New to Forex? Want to know how to get started? It is much harder to succeed at forex trading than most sources on the internet are willing to admit. We will tell you the truth, and the truth is ugly. The goal of this article is to give you a roadmap to minimize your chance of losing your money. So here are the steps to get started:
Step 1: Don’t start
That’s right, don’t start forex trading. Forget all about it. This is not the answer you want to hear. You want to hear that you can make a lot of money. You want to hear that it is easy. But this is not true. The reality is that the vast majority of new traders fail, and you are probably going to be one of them. We make this claim based on the data:
A 2010 study of hundreds of thousands of day traders from 1992 to 2006 that showed:
- 40% of day traders quit trading within a month
- 87% of day traders quit trading within three years
- 93% of day traders quit trading after five years
- only 1.6% of traders were profitable net of all fees, depending on the year (varied between 0.5% – 2.6%)
Let’s emphasize that again: less than 2% of day traders were profitable.
Note that this was a study of day traders who were trading equities on the Taiwan Stock Exchange. These performance results may not translate directly to today’s forex traders, but they are unlikely to be different by a significant margin. The vast majority of new traders will be unprofitable in the long run, and it is just a matter of how much they lose and how long it takes before they quit. The best way to protect your money is not to start trading at all.
Though we would love for you to follow this advice, we expect you will ignore it. So the steps that follow are designed to minimize the chance of you losing your money.
Step 2: Get educated
You need to learn what you are doing, and it is harder than it sounds. Sure, you can get up and running fairly quickly by treating forex trading like a casino game. There are forex brokers out there who cater to this kind of trader. However, you will be much better off if you take the time to learn everything you can before getting started. There are many sources on the internet, and some good sources are free. Babypips.com is one such example. They offer an online course presented as a series of articles that covers a broad range of topics on forex trading. None of the indicators or trading systems are likely to make you profitable in the long run, but they give you a good introduction to finding your own trading system.
The most important aspects of forex trading education are as follows:
1) The basics. Without an understanding of the basics there is no way to even get started. What is a currency pair? What is a pip? What happens to AUD/USD if there is bad news in the USA? How does that same news impact the USD/CAD?
2) Trading psychology. Even if you have a profitable trading system, you will fail if you don’t understand how your emotions can impede your success. Forex Training Group, Pipsychology and Brett Steenbarger have good information about trading psychology.
3) Risk management. Even if you have a profitable trading system, you will eventually fail if you do not properly manage your trading risk. This site offers an interactive risk management calculator to help you choose your position size to minimize your risk of ruin.
4) Trading system. You will need to find or develop a profitable set of trading rules.
Don’t risk real money before you have a thorough understanding of the above topics.
Step 3: Open a permanent demo trading account
Before risking real money, you will need to practice your skills and test your trading systems in a demo account. A demo account simulates a real trading environment, without risking real money. Don’t skip this step. Most forex brokers allow you to open a demo account to practice and test their trading platform. The problem with most of these is that you are only allowed to trade in demo mode for a short time, usually a month or less. This is not enough time to ensure that you will be profitable. You need to find a forex broker that allows you to open a permanent demo account that never expires, so you can take as long as you need to become profitable on paper. IC Markets, XM and Oanda all offer permanent demo accounts. We recommend starting with either of these two brokers for demo trading.
Do not proceed to the next step until your demo account is profitable for at least three months out of four. That is the minimum required to demonstrate real profitability. It may take you a long time to achieve this. It took me over two years. Some sources say you should not demo trade for too long because real trading is different and you may form bad habits. You must ignore that advice. Making a profit with live trading is harder than making a profit in a demo account, so if you can’t even be profitable in a demo account, you are guaranteed to lose your money trading live.
You may never be able to achieve the recommended performance in demo trading. In that case, never move on to the next step and risk real money. Quit without ever having lost money. One of the biggest mistakes new traders make is risking real money before they know how to make a profit. Remember, more than 98% of new traders fail, which means you are probably one of them. Use demo trading to find out for sure, before putting your money at risk.
Step 4: Practice, practice, practice
While trading with a demo account, you will have to find a profitable trading system. This is much harder than it sounds. There are no easy answers. You can try to develop a system yourself, using the tools in the Babypips course, or you can use a system that is already published online. Be wary of any system that is published online, regardless of whether it is for sale or free. 99% of it is garbage that will be unprofitable. Even if it looks good, the scammers have ways to fool and mislead you. If their system was so great, why would they sell it? Why not keep it for themselves and make endless profits for themselves? Please take the time to review our page about forex scams to find out more. Remember, don’t use a system with real money unless you personally use it in demo trading to generate profits in at least three out of four months.
Step 5: Develop a trading plan
Once you have found a profitable trading system, figured out how to manage risk, gained insight into your personal trading psychology, the time has come to put it all together into a documented trading plan. This will give clarity and discipline to your trading approach. It will help keep you on track when your emotions run high, and remind you of the risks and how to manage them.
Step 6: Choose a broker and go live
Only once you have completed all the above steps should you go the final step and open a live account with a forex broker. The best broker for live trading is not necessarily the one you chose for your permanent demo account. Please see our forex broker reviews for a rundown of brokers, along with the key criteria you should consider. Note that most forex brokers have been fined or otherwise penalized by the regulators. Others are outright scammers. Make sure to pick a good one.
We must remind you again of the study in step 1 above that showed that only 1.6% of day traders were profitable. Follow the above steps to find out if you can become one of them before putting your hard earned money at risk.