Three Tricks I Wish I’d Known When I First Started Trading…

Posted 06/05/2009, 9:00 am EST by Sean Hyman from worldcurrencywatch.com

Being something of a veteran in the currency markets now, there are plenty of things I do on autopilot when I’m trading. But that wasn’t always the case.

I’ve learned some tricks over the last few years that have made trading much easier. Honestly, I wish I had known all these tricks when I first started, so I could have been a more successful trader, faster. I want the same for you, so today I’m going to teach you all the tricks I had to learn the hard way…

1. Don’t Trade Just Because the Market Is Open

You see, I thought that any time the market was open was a great time to trade. However, eventually I learned that you don’t want to trade when the Asian market first opens on Sunday, and you don’t want to trade in the New York market on Friday afternoons.

Why is that? The big interbanks that provide the volume don’t jump right in with both feet on Sundays. In fact, the volume really doesn’t pick up until Monday morning.

The same goes for Fridays. Once the clock strikes noon on Friday, it always better to be out of your trades unless you’re planning to hold them over the weekend. The volume from the big interbanks starts to fade quickly because these big banks wrap up their week much earlier than your average retail trader. So, it’s very helpful to trade when the big guys are trading, and be out of the markets when they’re not trading.

Tip: If you want to know when the deepest volume is in the currency market, it’s between roughly 3:00 AM EST and 12:00 noon EST. The European markets are open during these hours, and it also covers part of the New York trading session. This is when the market tends to move the most. That means you can secure the best spreads between your buy and sell quotes because the higher volumes mean you pay less per trade.

2. Don’t Trade Off News Events

Lots of traders encourage you to trade off the news. But the problem is good news doesn’t always mean a currency will go up, and bad news doesn’t mean a currency will always go down. It’s never that easy.

If you trade news events long enough, you realize that it’s no better than a coin flip in the end. In fact, as an experiment I had a group trade off of news events around the clock for 30 days. Then I had them do it for another couple of months.

You know what the outcome was? At the end of each month, they were at about break even (give or take a little bit) each and every month.

How is that possible? It’s because the market often expects good news before it happens. As a result, traders buy a particular currency preemptively and it rallies ahead of time. Then that same currency tends to sell off a bit when the good news comes out.

However, the market doesn’t always anticipate good news to come out for a particular currency. When that happens, the currency can rally as the news comes out. The same goes for bad news.

This happens so often, that you end up with about the same odds as a coin toss at the end of each month. So don’t waste your time with news event trading. Also, realize that the big banks don’t generally place positions on around these events. So the volume becomes thin and only the “stupid money” is chasing these trades in the thin volume.

3. Start with a Padded Account and Trade Less

Than You Think You Should

The last thing I wish I’d learned a long time ago is to start with a well capitalized account and trade only one or two lots until I have a good feel for where the market is heading.

You see, many traders ask their brokers, “How much do I have to start an account with?” Rather, they should be asking them, “How much is prudent or practical to start out with?”

You see, if a pair normally moves 100 pips a day and you have a US$300 account, then you could use a third of your capital in one trading session (even if you’re just trading a single mini-lot!).

However, if you start with a larger account, say US$5,000, then you have a greater margin for error. You could trade that same mini-lot, lose 100 pips, and your account will only be down 2%, as opposed to 33%. See the difference? One is recoverable and the other likely is not!

Learn to trade small with well capitalized accounts and you are likely to succeed. Ignore this rule and you’ll struggle in your trades.

So, word to the wise: Learn from my mistakes and save yourself some time.

About the Author: Sean Hyman spends his days teaching his fellow professionals in the industry how to trade the $4 TRILLION currency market. Now he brings his 15 years of financial experience to you. From long-term currency strategies, to quick FX-trading moves usually reserved for the professionals, Sean will tell you everything you need to know to succeed in the currency markets.