Recently I had the opportunity to watch a new trader start their Forex career, and it could not have been more enlightening. It was a rare chance to see first-hand the mistakes that are made and a reminder of how much experience plays a role in a successful strategy.
The trader in question decided to start on a Friday. It was a down day at the office, and so we got into a discussion and decided that the best thing to do was to open a demo account with a larger Australian broker with whom I usually trade. The beauty about demo accounts is that they don’t involve real money, and traders can lose as much as they want and still go home with their heads held high.
A lot is going on in the world in May 2019. We have trade wars going on between the world’s biggest economies, we have the Americans pushing through arms sales to the Saudis while they move aircraft carriers into the Persian Gulf, and the British government continues into their 3rd year with trying to withdraw from the European Union.
Why is this important? Because trading the volatility that an environment like this creates can lead to a lot of opportunities, and opportunities to make large single day profits. So these profits attract a lot of new contract for difference (CFD) traders looking for a new career or to make enough money to pay for a summer holiday.
Watching a novice start trading in this environment brought flashbacks of the time I started trading back in 2006, but we had nowhere near this market volatility. Now, in 2019, I saw my own mistakes been repeated with the same naiveté
that I once had, but these are the lessons that I relearned and thought should be shared.
I am not sure it is the same in other countries, but Forex brokers are quite visible in the advertising landscape. In England they advertise on TV, they sponsor Premier league football teams and are quite commonplace. In a situation like this, it is often the one who shouts the loudest (or spends the most money) that will get more customers, and these brokers are rarely the better brokers.
Every new trader needs to research a broker that has i) a minimum deposit that suits them ii) is regulated by one or more reputable organizations and iii) has trading conditions that make it possible to profit from successful trades. While it may sound like these are obvious, the global broker market is not regulated and so finding a comparison or reviews of Forex brokers should help anyone refine their choice.
Because it was a Friday, and trading the USDGBP was going well, this novice trader forgot to close the trade by the time the markets closed for two days. While the currency exchange market is a single digital market, it does close for weekends, and any trades that are open at the close of business will be closed and automatically reopened at the new market price on Monday. The problem with this is that market prices will change between the close and the open, and it is highly probable for the economic situation to change enough for the prices to be significantly different. This is what is called a Forex gap or weekend gap (here is an excellent video of trading the gap)
Once the market had opened up for business, there was a great trading opportunity for the GBPUSD. Prime Minister May was going to hold a speech at Prime Minister’s Questions in Parliament on May 22, during a time when most groups in the Tory party were requesting her resignation.
Because the trader, who was well-versed in British politics, thought the Prime Minister would show signs of resigning, he opened a long position assuming the GBP would strengthen. Proper risk management strategy would be to set a take profit and stop loss order when opening the position regardless of the probability of success of the trade. While the trade went immediately into profit, the take profit was not there to secure the profits of the trade. Once the scalpers on the market started to sell and take their profits, the retail traders could only watch as the value of the USDGBP began to drop along with all their profits from the opportunity.
Reliving these novice mistakes are both a reminder of from where we have come from, but also a reminder of some of the cornerstones of trading CFDs. We should trade on a platform that offers conditions that benefit the trader, avoid mistakes that are fundamental to the way the market works, and regardless of how good we believe our position is, we should also hold risk management in the highest regard.