Being the largest market, retail traders are pitted against the largest business and financial entities and some of the smartest brains. Coupled with the use of large levels of leverage (50 times in Singapore and up to as much as 800 times offered by brokers elsewhere), trading in FX can be a highly risky business. Therefore, early mistakes for the novice or aspiring trader can be expensive and can put one out of business right away.

In this article, I would like to bring up 10 essentials for new trader to take note. Consider them the survival guide while you navigate unfamiliar territory. The rule is to stay in the game while you strengthen your wings and feathers. This guide will help new FX traders eliminate mistakes that arise from lack of experience as well as personal complacency.

There are plenty of literature both in print as well as the Internet. While many titles that you pick up will actually carry a lot of information that overlaps, I always consider it worthwhile if it contains one paragraph that has insight not mentioned elsewhere.

Discussion with such persons provides structure to all the information that we have gathered through our reading. We ask for their help with the questions we have and as a two-way process, they jog our memories and test our understanding by asking us critical questions.

An experienced and caring professional can also interview you to understand your needs. By pointing to a suitable path based on their experience, they can help to save us a lot of trial and error.

No one trades FX without knowing technical analysis because it is really a game of managing support and resistance and knowing what the trend is. Now some readers may not like that sentence but let me make some observations.

Visit popular FX-related websites like DailyFX (http://www.dailyfx.com) and CNBC (http://www.cnbc.com) and you will realize that there are always price charts and mention of support and resistance of currency pairs. Now you need technical analysis knowledge to be able to analyze those and that means if you ignore technical analysis, you miss out half of the input.

We can really get good ones provided by trading brokerages if we use their trading platform. Not all brokerages provide price charts however and some provide charts that are inadequate.

What kind of charting software?

Get acquainted with economic news and understand their implications to FX. That said even readers who have good clear understanding of economics may not be able to fully comprehend their effects on currency movement. That is because as retail traders, many of us do not receive enough information. In addition, the markets are forward looking, that is they anticipate and move ahead of events so that markets may not react anymore when news actually comes out.

I know of two types of traders who make use of news announcements: one to speculate and the other to avoid them.

The former speculates on the outcome of news announcements hoping that price will react decisively in a profitable direction. While it sounds like betting, some technique is involved. To be profitable in the long run, the speculator must follow some rules including limiting the downside risk of getting it wrong.

The other type of trader uses some strategy or another but wants news out of the way. Sudden movements are not welcome so no news is good news.

Whether you like to trade news or avoid them, a trading calendar is indispensable.

A good calendar has the following:

This is the place where we try out FX trading in a hands-on manner. After all we need to put our knowledge to application. At this stage, two things cross your mind: what is a good demo platform and what do you do with it?

Some important features:

What do you then?

Your strategies should make use of technical analysis or fundamental analysis or both. You should never be trading on someone else’s opinion because FX is fluid and situations change rapidly.

A crucial aspect of FX trading is risk management and cutting loss. Due to the high levels of leverage at work, traders should never hang on to a losing position. Averaging is NO-NO.

Improve and refine your strategy until you win money consistently. You must fully understand the mechanics of success so that they can be duplicated. Reasons for failure must be avoided. Sometimes, you have to drop a strategy entirely and start all over.

The more we trade, the more we learn. Situations continue to arise that challenge our knowledge. Gaps will appear and ‘truth’ suddenly becomes myth. Learn to recognize price setups and the events they associate with. Drill your trade execution based on the chosen strategy until you can carry them out reflexively.

Cash accounts should fit some criteria:

New traders should take note of an important fact. Brokerages offering FX trading in Singapore provide differentiation of services. The terms and conditions they offer can be varied and no one should take for granted that one broker is the same as the other. Make sure that you talk to a trading representative to discuss the finer points.

That’s because at this point emotions are involved. Make sure that you trade with disposable funds and follow a plan. After all, currency speculation is a really thoughtful activity.

Profit is all about to understand the market conditions clearly, before trading and doing right things at the right time. This is said easier than done. For a new investor, the beginning has to be on cautious premises. Choose blue-chips companies, whose reputation is above board and which have been consistently paying dividends and bonus/right issues. Alternatively, in the course of your research, you spot some companies whose share prices are low, it means that you have managed to beat the market and this investment is likely to fetch you good profits.

When you are unable to catch the trends of the market, and move away from them, instead of beating the market, you are beating the retreat. In such conditions, take advice from reputed stock analysts, who can tender appropriate advice, on the basis of the inputs secured from the fundamental and technical analysis. No method provides one with 100% guarantee of success, but workout such plans so that the odds are in your favor. The results of the research before you provide confidence, you understand the market better, and catch the right signals. In addition, your psychology and sentiments are important part of your trading and they are the practical elements in making money. When you provide suitable cut loss limits, they will keep you off trouble and you are able to prevent major losses.

Profit from share trading is not a profound science. The methods to deal with the exchange are amazingly simple. Only you need to employ them effectively and in a timely manner. If you are able to catch the signals of early stage of price rise movements, one can take advantage of the maximum profit opportunity with minimum chances of risk and losses.

Any condition is a good condition for a shrewd investor. The market bows before such investors, and provides them with a series of profit opportunities, whether the shares are moving up, down or sideways. Those are the masters of option trading. Such people wear ‘all weather proof jackets.’ They are mostly stock trading millionaires.

In any given market conditions, as far as possible, avoid day trading. Howsoever great are your strategies, risk looms large in such trades. Intra-day trading in the same security is fraught with great risk. Some one with limited resources and trading experience and with low risk tolerance should not enter this trade zone at all. Those who claim large profits from day trading, are perhaps are conducting their clandestine business to promote a particular share of the company, with some hidden agenda. Even in the normal course of day trading, your competitors are professional licensed traders engaged by securities firms, institutional finance companies and the commercial banks. A small investor stands no chances of engaging them in voluminous trades.

For immediate profits, option trading strategy is less risky and the chances of profits are more. There are many kinds of option trading strategies. Call Option, Sell Naked Put Option, Bull Put Option, Bear Put Spread, Straddle, Covered Call, and Short Straddle etc. Use these strategies as per your specific portfolio needs.

When you think of making profits in all market conditions, it is important for the investor to know, in which condition the market is passing through at a given moment. Unpredictability of the market is well-known to all investors. It so happens, when the well is full, you do not have the drums to store water, and when you have enough empty drums, the well is empty! Such are the tantrums of the share market; one fails to appreciate, its behavior. You can not question it with your reason, only accept the fact and respect the trends. There is no other way to do business dealings in the share market.

Trailing stop

The trailing stop works perfect with strategies with a maximum drawdown allowance.  A trailing stop is a stop loss that trails the current price by a percentage or amount that the trader sets.

For instance, if a trader sets a trailing stop of 10% on a $100 stock, the trailing stop will start at $90.  If the stock then moves to $120, the trailing stop will sit at $108.  Trailing stops never retrace; thus, if the price were to fall from $120 to $100, the trader would be stopped out at $108 for a profit of 8%.

Trailing stops can be very profitable to traders who use them in tandem with technical analysis.  Consider that a stock gyrates up to 10% a month – inserting a stop loss of 11% will ensure that the maximum normal gyration is considered while catching the stock before it falls out of normal range.

Normal market exit

The normal stop loss exit is set at the price the trader is willing to take for a maximum loss.  This normal exit is usually 8% for stock trades, though it can be lower for more conservative approaches.  Knowing how to generate profits can often be as easy as knowing when to cut a loss.  The basic trading fundamentals of any strategy will always include a normal market exit.

Backup exit

This stop loss approach is geared to preserving trading capital rather than exiting the market.  This stop loss is usually set much lower than the normal market exit and is used as an emergency backup rather than an exit.  These types of stop loss approaches are adorned by short term scalpers and traders who base decisions on real time technical analysis.

A perfect exit

Some traders use stop losses just because they represent a free limit order.  A stop loss will always be executed at the price for which it is set.  Some traders move stop losses up into the profit area to set a profit point below the price for a positive worst case scenario.  There are many ways to use a stop loss; none of them are perfect and they all need to be refined, but some of the best trading options come from the ability to place a stop loss.

1. The stock’s past history and movement.

2. Expected earnings reports of the stock’s parent company.

3. Volatility and volume of shares traded daily.

4. Any current news concerning the company’s growth or profitability.

5. The price of the option with respect to how you think the stock will perform. If you do not feel the stock’s movement will handily offset the cost of the option, plus the trading fees, then buying or selling the option would be fruitless.

6. Supply and demand of the underlying stock. (Industry group market action.)

Once you have decided upon which stock to pick, you next need to decide whether you believe the stock’s price is likely to rise or fall. (With stock options you can make money in either direction.)

By purchasing a Call option:

1. You expect the price of the underlying stock to rise, so you can then purchase it at the lower strike price, making a profit in the transaction.

2. You have the right to control 100 shares of stock for a fraction of the cost of purchasing the stock outright.

3. You are managing your risk by limiting the downside to the premium paid for the option. The major downside to buying any option is time decay. Your option expires within a finite period of time. If the underlying stock price behaves as expected, you will not need to be concerned about execution.

Having shown you the benefits of buying Calls over the risks of purchasing the stocks outright, we must emphasize the fact that buying short-term Calls has its associated risks as well. A Call buyer, especially a short-term Call buyer, is severely limited by the time-decay factor. The nearer to the expiration of an option, the less the option is worth, and the less time is remaining for the option to become profitable. Within the leverage used by gambling casinos (the house), the concept of short-term Call buying is completely understood, as well as exploited, as gamblers are considered short-term Call buyers.

Example: Consider your long-term Put, or Call, as a 6 to 8 month license to operate a casino. It allows you to capture short-term premiums; money that gamblers continuously give to you in attempting to beat the odds by speculating they will make profits on very risky bets. They feverishly feed the slot machines, ante up at poker, double-down on blackjack, or spin the roulette wheel. The odds are overwhelmingly against these short-term buyers. You, as the casino owner, continuously capture these short-term premiums, easily offsetting the expense of the license to operate the casino, then earning substantial, clear profits in the following months. They know the odds are with the casino owner, but they still take the enormous gamble on the slim chance they will hit a jackpot. The lottery works in the same manner.

On one side of the position, the transaction is definitely gambling, while on the other, the casino is simply engaging in business. Would you rather bet on the remote chance of a gambler’s rare, limited success, or rake in the steady, routine premiums captured from operating a successful business? Yes, occasionally a gambler does beat the odds to enjoy a limited, windfall return on his bet. For the casino owner, that is simply part of the cost of doing business. But we all know where the true, long-term profits lie. 30%, 40%, 50% and more, are common, and in short periods of time. The odds are with the short-term option seller, not the buyer.

When you choose a stock for short-term Call buying, you not only must carefully consider the proper stock for the type of option you are purchasing, you must also decide which direction the stock will move, then, that movement must occur within a specified, very limited period of time. Many investors have gone broke by attempting to make those same decisions. In short, time is not on the side of the short-term option buyer. It is on the side of the option seller.

Summary: 1. Buying stocks is risky.

2. Buying short-term options is less risky, but still risky.

3. Selling short-term options is the least risky, especially with a hedge, or insurance.

By selling a Call option:

1. You expect the underlying stock price to fall, so the option will not be exercised, but expire, worthless.

2. You can capture the entire premium that was paid to you, as profit. If the underlying stock price rises, you are obligated to sell 100 shares of stock at the lower strike price. If you do not already own those shares, you would then have to buy them at a higher market value, then sell them at the strike price, in order to meet your obligation. This situation is called a “Naked,” or “Uncovered” position, and is extremely dangerous. Anytime you sell a Call option you should consider buying the same option with a slightly lower strike price, and longer expiration date. This will reduce your profit potential, but will also reduce your risk considerably. (Remember the parallel twins, Risk and Reward

- If you want to reduce risk, you must also give up some degree of potential rewards. You may wish to lower your cost basis in the stock, to the extent of the premium received.

By purchasing a Put option:

1. You expect the price of the underlying stock to fall, allowing you to sell stock at the higher strike price, and thereby earning a profit.

2. This option is also used in a combination strategy as a hedge against selling Puts. We will explore that strategy later, in detail.

3. Buying Put options could also be used as a hedge, or insurance, against the possibility of a price drop in stock you already own. Consider the following:

You own 100 shares of ABC stock, and are concerned that the stock price could suddenly fall. You purchase a Put option on the same stock, with a strike price at current market value. If your stock falls in price, you would have the right to exercise your option and sell 100 shares of ABC stock at the higher strike price. The premium you paid for the option could be far less than the loss you would have incurred without that insurance. In this instance buying Puts acted as a hedge against the possibility of a price decrease in the stocks you already own. If the price of the underlying stock increases, your loss is limited to the premium you paid for the option. The option acts as an insurance policy against possible loss.

Selling a Put option without an opposing hedge -”Naked” You expect the price of the underlying stock to increase, causing the Put option you sold to expire worthless. You can then capture the entire premium paid to you, as profit. If the underlying stock price were to fall below the strike price, then you would be obligated to purchase the stock at the strike price, or pay the difference between the strike price and the stock price, if you do not want to own the stock. Your upside is limited to the premium received for selling the option. Your downside is potentially unlimited to the base value of whatever you could sell the stock for on the open market, or to the difference between the strike price and the stock price. This is a “Naked,” or “Uncovered” position, and should never be allowed to occur, unintentionally. Without the implementation of combination strategies, the main objective of the Put seller is to hope the option expires, allowing him to capture the entire option premium as profit. Nearing expiration, if the stock price moves below the strike price, changing the option’s value to ITM, and highly vulnerable to exercise, then the option seller must move quickly to buy back the option, perhaps lessening his profit potential, while also managing his risk. Even so, a small loss would be better than having to buy 100 shares of stock at inflated prices. Also, the loss can be immediately compensated for by simultaneously selling another Put expiring in the following month. We use OPM (Other People’s Money) to buffer downside risks, while buying more time for the stock price to rise.

Stock Option Trading, when done properly, can drastically reduce, or even eliminate, these two stumbling blocks to stock market success. In the first place, A trader of stock options never is not required to own the underlying stock in which an option is based. He or she can design a trade in such a way that downside risk is limited to the cost of the option, which in itself is a fraction of the cost of the stock. We capitalize on traders and speculators greed to get rich who purchase overvalued short term options bid up to inflated levels by an excess of demand over supply, by being the house or casino owner and capturing the inflated premium from the players or buyers. We buy reinsurance at a low cost by purchasing a longer term ( 5 to 6 months) out of the money option to sell the stock at a fixed price no matter how low it may drop. We buy this reinsurance ( puts ) to create a profitable hedge and sell overvalued puts repeatedly, month by month to bring the cost of our hedge down to zero and a credit so that we can enjoy a free ride capturing this inflated premium income. This strategy is known as diagonal put spreads and you do not need to pick a winner to profit.