In December 2008 I learnt about Foreign Currency Trading.  Reading around online I found there were a number of brokers that allowed you to trade foreign currencies and they all offered demo accounts that let you try their trading software on the live market, but using imaginary money.  Coincidentally a friend of mine down in Melbourne was also just getting into currency trading and was using a broker called IG markets.  He liked the way this broker worked so I gave it a go too using their demo account.  In their demo account you get $100,000 and the account is active for 14 days (10 trading days).  Their software is really easy to use and unlike many others you don’t need to download any software to your computer, which means you can log in and trade from wherever you have web access, rather than only on a computer where you have the software installed.  My performance using the demo account is shown in Figure 1 below.

 

Figure 1.  The closing balance of the $100,000 demo account with IG Markets over the 10 trading days it was active.  Total profit made on the account in 10 days was $56,133.74.

 

Over the 10 trading days I made $56,133.74 profit which is the equivalent of $1,459,477.24 per year.  Currency trading seemed so easy I didn’t know why everyone wasn’t doing it.  I wrote a couple of posts about this earlier which can be read here for the first one and here for the second one.  I understood there was a much higher risk of loosing your money than with other forms of investment since it is highly leveraged, but it didn’t seem especially difficult to look through the currency news, see what the different economies were doing and pick which direction the currencies were going to go in.  The technique I ended up using was what I called pursuit trading.  Sometimes you would open a position and the currency would swing your way and you made a profit.  That was great.  Just as often though you would open a position and the currency pair would swing against you.  Obviously you didn’t want to sell at a loss and I found if you just waited the currency pair would invariably come back in your favour.  To benefit from this technique even more I would generally open more positions as the currency swung against me so that when it finally swung back in my favour I would have a whole series of open positions which would then move into profit from the swing.

 

As a result of tactics such as this I made a heap of money on the demo account.

 

Feeling the courage than comes from success I decided to open a real account using money from my credit card since the rate of return from currency trading from what I could see was far in excess of the interest rate on the credit card.  I did try to get a personal loan at a lower interest rate but it was denied.  Bastards!

 

I opened the real account with $2,300.  The first thing I learnt is that there are a couple of differences between a live trading account and a demo account.  When you open a live account you need to show proof that you have at least $5000 in funds else where in order to have a full account.  If you can’t show this you have to have a guaranteed stop loss account.  With this account every order you place has a guaranteed stop loss, which costs an extra 3 pips on top of the spread for the currency pair you are opening a position on.  I didn’t know this when I was opening the live account and the account you used in the demo account was a full account.  With a guaranteed stop loss account the currencies have to swing further in order to come into profit for you which meant it was more difficult to scalp quick profits.  You had to rely on picking the medium term direction of the currency pair which is a lot more difficult.

 

The first day trading I made $293.31 which was pretty good.  I started to realise that I would need more money to be able to have the stop losses far enough away from the market to protect my open position.  The brokers suggested that you didn’t have to put the whole amount you were willing to trade with into your account since the money you are trading with is leveraged so you only had to put the amount you were putting up as margin.  However it takes at least 24 hours for any money you transfer in to reach your account which would be far too late to extend your margin if the market swung against you.  So the second thing I learnt currency trading with my live account is that you need to have your whole amount your are willing to trade with in your trading account since you won’t be able to transfer it in fast enough to do you any good if you don’t.

 

As a result I transferred in another $4000 on that first day which arrived the next day.  That next day I made $1,174.47 in profit, which was great.  So after putting in $6,300 I now had a balance of $7,767.78 which was pretty good for 2 days.

 

On the third day disaster came.  With the demo account you had $100,000 so when the market swung against you, you just waited until it swung back.  With only $7000, when the market swung against you it came dangerously close to your stop losses.  When this happens you have two choices, let the market hit your stops and go for the next trade, or you can move your stops further away from the market in an attempt to wait for the market to turn back in your direction.

 

With the demo account I would open new positions as the market swung away, but with the live account I didn’t have that much money and so while I opened new positions and shifted my sops further away I soon ran out of money to further shift my stops and in a big swing my stops were hit and I lost $7,027.78 because of all the positions I had opened.

 

With this lesson I learned that you can’t over extend your self.

 

I still had $740 left and I added another $1,500 to it.  I cut back the number of open positions so I could extend the stops further out.  That first day trade after adding the $1,500 I made $1,135.50 profit.  The next day I made $64, the next I made $531.23 and the next I made $16.88.  The next day though, the eighth trading day since opening my live account I lost $3,902.37 in a particularly vicious swing against me.  I had only $85.24 left.

 

At this point I stopped trading over Christmas to re-evaluate.  This second loss appeared to occur because even though I had far fewer open positions, and I had my stops moved as far away as I could, the market is capable of some very large swings, and in a particularly big one of a couple of thousand pips I was stopped out and there was nothing I could do.  These trading days in December are shown in Table 1 below.

 

After Christmas I thought I would give it one last try.  I would still only open one or two positions at a time but I would keep my stops close so even if I am stopped I would not loose much.

 

I added another $1000 to my account then traded only a couple of positions and kept my stops close.  As shown in table 2 below, I made a few profits but the market swings are bigger than the money I had available to trade, and so even though I kept my stops short, the market would invariably swing against me at some point and I would loose those particular trades.  So my money eventually dwindled away, even though I made just as many trades that were profitable, they just weren’t as profitable as the losing trades were losing.

 

There is a psychology to trading too I found out.  When you are making money the greater the profit, the greater the temptation to take that profit, so the size of the profit is often limited.  However when you are loosing, the greater the loss the less and less likely you are to take that loss.  Because if this it is very easy for a loss to become very large, but at the same time it is very difficult for a profit to become very large.  For this reason while the market swings just as wildly in both directions the amount of profit you can make off it is limited by your own psychology.

 

This experience in currency trading has been valuable however and I have learnt a great deal about how to trade in foreign currencies.

 

Table 1. December Live Trading Account.

 

 

 

 

Table 2. January Live Trading Account.

 

 

 

There is a psychology to trading too I found out.  When you are making money the greater the profit, the greater the temptation to take that profit, so the size of the profit is often limited.  However when you are loosing, the greater the loss the less and less likely you are to take that loss.  Because if this it is very easy for a loss to become very large, but at the same time it is very difficult for a profit to become very large.  For this reason while the market swings just as wildly in both directions the amount of profit you can make off it is limited by your own psychology.

 

This experience in currency trading has been valuable however and I have learnt a great deal about how to trade in foreign currencies.

 

This is what I have learnt:

 

1)     You need more money to trade with than the size of the swings.  If you can survive the swings it is possible to wait for the market to swing back in your direction.  If you don’t, while you might win a couple you will always get wiped out.  The demo account results seem to suggest that $100,000 may be sufficient.  Obviously $1,000,000 would be even better, and $100,000,000 would be even better etc, but to pick a value obtainable by an ordinary person, plus that seems to be sufficient to do what is needed, $100,000 appears to be an amount which will allow much safer trading than a lower amount.

2)     You must not over extend your self.  Even if you have a lot of money, if you use too much of it to open positions, you would still loose everything if the market was to swing against you.  I would suggest using the trading rule of only opening positions so long as your margin is less than 10% of your balance.  That way if the market swings you can wait for it to come back.  When it does and your margin is again less than 10% of your balance you can open more positions.

3)     Don’t get greedy.  If a trade is in profit I would take it.  Too many times I would have trades that were in profit, but I would wait for that profit to grow more, but invariably the market would swing back in the other direction as everyone else took profits.  A certain profit is far better than a possible profit.

4)     Protect your profits.  I have a trading rule now that as soon as I can I am obliged to put a stop loss at my breakeven point.  If I want I can then leave the trade to ride, but at least I know that no matter what happened I can’t loose money on that trade.

 

Conclusion

Far from being put off currency trading I feel I have learnt a lot and like anything that you fail at you can either let it turn you off it for ever, or you can get right back on that horse, perhaps a little more worse for wear, but hopefully a little more wiser.  It is my aim now to raise $100,000 from the first Tier businesses in my 10 year plan (to establish AEReS as described here) so that I can again begin currency trading with sufficient starting capital to make it profitable.  It is my intention that if the balance on my trading account ever drops below $100,000 that I would immediately hat trading so as not to loose the $100,000 and would instead continue to raise the money needed for AEReS by more traditional means.