step you will take after you start trading. You have probably come across a book on technical analysis and you have heard that those engaged in trading earn millions. Anyway, isn't it that difficult? You will get a decent profit and complete discretion.
I would not like to disappoint anyone but there are rather few people who really earn money through trading. Approximately 90-95% of traders lose their funds. That's just a fact. At the very beginning all traders feel very optimistic. You open an account and trading becomes very much like a sophisticated game. But the fact is that you don't know how to trade. You purchase and the market tendencies change, you sell and the market swerves again. The majority of the deals are determined by emotions, in other words, you buy just because you reckon that the market will take this or that direction but your conclusions don't have logical explanation. You are not acquainted with trade mechanism and psychology. What can be worse than that? Only the fact that you are completely unaware of it. Most traders lose their accounts at this point.
#2. Recruit
On Step Two you have already lost enough money to acknowledge your mistakes. In other words, you realize that you do not know certain things yet. Then you start reading carefully every book on trading you are able to find. You begin to study technical analysis reckoning that you have found The Holy Grail. You master all the foreign exchange models and learn such things like ADX, moving averages, Fibonacci, Pivot, MACD, Bollinger Bands, channels etc. You also get acquainted with all the indicators. Applying them to charts, you spend hours trying to found out how they work. You feel more competent because of your assurance that you have found the best indicator.
But still every single day you continue to lose your money. You realize that all the indicators are lagging behind and other traders also have the opportunity to use them. You see that you are still an amateur.
#3. Development
At this point you begin to understand how much you will have to work and to study before you learn how the market operates. Usually on Step Three traders realize that they are not ready to go for it and they quit. Passing successfully this step requires genuine desire and passion for what you are doing. Those who are brave enough will learn much more than they have before. You start browsing the Internet in search of various forums, seminars and lessons given by experienced traders. You begin to understand what you need to become a professional. You ask every trader you meet thousands of questions and read thousands of articles on the subject every day. You begin to work out the strategies and to test them on paper. You also start estimating risk for each deal and minding yourselves in order to overcome psychological trading aspects. You begin to analyze all the alternatives before making a deal. It is a real educational process. You will have to work hard so that you could realize what suits you most.
#4. Determination
You learn to understand various market situations and trade systems. Without even noticing it, you have finally found the best technique after thousands of hours of hard work. You use one trading method and you improve it. You understand that it is better to develop in one certain direction, be it Fibonacci lines or other instruments. The point is that gradually you become a professional trader. You test your strategy and it works. You obtain great knowledge about the market and when you look back at the time when you were just a beginner you cannot ignore how much mistakes you did. And though you have not yet earned enough money to call yourself a successful trader, you are proud of your achievements. You understand that technical analysis and indicators are not yet the Holy Grail. You calculate risks for each deal and you strictly observe all the money management rules. You quit losing deals quickly and gradually you learn to make only profitable ones. You start treating "moose" as normal business losses. You take only the best deals which have proved their profitability during tests. You feel confident as you know that trading is a game based on probability. Your psychology has changed, you become a professional trader.
#5. Successful trader
You trust your method entirely and you make deals systematically. Your main goal is stability and you follow your plan very often. You have achieved deliberate competence. You know well all your weak and strong points. Sometimes you feel euphoria or pain but you have enough knowledge to control yourself. Finally you have the opportunity to earn money by trading.
#6. Professional
This is the last step on your way of becoming a professional trader. You now understand the market in which you trade. You know all the level of support/resistance of this market as you trade on a daily basis. You understand how the market operates and in most cases you can predict the price trend. The moment you feel euphoria you close the deal because you understand that it is the same as emotion-based trading. While communicating with other traders you realize how much ahead you are. People start consulting you. You have your own trading technique and you can write a book on trading.
You open positions calmly, without stress and you enter and quit the market at precise moments. Instead of waiting for your position to close automatically with stop you close it yourself if you realize that you were mistaken. You hold your head high but at the same time you try to be modest inside. You have graduated from trading school.
To become a professional trader is very hard for many people as it is one of the world's most difficult professions. But if you like being challenged, then you will be extremely pleased with the results. Trading comprises 30% of system and 170% of psychology. You need the whole 200% to succeed as a trader.
45 reasons why traders cannot earn money
Now I would like to tell you about the main mistakes most traders usually make. You will probably find on this list something that would be similar to what you did and what prevented you from earning money even if you were giving full attention to your work. I advise you to consult this list regularly until your trading becomes automatic and does not anymore require reminders about how you should act in order to achieve good results: