Beginner Forex Trader

Let us briefly consider the path of progression for the average aspiring boxer. The aspirant is likely to commence such a journey by attending a local boxing club, going through a process of membership registration, and acquiring appropriate footwear and or any other related equipment. As the weeks go by, the aspirant transitions to become a novice boxer; one who is being schooled on the fundamentals of the sport, and continues to work with key tools such as punching pads, and may even engage in some friendly sparring. And as the months and years go by, the novice boxer is likely to progress through the amateur ranks by competing against local, regional and national talent.

Throughout the amateur phase, the boxer is highly likely to receive very little to no related income: but the boxing club membership and other related costs must be settled. And until the boxer turns professional, earnings from the sport may remain non-existent. Boxing shares a number of similarities with trading.

The beginner forex trader (or of any other market) can make almost as much money as one could think of, dependent, of course, on starting capital, and appetite for risk. More importantly, perhaps, the beginner trader is most likely to lose all money received (to the last cent): with interest added. There are several reasons for this; let us explore them.

As discussed previously, as a new trader, there is a relationship between one’s starting capital, and one’s profit potential per trade (see “ Deciding the Right Amount of Money for You”). There is also a link between one’s appetite for risk, and profit potential per trade; but the link is most unfavourable for beginner traders.  

The diagram above seeks to depict the relationship between different categories of traders. It suggests that capital is aggregated from one group of traders (as deposits) towards another group of traders (as withdrawal of profits): with such transition being aided by gravity.  And even within the broader group of withdrawers, some are better positioned to withdraw greater amounts than others.

The beginner forex trader falls under the category of ‘novice’. With the depiction above still in mind, if the beginner forex trader is to make money, from whom is it to be obtained? The novice trader can only truly gain from other novices: but can lose money to others from the categories of ‘novice’ right through to ‘master’. In trading, one’s ability to gain money is secondary in importance to one’s ability to retain money that’s been gained; and the minimum requirement for retaining what has been gained is competency.

The Five Levels of Trading

Imagine the time is 9:00pm, and you are just arriving at the centre of a large and fast-growing town to which you’ve not previously visited. Some time prior to your visit, you got wind of certain outdoor happenings across the town, and you’ve decided to get a sense of the environment for yourself. You arrive at a hotel near the centre of town in which you are greeted by a receptionist who informs you of the different types of rooms available, from the ground floor right to the top; and, you are also informed that the upper levels of the hotel offer great aerial view of the town. Which room would you choose?

The late great trading educator, Bill Williams, asserted that there are five levels of trading, namely: Novice, Advanced Beginner, Competent, Virtuoso, and Master. Let us briefly explore each of these.

NOVICE LEVEL OF TRADING

Every new trader, irrespective of market(s) being traded, begins at the novice level of trading. At this level, the aim of the new trader ought to be that of trading the market and gaining some experience without losing money (without blowing your account). Your limitations at this point are knowledge and attitude, and both of those would need be improved upon before you can progress onto the Advanced Beginner level. Limitations on knowledge and attitude includes, but not restricted to, knowledge about yourself, the market(s) you trade and its participants, attitude towards various aspects of trading, and life in general.

Think back to our discussion on the ‘five broad categories of learning’, and ‘SAPA’.

ADVANCED BEGINNER LEVEL OF TRADING

At this level you will continue to improve upon your knowledge and attitude. However, your primary aim ought to be making money consistently (in a way that does not vary) whilst trading small capital.  Within this context, consistently implies approaching your trading activities in a predefined manner: and not necessarily how many trades end favourably. Trading consistently entails that you create and implement a trading plan (at least your first of a few likely renditions).

The aforementioned must be achieved before transitioning away from this level and into the Competent level.

COMPETENT LEVEL OF TRADING

This level sees continuation in advanced improvements to your attitude and knowledge of self, the market(s) and trading; and improvements toward trading consistently.

This level is attained once you know all the signals of your trading plan, all the different ways it can be presented by the market (its permutations), and how to implement them. You understand the mechanics of your trading platform and how to use them effectively.  

Bill Williams contends that this level marks the end to the science aspect of trading. the subsequent levels beyond this point are immensely reliant on the development and utilization of advanced trading psychology.    

VIRTUOSO LEVEL OF TRADING

If you’ve been exposed to the world of trading for long enough, or fortunate to have been mentored by a trader operating at this level, you may have witnessed one of a few ways in which such traders seek to align their feelings with the market. For example, in stock trading, some traders operating at this level often position small orders ahead of the market (in any direction) with the objective of gauging how such position gets filled by the market. The feedback would enable the trader to better align own feelings with the current intentions of the market.       

At this level, traders know what’s going on in the market, without knowing how they know and or being unable to explain it. 

MASTER LEVEL OF TRADING

At this level, the master trader knows and understands the market to an entrenched degree; characterised by inventiveness and seeing what others can’t see.  For instance, at this level, the master trader can spend just a few seconds at observing the market and swiftly gain understanding of what’s set to play out. The trader may position orders at a set area of price action, ride that through, and then position orders ahead of the market in the opposite direction. It would seem almost as though the markets are observant and respectful of the master trader’s instructions.

As a beginner forex trader, WHERE DO YOU FIT IN?

Let us revisit our initial scenario of arriving at a hotel in a new town, and the need to book a room. The hotel has five floors from ground up.

The ground floor (street level) is host to the main entrance. It is capacious of all floors, but its rooms are characterised by small blurred windows which are positioned well beyond the average eye level. The rooms have very minimal amenities; the cost per night is cheap and (unsurprisingly) not inclusive of breakfast or any other meals.    

The first floor up is host to rooms of a similar size to those on the ground floor. But they are characterised by slightly big windows which are positioned at eye level, and enable for some view of activities at street level. The rooms have basic amenities; and the cost per night is relatively cheap and not inclusive of breakfast or any other meals; but, each room on this floor is equipped with a stainless-steel tray which is frequently host to a basic assortment of biscuits and teabags, along with a set of cups and a small kettle.

The second floor up hosts rooms and windows that are notably bigger than those on the lower floors; the windows offer a good view from above street level, albeit from only one of four sides of the hotel, per room. The rooms offer decent amenities: inclusive of Wi-Fi, gym access, and room service. The cost per night is modest, and it is inclusive of a reasonable breakfast offering: which includes tea/coffee, orange juice, muffins and croissants.

The third floor up has far fewer rooms than the previous floors, but they are considerably larger in size: premium in nature. The rooms are characterised by very large windows positioned on two of four sides of the hotel, and offering great views from above street level. Although pricey, the rooms offer access to excellent amenities including swimming pool, gym, and sauna. And, premium-grade meals are offered three times daily.    

The fourth floor up is the penthouse; only one available. It is very spacious, has large windows on all four sides of the hotel, and has a balcony area that spans all four sides of the hotel. The penthouse offers access to all amenities offered by the hotel, and dedicated round-the-clock room service. Reservations are only accepted from regular guests of the hotel, and the cost per night is not for the faint hearted.

Starting out in trading is like having a room reservation on the ground floor of our fictitious hotel. You may not like it and, perhaps, would like to upgrade to a better room. But can you afford it? Have you got what it takes to get closer towards becoming a master trader?  What does it take to get closer towards trading mastery? This is a consideration you need think carefully about. We discuss this further under “ Is Forex Trading Worth Starting?”.