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90 percent of Forex Spread Betters Fail

Posted By Nick Parry On Sunday, June 22nd, 2008 With 0 Comments

It’s a commonly accepted fact that 90 percent of people who spread bet forex will fail. Either by losing all their money and giving up, or by being a consistent loser for their entire forex spread betting career (or somewhere in between). Lets look at this maxim in more detail…

The reality is the 90% off Forex traders lose their money. Trading FX is about probabilities. You can actually have more losses than winners and still be profitable if you are cherry-picking your trades and shooting for a minimum 2:1 reward/risk ratio.

When you learn to understand, trends, support & resistance, how price action moves during certain times of the market, and you follow a process, you can be a successful trader. Understanding the fundamentals (economic factors that effect price, interest rate differentials, etc) is also very important.

The problem is that the “buzz” about FX attracts a lot of “gamblers” hoping to strike it rich…and if you are gambling in Forex you are going to get killed.

I have traders come to me all the time with screen shots of their accounts over-leveraged over-traded…they are simply gambling.

The key is to open a demo account, learn, grow…and when you can show that you are consistent over a period of time…then…and maybe then..you trade with real funds. Get educated, learn the ropes, play in a demo account until you are solid.

You can do very well in forex trading…if you are willing to be patient enough to learn to do it right. This takes years to get good at. Not months. It is very difficult to learn to be profitable over a period of years. Anyone can have a few lucky months. But to be able to make a living trading over years, like I have, takes a lot of patience.

Is it just a guessing game or does it pay to do the homeworks?  No; it isn’t.

That’s why a very small minority of independent forex traders make very consistent profits (some of them for decades), and are effectively subsidized by the masses of others who depend on inaccurate information mostly gleaned from people with direct or indirect incentives to promote things that don’t really work.

Here’s some food/resources for thought…

Recommended website:

Joe Ross’s site at Tradingeducators.com. There’s a forum there, too (or there used to be, anyway).

Books:
(i) “Trading For A Living” by Alexander Elder (good writer – has some very weird views about indicators for a man of his intelligence, but parts of the book are very good)

(ii) “Beyond Technical Analysis” by Tushar Chande (completely reliable)

(iii) “Trade Your Way To Financial Freedom” by Van Tharp (completely reliable)

(iv, and best of the lot) Any books by Joe Ross (expensive) – don’t be put off by the fact that all Ross’s material/teaching/books isn’t specific to forex – it’s all about charts, and forex charts are just like any other charts, except safer to trade because their markets are far less subject to manipulation.

All of the above are incomparably better than any information you’ll readily find online.

Two key concepts:

(i) Don’t listen to anyone who tells you that “technical analysis” is based exclusively on “indicators”.

It’s what almost all people going into forex trading believe, and it’s what the entire forex marketing industry has an incentive to get everyone to swallow, and it’s nonsense.

It’s forex’s equivalent of article marketing’s “duplicate content penalty”, and you have to see through it, to get anywhere at all!

In fact, if anyone tries to tell you that, you’d probably be well advised, on general principles, to ignore any other “information” also offered by the same source.

The worst form of attempted automated indicator trading are things called “Expert Advisors”, a form of “trading alerts” made for a platform called “MetaTrader” which is what some home-based traders try to use. (These are the people effectively subsidizing the tiny minority of professionals who are actually making a living!).

(ii) Try to get your advice and education, whenever possible, from people who are not selling/promoting anything. Can’t stress this enough … otherwise you end up believing all sorts of “plausible nonsense” with no underlying reality at all.

It’s just like affiliate marketing, in one way: if you look in forums, you’ll naturally find far more people who are making a living from “selling information to beginners” than there are people making a living from actually doing it themselves. Be aware that there’s probably 50 times more “misinformation” than “information” out there, about forex trading. Some of it broadcast by people selling things, and some of it just believed by gullible/hopeful market participants who lack experience, know no better, and simply repeat what they’ve heard. (Just like internet marketing, really.

A small number of independent traders make quite consistent profits trading the forex markets (some of them every month, every year, for decades), and are effectively subsidized by the masses of others who depend on inaccurate information mostly gleaned from people posting ill-informed and prejudiced generalizations from strangers and forums.

The first question we should probably ask is – why do most forex spread betters fail? Think about it for a second, most traders are intelligent, have some capital, have access to the latest trading technology (like real time charts), access to masses of information in the form of books and the web. So, with all this support, why do 90 percent of people who spread bet forex lose? Here are the reasons:

1. Not enough spread betting education!

By this I don’t just mean learning how technical indicators work (like a MACD cross over), or what a candlestick shape means. I mean completely educating yourself in all areas of spread betting. On a general level, this means learning everything about spread betting systems, psychology, and money/risk management. Whats does it mean to control your emotions, what does true leverage mean to your bet size, should you fade the trend, should you wait for a pull back before entering a breakout? For every question asked, many more questions are raised, each with many answers. The scope for learning is massive.

Common Misconceptions Of New Traders:

– Think they can predict turning points in their given markets to within minutes.
– Think they can turn $1000 into $100,000 in six months.
– Think they will quit their jobs and make a living full time after a few months of forex spread betting.
– Think they can trade consistently with an near 100 percent accuracy.
– They think they can buy a system that is 100% accurate.

Why do so many new traders think forex spread betting is an easy way to get rich? The answer is clever marketing!

2. Fundamentals Of Trading

Trading is more an art than a science. Although chart analysis and indicators can be carried out scientifically, their interpretation is largely artistic. On the same data set, one man will see a buy signal, another will see a sell signal. Forex spread betting is all about probability. It is the art of correctly applying a set of carefully thought out rules and allocating the probability of that event to result in success.

Your state of mind has as much to do with your success as any systematic trading plan.

Money management is important if you want to have any hope of becoming a successful trader. Some argue that if you have solid money management, you could base your trading entirely on the flip of a coin (heads you buy, tails you sell) and you would be profitable (although I doubt this myself, but you see my point)?

Your trading method must match your personality, otherwise you will fail. Trading is a very personal journey.

Under-capitalisation (aka – not having enough money to start with) is another problem. It means you’ll be tempted to take bigger bet sizes with smaller stop losses, an this will send to the poor house sharpish. It will also affect your emotions as every meaningless pip movement could be make or break for your trade.

Emotion, can’t live with them, can’t live without…
As humans we have the need to control our environment and affect the outcome of events surrounding us. It’s a blessing and a curse, but in forex spread betting, it’s most definitely a curse.

As traders we have no control over the market. If we can accept that then we accept that we cannot ever influence which direction the market will go.

When we have an expectation, it means we have set ourselves up for both fulfilment and disappointment (win or lose), and this messes with our heads.

As spread bettors, we have to be impartial and know that we will both win and lose. As long as you trust that in the long term we will win more than we lose, you can stay solvent and sane.

3. Money (risk) Management

Protect your capital before all else.

To spread bet forex successfully you have to ask the following:

– How much equity do I need to start?
– How much should I risk on any one trade?
– Am I under capitalized?

You need to use stop losses all the time, but they have to be wide enough (50 pips as opposed to 10 pips) for your trade to develop over time, and not be stopped out by the natural rhythm of the market.

You also can’t take to large bet sizes (low leverage – £1 per point as opposed to £10 per point).

Only ever bet between 1 – 3 percent of your entire capital on one trade.

So, if you have to have wider stops, small percent of capital per trade, and low leverage, what this all mean? It means you need enough money to start with.

4. Entry And Exit

As a forex spread bettor you will fall into two categories:
– Breakout trader
– Established trend trend

If you are a trend trader, you want to see an established trend and then find a way in. It could be using indicators or the just plain price action and trend lines. Enter the trend as early as possible with the least amount of risk.

Breakout traders like to enter the market on the breakout of an identified range. This may be support and resistance zones, trend lines, pennants or other patterns. The key here is to determine a valid break, and then enter either immediately, or wait for a pull back to test the new up (or down) move.

Conclusion

This article is really to give you a glimpse into the world of forex spread betting, with a summary of the key areas that help you understand how hard it can be, and why most fail.

On the more positive side, forex spread betting is a fascinating world, which will allow you to train your brain. There is no other field where you get to challenge the best minds in the world on a truly level playing field.

If you can master this field, and rise above the rest, to become one of the 10 percent of winners, life will be at least a bit (if not a lot) better.

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