You have all heard the business analogy used a billion times in the trading world. And in case you haven’t, it goes something like this, “If you want to do well at trading, you must treat it like a business.”. Then they go on to cite some business examples and you pretty much get the rest of the idea. So why don’t new traders follow through on this idea? And how do you go about treating forex like a business anyway? It’s not like you are selling pizzas, or is it?

Let’s think about a guy who wants to start a pizza joint. There are tons of them in New Jersey. How does he start? First he has to be confident enough that he can make a pizza that can compete with the pizza supply from the 9 million other pizza joints in the area. Okay so let’s say he has an idea about how he will differentiate his pizza. Is that enough to go out and get a small business loan, or a high interest loan from cousin Joe’s book maker and friendly neighborhood banker Pauly which is collateralized against his fingers, or sink his own capital into the business? No sensible pizza guy would do such a thing.

The sensible pizza guy does research. Tons of it. Competition, location, equipment, marketing and promotion, menu development, labor, legal, accounting. And so much more. So why do new traders who claim to be “serious” about this do the opposite? Just jump in, start putting real money at risk without the slightest understanding of structure, leverage or risk? Some new traders are risking real money and don’t even know the difference between a micro lot, mini lot or standard lot.

Let’s take a moment and consider why new traders may behave this way. Have you ever seen banner ads for entering the pizza business that say, “Make pizza and generate 50% of your initial investment every month! Just buy this proprietary dough and special sauce and you will have the secret recipe that will get your customers instantly hooked and wanting more! Our pizza formula actually prepares and sells itself! Make money selling pizza while you sleep! Testimonial: I made $100,000 in two weeks and slept the whole time , Salvatore G. NJ.”

I wonder how much more impulsive and less responsible aspiring pizza business owners would be if ads like that did appear. The next question is, if you actually believe the message of such marketing, and you lose all your money, is this the marketer’s fault? New trader ignorance and emotional needs lead to such beliefs and conclude with empty trading accounts. Whose fault is this? Here is a clue: It’s not the marketer’s.

The lesson to take away is this: Before you fund your trading account and start your strategy experiments, you need to first create an educational plan. Begin with an outline that looks something like this:

Study Basics
Go to a website like www.babypips.com and learn how the forex market works (You can spend weeks on this site)

Open a Practice Account

Find a broker that you are comfortable with initially. Open a practice account in order to become comfortable with order entry, order types, leverage and position sizing. It is too early to to use this for strategy development or performance metrics. This means don’t think you are ready to trade because you have a couple of good trades. Also don’t feel discouraged when you generate losing tradings.

Research analysis and trading styles

Visit forums such as www.forexfactory.com and expose yourself to different styles and perspectives. The purpose of this is to just get familiar with the many technical and fundamental views on the markets. Do not open an account and start trading on such information. Also don’t think you have to use everything you come across here, much of it is ineffective. The purpose is to get familiar with how the crowd thinks, and appreciate the difference between conventional and unconventional ideas.

Research Educators

This is the most important part of your educational plan. This is also ongoing. You want to first find an educator that offers the style you are most interested in. Then you want to learn about them, watch their youtube videos, sign up for a free chatroom, ask around to see what other people are saying about them. Get in touch with the educator and ask questions and analyze the quality of their responses. This process can take months.

Just like a pizza guy doesn’t just sign a lease and start making pizzas on an impulse, you should not be opening an account in the same way. Prepare yourself by gathering information and plan on doing this for a few months. This investment of time is well worth the amount of money and hair follicles you will save on mistakes resulting from ignorance and lack of structure. Also by having a good general foundation, you will be that much more prepared for when you find your mentor. You will be in a much better position to judge if their training is right for you and if it is, be able to utilize your training much earlier than if you had to start from scratch.

—
Marc Principato, CMT

Risk Disclaimer