Daytrading Instrument: Forex or Emini Futures?

Received this from a fellow course mate:

Thank you for sharing with me so much through the few days of knowing only each other for such a short while. I kind of admire you that you have become a full-time trader, and I truly want to be in the footsteps of you and Michael Woo.

As I see myself having similar interests with you trading both the futures and forex, I was just wondering if you can help me with some queries which I have in mind.

Currently, I am trading in the Spot Forex, which in time I will be moving to the futures market once I have enough dough to open an IB account. I do have 2 questions, hope you can help me.

Are there are periods of time which you shun away or avoid trading big units due to low volatility or news such as FOMC.

Also, I am highly curious who you have learnt forex trading from. Will you be able to recommend the person who taught you forex trading? Whilst I am fully committed to Michael Woo's teachings, my aim is to build capital from trading forex as it is the only way that could lead me to the E-MINI trading eventually.

My reply (which I've decided to put on my blog because I realized it is something I can refer to whenever I feel lost myself) is going to offend forex scalpers I'm afraid, and I want to state that this is purely my opinion, and opinions and facts are not the same:

You mentioned you would like to use profits from forex trading to start a futures trading account with IB. I'm not sure that's the easiest path, or even a correct one for that matter. Personally, I would do the opposite, and here's why: it is easier to generate "income" from trading futures than forex. The futures market is where all the actions are on intraday basis. You can find trading opportunities virtually everyday in the futures market. With forex, there tend to be long periods of price congestions (where price is going nowhere), and the only way to make quick profits is if you scalp the 1-min charts. Add spreads and commissions into the picture and you'll be left with very meager profits. That is provided you're right most of the time. And even if you are, trading off 1min charts will take you ages to accumulate what you need to start an account in IB.

Since I know nothing about your financial status and why you are rushing into making money from trading, I'll just give you my general opinion: it's more feasible and realistic to SAVE up to start a 10K account to trade the eminis, and build your account SLOWLY. By that time, you'll not want to go back to forex, except to SWING trade it.

If I remember correctly, you're now pusuing a tertiary education? Do you work part-time? If you do, then start saving. Depending on your income, it might take you a year or 2 to reach USD10k. Meanwhile, open a paper trading account (with Options Express perhaps) and start paper trading the e-minis to get in syn with the market and get familiar with e mini futures. When you are finally able to fund an IB account, it's advisable to paper trade on the IB platform for a week or two to get used to it. After that, you can start trading real money, since you'd have had done a lot of paper trading by then.

As and when you start paper trading, start a trading journal as well. Document how you plan your trade, document your entries and exits and include details like whether you have followed your plan (which would include the REASONS for entries and exits), document your thinking process (aka decision making process), your moods, and finally, document what the broader market sentiment is like for that day.

By the time you complete your own "coaching" program, you'll have enough notes and real data to assess what type of trader you are (are you a scalper or a daytrader? what chart patterns are you inclined to recognize and profit from? what is your risk tolerence - which will determine where you place your stops, etc), which timeframe suits you (some people can trade the 1st 2 hours, and some can't), and what kind of market is more profitable for you (some people can't make money from a market that's too volatile, some flourish in a wild market - both groups make money).

Having all this info gives you the confidence to enter a trade and see it through, and also the experience to know when you should take profit or get out of a losing trade.

What I'm telling you might not sit well with you. But I have to tell you that PATIENCE is a trait that if you don't already have right now, you'll have to start acquiring. Trading really tests your patience. Much like fishing. Am sure you know what I'm getting at.

There's always plenty of opportunity to make money once you've acquired both knowledge about the market and ABOUT YOURSELF. Right now, it's important for you to focus on your studies and not be distracted by losses (as you can see, I'm stating it as if it is a fact. It is. Losses are part of the game. You will most definitely lose money in the first few months or even years that you begin trading). It's ok to paper trade to gain knowledge about the instrument you're trading, about the market, and about yourself as a trader. Even taking time out to work to save up for your capital is ok, as long as your work doesn't take your focus away from your studies.

Trading real money requires full concentration and a GOOD state. If you're worrying about a test, an assignment or an exam, it's not possible to trade well. So you're looking at a situation where both your trading and your studies are going to be affected.

If you must earn quick money, I suggest you take up a sales job. The hours are usually flexible, and if you're a people person, you'll most likely even have fun at work :-)

Just don't put your hope on making money from trading. Not now. Not even in the next few months. Trading is like any other profession. It takes years of practice and being with the market DAILY to become good at it. You don't have to start counting from the day you have the capital to start trading. You can start now by paper trading. That is experience too. And you don't lose any money.

Just make sure that when you paper trade, you treat it like it's real trading. Which means you don't trade 10 contracts and wipe out your 100k paper trading account in a month. You trade on paper the way you'll trade with real money. It will make the transition to real money trading much much faster. When you finally start trading with real money, just be prepared that there'll be a learning curve too. The psychology will be different, no matter how prepared you are. But having the confidence that you actually know what you're doing will give you a lot of edge.

Now, to answer your question on forex - I can't point you to anyone, coz I've never had a teacher. I'm self-taught. There isn't even a good forex book on the market that I can recommend you. The best forex books are the manuals that banks write for their traders. These are the professional traders who look at a multitude of things that will overwhelm you at this point if I were to tell you what they are.

In anycase, it's pointless to know how they work, coz we belong to the group called "retail" traders. We are at their mercy. There's just no way that you can daytrade forex to consistently make money. With forex, you'll have to take a buy/sell and hold approach. Trend recognition becomes an important skill you must develop. Once you figure out what the short to intermediate trend is, you'll trade in that direction until there're signs to tell you to get out. These signs are mostly fundamental; charts will not be useful.

I was telling you the other day about patterns being useful on even intraday charts - I was speaking in the context of an established trend. When I do intraday trade, I'll need charts to time my entry. But I already have an idea where the pair is heading so I trade only in that direction. But the reason I'm trading FX is so that I don't lose touch with the FX market. Not to make money. Not that I can't, it's just that daytrading FX is not at all lucrative. Swing trading or postition trading (where you hold your trades for weeks to months) is the only way to make money from the FX market. But in order to do that, you'll have to have MORE money than what you need to start trading the eminis.

Now, do you see why I said I would do the opposite of what you're planning to do ie. to trade FX first then trade the eminis?

Will let you digest the above before I say more :-)

Feel free to write to me. If I've confused you in any way, do let me know. If you need further clarification to the above, just give me a shout.

You know, the internet offers a wealth of info on trading all kinds of instruments, free of charge. You are already familiar with the basics of trading, so I won't suggest that you read more books. You don't appear to be the reading kind to me :-)

If action is what you want, start by OBSERVING others in action. Visit forums and blogs. NEVER trade others' views and opinions. Just WATCH what they do, and take note of the outcome of their trading decisions. They provide good info on general market sentiments, and sometimes offer very good insights regarding the market and regarding trading. Observe how they develop those insights, and how they use them in their decision making process.

What you want to learn from them is HOW THEY EVOLVE from a novice to a fairly competent trader. The exercise will help you to write comprehensive journal entries. More importantly, as a start, these blogs and forums will tell you things that you should know, which you can't go about finding out if you're clueless as to what you don't know :-)

Go to my blog (www.juzjules.blogspot.com) and focus on the list on the right - my blogroll. Those are good blogs. Most are forex and stock traders. Check out Traderfeed - Dr Brett's archive is a treasure. Take a look and you'll know what I'm talking about.