Top five trading tips from Dragon's Den's Richard Farleigh

There's a lot of conflicting information out there on the best way to trade and trying to absorb it all could lead to a bigger headache before you've even started.

But don't fear, Richard Farleigh - one of the best-known business brains following a stint on BBC's Dragon's Den - has offered a string of tips to get your trading life underway.

The early years

Multi-millionaire Farleigh, originally hails from Australia and has a rags-to-riches tale worthy of a Hollywood film. Born in the outback, with an abusive alcoholic father, he went into foster care aged two. From a young age Farleigh was considered reclusive and struggled at school and was diagnosed with Asperger syndrome for a period of time.

Indeed his love of chess and puzzles as a child is not at odds with some of the characteristics associated with this form of autism and led to a natural aptitude for mathematics. Farleigh competed in chess tournaments across Australia and with his success came increased confidence and better performance at school.

So much so that Farleigh was awarded a scholarship by the Reserve Bank of Australia (RBA) to study economics at the University of New South Wales. From the age of 23, Farleigh did a stint as an investment banker in the derivatives division for Bankers Trust Australia, which led him to develop trading principles that he still abides by today. By the age of 27 he was the youngest director in an Australian Bank ever and in his early 30s he was earning a seven-figure salary as the star trader of the bank.

Aged 34, Farleigh retired from trading and started to look for investment opportunities within the smaller company sector, both at home and abroad. It is this interest that meshed so well with the Dragon's Den idea of taking a punt on start-up businesses and led to Farleigh's appearance in the third and fourth series in the UK.

Unlike many high-earning traders Farleigh disliked the idea of flirting with risk and developed principles solely designed to limit it.

Here are five of his most feted rules for a successful trading strategy...

1. Different markets have many useful similarities

Farleigh says: "For those of you who just want to trade FX you're already limiting yourselves a little bit. If you have a view on a situation often it will lead you to different markets. You have to have a genuine opportunity and be sure there is an opportunity."

For example, a view on a currency will usually stem from a view on that country's economy.

If you are long on the Australian dollar, why not think about the themes that have led you to take that position and whether you can benefit from investment in those. Links with China, high demand for its commodities and the high yield paid by the RBA are chief reasons cited to invest in the Aussie dollar.

Could you use that information to seek out mining companies with exposure to Australia's commodity story?

2. Fear the market

Farleigh says: "When I first started trading in my own time I lost AU$4,000 in a number of months. At that stage I was earning AU$20,000 a year. Any view on markets has to start with a fear about losing a lot of money and losing it quickly.

"I wanted new traders with me to start with a loss. If they made money straight away they would get very cocky and it would just make them think it was easy."

You can't expect to win every trade from the start and have to be prepared to lose money. If you are not in a position to lose money, you shouldn't be trading.

3. Markets are more efficient than people think

Farleigh says: "Markets are 95% efficient, which means most information is already in the price. If you think the EUR/USD is going to go up or down, ask yourself why do you know that and no-one else does?

"Also ask yourself what they know that you don't. Be very sceptical, just reading stuff in a paper that other people know about is not a technique."

Particularly with currency, it is important to be as ahead of the curve as you can be. Access to an economic calendar with notifications of currency-moving events and data releases is crucial. If you are clued up on what is due to happen on any given day you can formulate an opinion on how you think the event will affect the market. From there you can make more informed trades, rather than lagging behind waiting for the information to filter through to you and catching the market movement too late.

4. Understand recent history

Farleigh says: "Explaining something that has happened helps you identify patterns. If someone can explain why the yen went up after the tsunami then that is more beneficial than them trying to second guess what it's going to do next."

Initially, many people were confused by the upward surge of the yen after the tsunami and subsequent nuclear crisis hit Japan. Even if one of those people was you, working out that it was due to the repatriation of funds by businesses, individuals and insurance companies pre-empting the need for clear-up funds would help you to look for similar situations in the future and enable you to react faster next time round.

5. A small advantage is enough to outperform the market

Farleigh says: "You're never going to have a big advantage over financial markets. At best you're going to have a small advantage and its going to take time. You have to have the right sized positions and right mental attitude. Do not give up after one go. You can't be sloppy, you have to say ‘this is my technique, this is my position size, this is my stop loss'. You have to be careful and disciplined."

Just because something works for you once, or twice, don't automatically double your position size as that could easily be the time it goes wrong and you lose money. Farleigh says he always has to execute a particular trade or position successfully eight times before he trusts the technique and theory behind it and doesn't just see it as a fluke.

Only then will he think about increasing his position size.

This article was written for Interactive Investor

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very interesting