How To Develop A Profitable Forex Trading Mindset
It‟s an unavoidable reality that your forex trading success or failure will largely depend on your mindset. In other words, if your Forex trading psychology is not right, you aren‟t going to make any money! Unfortunately, most traders ignore this important fact or are unaware of how critical having the proper mindset is to Forex trading success. If you do not have the correct trading mindse t, it doesn‟t matter how good your trading strategy is, because no strategy will ever make money if it‟s used by a trader with the wrong psychology. A lot of people seem to be unaware of the fact that they are trading with a mindset that is inhibiting them from making money in the markets. Instead, they think that if they just find the right indicator or system they will magically start printing money from their computer. Trading success is the end result of developing the proper trading habits, and habits are the end result of having the proper trading psychology. Today‟s lesson is going to give you the insight you need to develop a profitable trading mindset, so read this lesson carefully and don‟t dismiss any of it, because I promise you that the reason you are a re struggling in the markets now is because your mindset is working against you instead of for you. Step 1: Have realistic expectations
The first thing you need to do to develop the proper Forex trading mindset is have realistic expectations about trading. trad ing. What I mean is this; don‟t think you‟re going to quit your job and start making a million dollars a year after 2 months of trading live with your $5,000 account. That‟s not how it works, and the sooner you ground your expectations in reality, the sooner you will begin to make money consistently. You need to accept that you cannot over-trade and over-leverage your way to trading success, if you do those two things you might make some quick money temporarily, but you will soon lose it all and more. Accept the reality of how much money you have in your trading account and how much of that you are willing to lose per trade. Here are some other points to consider: • Only trade with disposable „risk‟ capital – Disposable Disposable capital is money you don‟t need for any any life expenses, including retirement or other long-term things. If you don‟t have any disposable or risk capital, then keep demo trading until you do, or stop trading all together, but whatever you do, do not trade with money you are going to become emotional about losing. Always assume you could lose whatever money you have in your account or in a trade…if you‟re truly OK with that, then your good to go, just make sure you don‟t lie to yourself…REALLY BE OK
WITH IT. Trading with „scared‟ money (money you can‟t afford to lose) will lead to severe emotional pressure and cause ongoing losses. • Make sure you can still sleep at night !– This This is related to the above point about disposable capital. But the difference is that you need to ask yourself before EVERY trade you take if you are 100% neutral or OK with potentially losing the money you are about to risk. If you can‟t sleep at night because you‟re thinking about your trade, you‟ve risked too much. much . No one can tell you how much to risk per trade, it depends on what you‟re personally comfortable with. If you trade 4 times a month you can obviously risk a little more per trade than someone who trades 30 times a month…it‟s relative to your trade frequency, your skills as a trader, and your personal risk tolerance. • Understand each trade is independent of the previous one – This This point is important because I know that many traders are way too influenced by their previous trade. The fact of the matter is that your last trade has absolutely ZERO to do with your next trade. You need to avoid becoming euphoric or overconfident after a winning trade or revengeful after a losing trade. The fact of the matter is that every time you trade it should just be seen as another execution of your trading edge; if you just had 3 consecutive winners you need to avoid risking more than usual on your next trade just because you are feeling very confident, and you need to avoid jumping back into the market right away after a losing trade just to try and “make back” what you lost. When you When you do these things you are operating 100% on emotion rather than logic and objectivity.
If you follow the 3 points we just discussed • Don‟t get attached to your trades – If you should have little chance of becoming too attached to your trades. Don‟t take any trade personally, just because you lose on a few trades in a row doesn‟t mean you suck at trading, likewise if you win on 3 trades in a row it doesn‟t mean you are a trading “God” who is immune to losing. If you don‟t risk too much per trade and you aren‟t aren‟t trading with money you need for other things in your life, you probably won‟t get too attached to your trades. Step 2: Understand the power of patience
I think one of the biggest realizations that allowed me to turn the corner in my own trading was that that I didn‟t have to trade a lot to make a decent monthly return. Think about, most people consider a 6% annual return very good for a savings account, and if you average 12% a year on your retirement fund you are pretty happy. So why is it that most traders expect to make 100% a month or some other unrealistic return? What‟s wrong with making 5 or 10% a month? That‟s still exceptional
WITH IT. Trading with „scared‟ money (money you can‟t afford to lose) will lead to severe emotional pressure and cause ongoing losses. • Make sure you can still sleep at night !– This This is related to the above point about disposable capital. But the difference is that you need to ask yourself before EVERY trade you take if you are 100% neutral or OK with potentially losing the money you are about to risk. If you can‟t sleep at night because you‟re thinking about your trade, you‟ve risked too much. much . No one can tell you how much to risk per trade, it depends on what you‟re personally comfortable with. If you trade 4 times a month you can obviously risk a little more per trade than someone who trades 30 times a month…it‟s relative to your trade frequency, your skills as a trader, and your personal risk tolerance. • Understand each trade is independent of the previous one – This This point is important because I know that many traders are way too influenced by their previous trade. The fact of the matter is that your last trade has absolutely ZERO to do with your next trade. You need to avoid becoming euphoric or overconfident after a winning trade or revengeful after a losing trade. The fact of the matter is that every time you trade it should just be seen as another execution of your trading edge; if you just had 3 consecutive winners you need to avoid risking more than usual on your next trade just because you are feeling very confident, and you need to avoid jumping back into the market right away after a losing trade just to try and “make back” what you lost. When you When you do these things you are operating 100% on emotion rather than logic and objectivity.
If you follow the 3 points we just discussed • Don‟t get attached to your trades – If you should have little chance of becoming too attached to your trades. Don‟t take any trade personally, just because you lose on a few trades in a row doesn‟t mean you suck at trading, likewise if you win on 3 trades in a row it doesn‟t mean you are a trading “God” who is immune to losing. If you don‟t risk too much per trade and you aren‟t aren‟t trading with money you need for other things in your life, you probably won‟t get too attached to your trades. Step 2: Understand the power of patience
I think one of the biggest realizations that allowed me to turn the corner in my own trading was that that I didn‟t have to trade a lot to make a decent monthly return. Think about, most people consider a 6% annual return very good for a savings account, and if you average 12% a year on your retirement fund you are pretty happy. So why is it that most traders expect to make 100% a month or some other unrealistic return? What‟s wrong with making 5 or 10% a month? That‟s still exceptional
over the course of one year. Whilst I can‟t imply you will make a certain percentage per month, if you just understand that slower and more consistent gains are the way to long-term success in the markets, you will be far better off at the end of each trading year. Here are some other points to consider about patience: • Learn to trade on the daily charts first – By By learning to trade on the daily chart time frames first, you will naturally take a bigger-picture approach to the markets and you‟ll avoid you‟ll avoid most of the temptation to over-trade that the lower time frames induce. Beginning traders especially need to slow down and learn to trade off the daily charts first. Daily charts provide the most relevant and practical view of the market. YOU DO NOT HAVE TO TRADE EVERYDAY to make a solid return each month. • Quality over quantity – I consider myself a “sniper” of the market; I wait and I wait and I wait, sometimes for days or even 1 week without trading, then when I see a price action setup that triggers trig gers my “this one is a nono - brainer” brainer” alarm…I pull the trigger with ZERO emotion. I am always fully prepared to lose the money I have risked on any one trade because I do not trade unless I am 100% confident that my price action trading edge is present. • User your „bullets‟ wisely – To To really hammer-home the power of patience in developing the proper trading mindset, you need to understand that being patient will work to instill positive trading habits within you. Patience reinforces positive trading habits, whereas emotional trading reinforces negative ones. Once you begin to trade patiently you will see how using your “bullets” wisely works…you only need a few good trades a month to make a respectable return in the markets, after you achieve this via patience, you will learn to enjoy NOT being in the markets…because it‟s then that you are “hunting your prey”. This in contrast to the frazzled and frustrated trader who is staying up all night staring at the charts like a trading zombie who just will not accept that they need to trade less often. Step 3: Be organized in your approach to the markets
You NEED to have a business trading plan, a trading journal, and you need to plan out most of your actions in the market before you enter. The more you plan before you enter the higher-probability you will have of making money long-term. You are ALWAYS going to interpret the market more accurately whilst you‟re not in a trade…so pre-planning pre-planning everything increases your odds of making money since you will be working more on logic than emotion.
I know it can be boring, I know you might think you • Have a trading plan – I don‟t “need” to make one, but if you don‟t make a trading plan and actually use it and tweak it as you learn, you will start trading on an unorganized and probably emotional path. A trading plan doesn‟t have to be a very dry and boring bori ng document; you can get creative with it. You‟re trading plan could be that you write your own weekly commentary before each week begins, plan out what you will do and look for in the upcoming week…just make sure you have a “plan of attack” before you enter any trade. You need a track record, you need to • Keep a professional trading journal – You record your trades, you need to do this in a forex trading journal. journal. This is a critical component to forging the proper Forex trading mindset because it gives you a tangible document that you can look at and instantly get raw feedback on your trading performance. Once you start keeping a journal of your trades it will become a habit, and you will not want to see emotional e motional results staring back at you in your trade journal. Eventually, you will look at your trading journal as something of a work of art that proves your ability to trade with discipline as well as your ability to follow your trading plan. This is something any serious investor will want to see if you plan on trading other people‟s money. All of the planning and preemption • Think BEFORE you „shoot‟, not after – All that I just discussed is analogous to thinking before you shoot. A gun is a very powerful weapon, we all know that we need to think before we shoot one, even if we are just hunting or shooting at a gun range. Likewise, the markets can be very powerful “weapons” in regards to t o making or losing you money. So, you want to do as much thinking before you enter a trade as you can, because after you enter you are going to naturally be more emotional and you don‟t want to put yourself in a position of constantly entering regrettable trades. If you plan your actions before you enter, you should not regret your trades, even when you have losing trades. I never regret any trade I take because I don‟t trade unless my edge is present and I‟m always comfortable with the amount of money I have ha ve risked on any one trade. Step 4: Have no doubt about what your trading edge is
Finally, don‟t start trading with real money if you aren‟t really sure how to trade your edge. You are obviously not going to develop the proper trading mindset if you jump into into trading a live account without being 100% confident in what you‟re looking for. Whatever your edge is, make sure you‟ve found success trading it on a demo account for at least 3 months or more before you go live. Don‟t just “dive in head first” without being without being totally comfortable in your approach…this is what most traders do and most of them lose money too.
I have 100% confidence in my price • Have 100% confidence in your edge – I action trading strategies…that‟s not to say that I am foolish enough to belie ve EVERY trade will win, but I am totally confident that every time I trade my edge is truly present. I don‟t compromise my trading edge by taking setups that look they are “almost” good enough…I simply don‟t trade in that case. I only take price action setups that I feel in my gut are high-probability valid representations of my edge. Therefore, I am never fearful or worried about any trade I enter, even if it ends up losing. There are skilled traders, and then there are people who gamble • Don‟t gamble – There in the markets. If you take a calm and calculated approach to your trading and wait patiently for your trading edge to appear, like a sniper, then you are a skilled trader. If you just “run and gun” and veer off course from your trading plan, you are a gambler. So, are you a Forex trader or a gambler? My trading • Price action trading helps develop the proper trading mindset – My edge is price is price action, action, and I fully believe that the simplicity of price action trading helped me develop and maintain the proper Forex trading mindset. min dset. We don‟t need tons of messy indicators on our charts and we don‟t need Forex trading robots or other expensive software. All we need is the raw price action of the market and our magnificent human minds to interpret it; it‟s up to us to harness this power. this power. The price action of the market gives us a map to follow, and a pretty obvious one at that, if we can ignore the emotional temptations that arise in our minds we will have no problem profiting off of this price action map.
Trade Forex Like a Sniper…Not a Machine Gunner
A sniper in the military has an edge over his or her enemy; their edge is unwavering patience, mastery of their weapon, and the ability to remain
consciously in control of their mind and body for long periods of time in highstress situations. We can apply these same concepts to Forex trading…
Forex trading is very similar…you need a trading edge (weapon), you have to master this edge, you need to develop and maintain rigid self-discipline and control, and you have to execute your edge flawlessly in the face of constant temptation to over-trade and over-leverage. Now, trading is nowhere near as stressful as war, but it still requires conscious control of mind and body. Those traders who learn to pick and choose their trades wisely, trading like a Forex “sniper”, are typically the ones who succeed long-term, whereas those traders who act like machine-gun traders by shooting at everything they see (trading too much), tend to run out of ammo (money) very quickly and fail to accomplish their goals in the market. Let‟s discuss how you can learn to trade like a sniper instead of shooting at everything (taking every trade) that comes your way… • Accept that less is more in Forex trading
One of the things that we traders can learn from a sniper in the military is that in certain situations less is indeed more. Forex trading is definitely a “situation” where less is more. However, it is very common for beginning traders to feel that more is better; more Forex indicators, more trades, more analyzing, more money on useless trading robots, etc. What is the result of such misinformed beliefs? The result is almost always overtrading; indeed, most beginning Forex traders are like machine-gunners; spraying bullets (money) at everything they deem to be a trade and likely causing more damage to their trading accounts than good. The first step that you need to make if you want to trade more like a sniper and less like a machine-gunner, is to truly accept that less is more in Forex trading. Just like a sniper waits patiently for his or her pre-determined target to come into view; you need to learn how to wait patiently for your pre-defined trading edge to show itself in the market. As price action traders we have a very effective trading edge that allows us great opportunity to trade the market with sniper-like precision, and the daily charts provide the best “battleground” for us to execute our edge on. • Higher time frames
As I mentioned previously, the daily chart should be your “battleground” for developing your ability to become a Forex sniper. Why, you ask? Because it is the
daily chart that gives us the “highest value” or highest-probability targets when compared to any time frame below it. Weekly charts are also accurate, but they don‟t give us enough targets each month and they are less practical to trade than the daily chart. These targets are price action setups, and you should think of them as higher-value on the higher time frames, because in reality the higher the time frame the higher probability the setup becomes. This is the primary reason that trading higher time frames drastically increases trading success. Think about it this way; a sniper is on a pre-planned mission to take out high-value targets that can change the course of a war, and in Forex trading you should be looking for the highest-probability trade setups that can have the greatest positive impact on your track record. Machine-gun trading the lower time frames is not going to do anything but cause you to lose all your ammo or money a lot faster than you think. There is really no sense in ever trading any time frame below the 1hr chart since the value or probability of the targets or setups decreases dramatically as you move lower in time frame. You want to stick to the high-value or high-probability setups of the daily chart as much as possible, and especially while you are still learning to trade. • Patience
If there is one thing that a sniper in the military definitely IS, it‟s patient. Patience is like the “magic” ingredient that makes everything work for a sniper in the military, and it is also the “magic” ingredient that you will need to use if you want to become a Forex sniper. Most beginning traders lose money in the markets, and most beginning traders are also anything BUT patient. See the connection here? There is a tendency for traders to want to “force” the issue of trading by manifesting signals that aren‟t really there or by jumping into a signal that has not closed out yet. When it comes to money it is human nature to be impatient, this is otherwise known as greed, but if you don‟t learn to become a patient Forex trader , you will never forge the type of overall self-control that it takes to succeed as a Forex trader and become a Forex sniper. • Mastery of strategy
A sniper will train for years to sharpen and perfect his or her shooting skills, and a sniper knows exactly what their target looks like and pulls the trigger without hesitation. Similarly, you will need to “train” with the particular Forex trading strategy you choose to employ in the markets so that you know EXACTLY what
you are looking for every time you open your charts. However, you will need to do more than that; you will need to truly MASTER the Forex trading strategy that you choose, because if you don‟t master it, you will never achieve your full potential as a Forex sniper. Mastering a trading strategy begins with education. If you choose to employ high probability price action trading strategies, I can provide you with the Forex trading training you will need. However, you must put in the time and effort to learn and master it; I cannot do this for you. You need to be realistic about this, it will take time; it takes time to become a master at anything, and Forex trading is no different. But, if you put in the necessary time and take advantage of the insights discussed in this article, you will begin trading like a sniper sooner than you might think. • Developing a sniper-like Forex trading mindset
Sniper-like Forex trading breeds confidence and discipline. The more you strive to trade like a sniper and less like a machine-gunner, the more your Forex trading confidence and discipline will improve. This is because you will be rewarded for patience, and as you start to see your patience pay off over time, you will want to maintain it. It is the initial stages of developing a sniper-like Forex trading mindset that most traders fail it, usually because they do not understand the power of patience and discipline. It tends to feel better to be a machine-gun trader because you feel powerful and “in control”. The problem with this mindset is that you can never control the market, in fact, the more you try to control the Forex market the more it will actually control you. The only thing you CAN control is yourself by learning to trade like a sniper, and if you do this you will significantly increase your chances of success as a Forex trader .
(My Secret Trading Weapon) – The Most Important Ingredient to Trading Success This is something very real and practical … Something that, if applied, can make a positive change in both your trading results and your personal life . There is one thing that I consider to be my „secret weapon‟ for trading the markets successfully. It is something that all of us have the ability to develop and employ
in the markets, it does not cost any money and it‟s the single most important ingredient to trading success… What am I talking about here? Well, in all areas of life there is something that separates winners from losers, achievers from underachievers, and those that reach their goals from those that don‟t. The ability to plan ahead and not let emotional decision-making rule your life is something that allows people to excel in their personal relationships and in their professional lives. One of the most important and prevalent defining characteristics of people who achieve success in their lives is that they have patience. Patience is perhaps the MOST important habit that a Forex trader can develop. It is the patience to sit on your hands and wait for only the best trade setups that separates the winning traders from the losing traders. Patience is the defining characteristic of what sets humans apart from all other species in the world. When we employ patience we are using the most advanced frontal-lobe area of our brains that is responsible for planning and forward-thinking, and when we employ emotion we are using the older and more primitive limbic system area of the brain which evolved for use in fight or flight situations. So, which trader will you be; a patient trader who uses the more highly evolved areas of their brain, or an emotional trader who essentially trades like a monkey? Patient Forex traders make money faster than impatient traders
Want to make money as fast as possible in the markets? Stupid question? Maybe. But, most traders do the exact opposite of what they should do to make money in the markets. The problem is that most traders trade with little or no patience because they want to make money now and have a skewed concept of what „making money fast‟ actually means. They do not think about 1 year from now or 2 years from now. What good are you doing if you trade now with little or no patience and as a result your trading account value increases and decreases like a roller coaster of emotion only to end up negative at year‟s end? What you need to do is think about trading as a year-long process. Think about how you can build your trading account over the course of a year, not over the course of one day or one week. By slowing down and realizing that you need to have patience to trade only the most obvious setups and thus to not over-trade, you will inevitably build your account faster than if you enter numerous trades each day in a futile attempt to „force‟ the market to make you money. You see, the market does not care about you, so you have to care about it by taking what it gives you and waiting until it shows you its cards by forming an obvious price
action trading setup. If you can do this consistently for one year I promise you that your trading account will be larger than if you trade every day and over-analyze the markets for hours all day and night. Allow your trading edge to work in your favor by employing patience
Having patience to let your trades play out in order to see the true probability of your trading edge is something most traders don‟t do because they voluntarily lower the probability of their trading edge by meddling with their trades too much. Let me explain that in simpler terms… Do you move your stop losses and targets around multiple times after entering a trade? Do you get stopped out at breakeven all the time only to see the trade take off in your favor? If you are doing these things you are likely trying to control the market and by doing so you are voluntarily decreasing the probability of your trading edge. This is a concept that is a little difficult to grasp because most traders feel the need to move to breakeven or manually close out a trade that is moving against them instead of letting the market run its course. But, think about this, if you simply set and forget all your trades and let the market play out by either hitting your stop loss or your target, you are allowing your trading edge to work and after a large enough samples of trades you will see your trading edge pay off. Most traders take smaller profits than what they had pre-determined before entering, or they make the huge mistake of moving their stop loss further from entry and taking a larger loss than they had pre-determined. (Note: there are times when moving your stop or target is warranted, see my article on Forex trade management for more) All of these mistakes are born out of a lack of patience, and until you understand that you do not need to meddle with your trades after they are live, you are going to lower the probability of your trading edge. Consider this; if you save yourself 2 losses by moving to breakeven and then you decide to move the next two trades to breakeven after getting up a small profit, but then these two trades also got stopped at breakeven when they would have been winners, you have just lowered the probability of your trading edge…even if you would have taken the 2 losses. Look here: Risk = $100, Reward = $200 2 potential losing trades stopped at breakeven = $0 2 potential winning trades stopped at breakeven = $0
2 losing trades = -$200 2 winning trades = $400 Net profit of just „setting and forgetting‟ and letting the market play-out by having patience to not meddle in your trades = $200 Now, this is a small example, but it shows you why moving your stops around and getting out at breakeven all the time or even manually closing your trades for small losses or gains BEFORE they hit your pre-determined stop loss or target can and will lower the overall probability of your trading edge and will thus cause you to have a very difficult time making money. The underlying point here is that you need to always make sure your actions in the market are in-line with the FACT that you never know for sure what is going to happen. By pre-defining your entry and exits and letting the market then play-out you are trading in-line with the fact that you do not know what will happen. But, when you move your stops and targets all around after the trade is live you are ignoring the fact that you do not know what will happen and you are acting as if your actions in the market will somehow cause the market to do what you want it to. Here‟s the point: master your Forex trading strategy, develop a trading plan, then trade your plan and let the market do the work. Patient traders know exactly what they are looking for in the markets
If you know exactly what your trading edge looks like and how to trade it there is no reason to not be a patient trader. In fact, by thoroughly mastering an effective trading edge like price action trading, you will find that you naturally increase your patience in the markets because you will know what constitutes a high probability trade setup and what does not. Some traders decide to trade with no patience and thus gamble all their money away, other traders become skilled trading „snipers‟ and perfect their trading strategy and trade the markets with a high-probability trading edge that is realized through the consistent application of patience. Remember, this is only possible if you are totally clear on exactly what your Forex trading edge looks like and how to trade it. For more on trading like a sniper check out my trade forex like a sniper not a machine gunner article. Patience is critical before, during, and after a trade
We have talked about having patience while your trade is live and briefly about having the patience to pre-define your entries and exits. We have not talked about patience after a trade however, and it is at this time that you really need a lot of patience. Most traders feel some level of emotion after a winning or losing trade, the emotions are different of course, but no matter how much money you put on
the line you probably feel either euphoria or disappointment, depending on whether you won or lost on the trade. It is at this time, directly after a trade closes out, that you really need to step back and separate yourself from the market. You need to have the patience to not jump right back into the market on the emotion you are most likely feeling after a winning or losing trade. This is something you can write into your Forex trading plan. At the very end of your trading plan you can include a line that says something like “I will close down my trading platform and remove myself from the markets for 12 to 24 hours after any trade closes out”, or something similar. This will help to make this a habit and will work to reduce the amount of emotion based trades you make. Learn to enjoy and embrace being a patient trader
Sitting on the sidelines is a profitable position….by having patience and not trading, you are further ahead than you would be had you traded and lost…never be in a rush to trade because the market will always be there tomorrow…when in doubt stay out because it is a much more lucrative position to be in than to lose money. Learn to enjoy and embrace the patience that is necessary to trade successfully. Once you begin to think of patience as the „most important ingredient‟ to trading success, and actually understand how and why being a patient trader can actually make you money faster, you will have no problem waiting for the best trade setups, because you will feel like you are actually making money by not trading, which technically you are if it means you are avoiding low-probability / losing trades. So, you need to „trick‟ your brain into believing that patience is how you make money…not trading a lot, because as humans we are naturally wired to want to trade a lot, thus you need to use your frontal lobe / planning part of your brain to allow logic and common sense to develop the positive habit of patience into your wiring, then it will become second nature and your trading will be relaxed and profitable. To learn how to trade simple yet effective price action strategies off the higher time frames that will allow you to relax and develop a patient trading mindset ,
How To Grow A Small Trading Account Successfully
While this is not an easy goal to achieve, it can be done if you are willing to be disciplined and change the way you think about trading the markets. In today‟s Forex trading lesson, I am going to share with you my honest and practical insight on how to successfully trade with a small trading account. So, if you‟ve been lying awake at night, unable to sleep because you just can‟t seem to make any consistent progress on your small trading account, this article is for you. Before we dive into the details of today‟s lesson, it‟s worth noting that you are not experiencing difficulty in your trading because you have a small trading account. To be honest with you, the size of your trading account has no bearing on whether or not you are a successful Forex trader. A successful Forex trader is not necessarily a full-time professional trader, this is a myth you need to forget about right now. You need to view success in the markets as a function of what is possible given the size of your trading account. So, if you have a $2,000 trading account and you are consistently making $200 a month, you should consider yourself a successful Forex trader, even though you obviously cannot live on $200 a month, more on this later. Some people come into the markets with a $50,000 or $100,000 account and lose all their money in a short period of time. While other traders start with $1,000 and parlay that small amount into a substantial trading account over time. The determining factor of success lies not in the size of the trader‟s account but in their beliefs about what successful trading consists of and what they need to do to achieve it. Focus on trading the markets, not on making the money
It is not a profound statement to say that making money in the markets is a result of successfully trading them, but it‟s worth examining this statement further to see just where most traders with small accounts go wrong. The problem that plagues most traders with small accounts is that they are probably coming into the markets feeling a “need” to make money because they have put all the disposable income they have into their trading account and they
really want to quit their jobs / get rich quick / buy a yacht, etc. The point is that trading the markets with a f eeling of “need” results in you focusing most of your brain power on money and profits and much less of it on managing risk and mastering an effective Forex trading strategy like price action trading. A trader needs to be good at trading a small account before they can move on to a larger account. I would even say that even if you do have a large sum of money to trade with, you should not fund your account with all of it until you have proved to yourself that you can make money on a smaller sum of money. Your focus should not be on turning a small account into lots and lots of money extremely quickly, this is simply not possible if you are managing your risk properly. Instead, your focus should be on becoming a good trader, not on making money super fast. If you learn to trade the market successfully, the money will follow and attract itself to you in increasing amounts as time goes on. You truly need to focus on the trading not on the money if you want to have a chance at keeping your emotions at bay and obtaining consistent trading success as a result. I can‟t even tell you how many emails I get each week from people asking me questions like „Nial, how much money do I need in my account to make $1,000 a month‟, or any number of other similar questions that just totally miss the point of what successful trading is all about. I am not criticizing anyone for asking such questions, as most beginners simply do not know what it takes to succeed in the markets and have probably been fed lies and rumors by other Forex websites that promise them the world but deliver little in the way of practical trading strategies and insight. But, traders need to understand that in order to make consistent money in the markets they must first master a trading strategy like price action, build a trading plan around it, manage risk effectively and with discipline, and not stray from these primary tenants of successful trading, if you can do these things you will see your trading account will grow slow but consistently. If you don‟t do these things you will be another member of the large pool of losing Forex traders who refuse to stop thinking about getting rich overnight. Treat a small trading account as if it were 1 million dollars
If you had a 1 million dollar trading account and had one or two big winners per month, you would be making substantial money, and you would have an impressively consistent track record.
You need to think about your current trading account as if it is a 1 million dollar account, because the principles that lead to consistently successful trading are the same. You are only feeling the emotion and urgency to trade now because your account is small and you want to make a lot of money really fast. But, unfortunately the path to make money in the markets is not paved by risking a lot and trading too much, but rather by taking a slow and calculated approach to your trading and never becoming emotional. If you had a 1 million trading account, you would have no problem waiting for a pin bar strategy or fakey setup that sticks out like sore thumb on the charts, because you know you only need a few good trades a month to make your money. Granted, it‟s easier to not care about the money when you have 1 million dollars, but the point of this article is that in order to make money on your small trading account you need to THINK like you have a big trading account now, because this will deliver you from feeling the urgency and “need” to trade that you probably feel now which is causing you to over-trade, over-leverage, and lose money consistently. The very reason why most traders lose money is because they simply cannot see the forest for the trees, meaning they get caught up in the temptation to trade every day and over-leverage their accounts because they forget about or are unaware of the bigger picture of trading, which is that slow and steady wins the race, not fast and haphazard. Many traders also get caught up in trying to analyze every piece of news data and all the forex indicators they can get their hands on. Adding such unnecessary variables to your trading analysis only works to keep you deeper in the realm of emotional trading and further away from understanding the bigger picture of what Forex trading success is all about. A consistent track record can take you places
If your trading account is somewhere in the range of $2,000 or less, we are going to consider this a “very small” trading account and this means your focus absolutely has to be on building a consistent track record and building your confidence as a trader. Then, as you grow and progress as a trader and your track record becomes consistently profitable each month, you can proceed to trade larger sums of money. If you do not have access to more money you can look to an investor, friend, bank or prop firm for trading funds, I even fund some of my successful students from time to time if they have proven themselves to me. So, if you have a small trading account right now, your primary goals to trade it successfully are to do the following things:
• Forget about the money and instead become “engrossed” in mastering an effective yet simple trading strategy like price action. The more focus you put into the process of trading instead of making money and getting rich, the sooner the money that you desire will find its way into your trading account. • Build a trading plan off of the price action trading strategies you have mastered. A forex trading plan is essential for succeeding long-term in the markets because it gives you an objective daily guide to follow and will lay out all your entry, exit, and money management strategies, so that you are not just trading on a whim every time you open up your charts. • Once you build your trading plan you are going to need to track your progress in a forex trading journal so that you can stay disciplined and accountable. If you don‟t maintain a trading journal you are probably going to lose your discipline and focus because you will not have a tangible piece of evidence that reflects all your trades. If you are looking for a backer to fund your trading, they are going to want to see hard evidence that you can trade consistently. This evidence will need to at least contain a legitimate track record that reflects your account history and a comprehensive yet concise Forex trading plan that matches the trades you‟ve executed in your trading account history. They are not going to care that much about how much money you have in your account, if you are trading a real-money account and you can provide documents that show your discipline and consistency over a period of 3 months or more, you will not have trouble finding investors or institutions to fund you. So, if nothing else, let this be the motivating force that you need to stop trading haphazardly and get disciplined. Managing your money on a small trading account
Finally, a few words on managing your money in a small account: it‟s no different from how you would manage your money on a larger account, except that you will obviously be trading smaller position sizes per trade. Whatever you do, do not get greedy and trade too large or over-leverage on a smaller account, this is a common emotional trading mistake and it will kill your trading account faster than you think and greatly inhibit your chances of becoming a successful trader. If you will just slow down and focus on trading like a sniper and not a machine gunner by learning to trade only the most obvious and confluent price action setups, you will be able to trade much more relaxed and care-free, this will help you greatly in your money management. I will not go into my personal Forex
money management theory to deeply right now, because I have written about it in other articles, one of which I suggest you read when you finish this one: Don‟t measure your profits in percentages or pips. But, basically, you should never risk more money per trade than you are TRULY OK with losing, because you COULD lose on ANY trade, let the be your guiding principle before you enter any trade, because if you really accept this statement you will not ever risk more than you are comfortable with losing. What to do now
If you are serious about trading your small account successfully and having a chance to take your trading to the next level, you will need to use the insight I have provided in this trading lesson and really try to make a shift in the way you think about trading. I cannot force you to manage your money correctly, master price action trading, or remain disciplined over a long period of time, but if you are truly serious about having a career in trading, you will have to dig deep within yourself and muster up the motivation to do these things and forge the proper trading habits. You can succeed at anything if you want it enough, and Forex trading is no different, so right now you should ask yourself “How much do I want to be a successful Forex trader” and then go back and re-read this article and begin implementing the points discussed here immediately.
A Forex Trading Journal to Track Your Trading Performance • Why do I need a Forex trading journal ?
First off, you need a trading journal because you need to track your trading performance over time. Many aspiring traders get caught up on the results of each individual trade; however, the professional trader knows that their trading
performance is measur ed over a long series of trades, not just one or two. So, it‟s important to have a way to track your results so that you can see how you are doing over a series of trades, this allows you to not get caught up on any individual trade. You can think of your trading journal as a constant and tangible reminder that your trading performance is measured over a series of trades. Having this type of reminder is very important, especially early-on in your trading career, it helps keep you focused and it helps to remove any emotion you might attach to any one trade. Next, developing a track record is something you should take pride and pleasure in doing. If you have a tangible track record that shows your ability to be consistent and disciplined over time, you won‟t want to mess up this display of mental strength by committing emotional or stupid trading mistakes. In this way, a trading journal works to keep you accountable, you need something to be accountable to as you trade, because there is no boss looking over your shoulder threatening to fire you if you don‟t do XYZ exactly right. If you don‟t have a lot of money to trade with, creating a track record that shows consistent trading results over a long period of time is proof that you CAN trade, and if you have this proof you can find people to fund you. So, as we can now see, creating and maintaining a Forex trading journal is a key element to any effective Forex trading plan. Finally your trading should be a routine. Creating and maintaining a trading journal gives you the structure required to build your trading routine on and it also helps you examine and focus on each individual element of a trade. Essentially, Forex trading success is the result of doing a lot of things the right way every time you interact with the market, and a Forex trading journal helps you do everything the right way every time you trade. • What should my trading journal include and how do I make one?
The images below are actual screen shots of my trading journal. I have entered example trade parameters below each heading just for demonstration purposes; it wasn‟t an actual trade that I took, although it was a good price action setup. However, this is the same trading journal I use; you can use it too if you like, or tweak it to your desire.
- Entry date: This is self-explanatory; the date you entered the trade, the date you got filled is what you want here (if the order got filled). If the order never gets filled just delete it from you journal. - Security / FX pair: The particular security traded, this will either be a currency pair or Gold / Silver for most of us. If you are unsure which currency pairs are best to trade, check out this article: best Forex currency pairs to trade? - Entry B / S: Here you enter whether you bought or sold and record the specific level/price you entered at. - Planned Stop and Planned Target: You will put your pre-determined stop and target price in these boxes. It‟s very important to pre-define your stop level and target level. If you have pre-determined that you will trail your stop, you can just type something in this box describing your trail method, for example you might type; “trail stop each time trade moves 1 times risk in my favor”.
- Possible $ Risk: How much money can you lose on the trade? - Possible $ Reward: How much money are you aiming to make on the trade? - Position size (lots): Your position size on the trade, or the number of micro / mini / standard lots being traded. - Exit Price: What price did you actually exit the trade at?
- Pips +/-: How many pips you gained or lost on the trade. - Total P/L: How much total money you made or lost on the trade. - Planned R:R : What was the pre-defined risk reward ratio of the trade? - Actual R:R : What did the risk reward ratio actually end up being? This is important, if you aren‟t achieving a risk reward of 1:2 or greater on your winning trades, you will see that over time it‟s very hard to make money in the markets. Also, you will notice that if you take profits prematurely this greatly lowers your risk : reward ratio, and of course if you take a risk that is larger than what you had planned the same thing happens. - Exit date: Date the trade closed. - Setup: What was the setup / why did you take the trade? Did you trade a valid price action trading strategy? • Final thoughts
Documenting your Forex trading results is a necessary component to becoming a professional Forex trader. As your trading journal progresses over a series of trades, you will start to see the significance of it more clearly. The power of risk reward and money management will become glaringly evident to you as you look over your trading journal after a few months go by. Having this tangible piece of evidence to explicitly show you how discipline and patience pay off over time, is a critical element to attaining and maintaining the proper Forex trading mindset. The reality of Forex trading is that at some point on your journey of learning how to trade, you absolutely have to figure out a way to become a disciplined and organized trader, otherwise you simply will not become successful in the markets. Creating and meticulously maintaining a Forex trading journal is the quickest and most effective way to develop into a disciplined and profitable Forex trader.
Forex Trading Money Management – An EYE OPENING Article
Everyone knows that money management is a crucial aspect of successful forex trading. Yet most people don‟t spend nearly enough time concentrating on developing or implementing a money management plan. The paradox of this is that until you develop your money management skills and consistently utilize them on every single trade you execute, you will never be a consistently profitable trader. I want to give you a professional perspective on money management and dispel some common myths floating around the trading world regarding the concept of money management. We hear many different ideas about risk control and profit taking from various sources, much of this information is conflicting and so it is not surprising that many traders get confused and just give up on implementing an effective forex money management plan, which of course ultimately leads to their demise. I have been successfully trading the financial markets for nearly a decade and I have mastered the skill of risk reward and how to effectively utilize it to grow small sums of money into larger sums of money relatively quickly. Money Management Myths: Myth 1: Traders should focus on pips.
You may have heard that you should concentrate on pips gained or lost instead of dollars gained or lost. The rationale behind this money management myth is that if you concentrate on pips instead of dollar you will somehow not become emotional about your trading because you will not be thinking about your trading account in monetary terms but rather as game of points. If this doesn’t sound ridiculous to you, it should . The whole point of trading and investing is to make money and you need to be consciously aware of how much money you have at risk on each and every trade so that the reality of the situation is effectively conveyed. Do you think business owners treat their quarterly profit and loss statements as a game of points that is somehow detached from the reality of making or losing real money? Of course not, when you think about it these terms it seems silly to treat your trading activities like a game. Trading should be treated as a business, because that‟s what it is, if you want to be consistently profitable you need to treat each trade as a business transaction. Just as any business transaction has the possibility of risk and of reward, so does every trade you execute. The bottom line is that thinking about your trades in terms of pips and not dollars will effectively make trading seem less real and thus open the door for you treat it less seriously than you otherwise would. From a Mathematical standpoint, thinking of trading in terms of “how many pips you lose or gain” is completely irrelevant. The problem is that each trader will
trade a different position size, thus, we must define risk in terms of “Dollars at risk or dollars gained”. Just because you risk a large amount of pips, does not mean you are risking a large amount of your capital, such is the case that if you have a tight stop this does not mean your risking a small amount of capital. Myth 2: Risking 1% or 2% on every trade is a good way to grow your account
This is one of the more common money management myths that you are likely to have heard. While it sounds good in theory, the reality is that the majority if retail forex traders are starting with a trading account that has $5,000 in it or less. So to believe that you will grow your account effectively and relatively quickly by risking $50 or $100 per trade is just silly. Say you lose 5 trades in a row, if you were risking 2% your account is now down to $4,500, now you are still risking 2% per trade, and to get your account back to break even you will have to win nearly 6 trades in a row. Any trader that has traded real money for any period of time knows how difficult it is to win 6 trades in a row. What ends up happening when traders use this risk model is that they start off good, they risk 1 or 2% on their first few trades, and maybe they even win them all. But once they begin to hit a string of losers, they realize that all of their gains have been wiped out and it is going to take them quite a long time just to make back the money they have lost . They then proceed to OVERTRADE and take less than quality setups because they now realize how long it will take them just to get back to break even if they only risk 1% to 2% per trade. So, while this method of money management will allow you to risk small amounts on each trade, and therefore theoretically limit your emotional trading mistakes, most people simply do not have the patience to risk 1 or 2% per trade on their relatively small trading accounts, it will eventually lead to over trading which is about the worst thing you can do for your bottom line. It is also a difficult task to recover from a drawn down period. Remember, once you drawn down, using a 2 % per trade method, your risk each trade will be smaller, there fore, your rate of recovery on profits is slower and hinders the traders effort. The Most important fact is this.. if you start with $10,000 , and drawn down to $5,000, using a fixed % method, it will take you “much longer” to recover because you started out risking 2% per trade which was $200, but at the drawn down period, your only risking $100 per trade , so even if you have a good winning
streak, your capital is recovering at “half the rate” it would using “fixed $ per trade risk. Myth 3: Wider stops risk more money than smaller stops
Many traders erroneously believe that if they put a wider stop loss on their trade they will necessarily increase their risk. Similarly, many traders believe that by using a smaller stop loss they will necessarily decrease the risk on the trade. Traders that are holding these false beliefs are doing so because they do not understand the concept of Forex position sizing. Position sizing is the concept of adjusting your position size or the number of lots you are trading, to meet your desired stop loss placement and risk size. For example, say you risk $200 per trade, with a 100 pip stop loss you would trade 2 mini-lots: $2 per pip x 100 pips = $200. Now let‟s you want to trade a pin bar forex strategy but the tail is exceptionally long but you would still like to place your stop above the high of the tail even though it will mean you have a 200 pip stop loss. You can still risk the same $200 on this trade, you just need to adjust your position size down to meet this wider stop loss, and you would adjust the position down to 1 mini-lot rather than 2. This means you can risk the same amount on every trade simply by adjusting your position size up or down to meet your desired stop loss width . Let‟s now look at an example of what can happen if you don‟t practice position sizing effectively by failing to decrease the number of lots you are trading while increasing stop loss distance. Example: Two traders risk the same amount of lots on the same trade setup. Forex Trader A risks 5 lots and has a stop loss of 50 pips, Trader B also risks 5 lots but has a stop loss of 200 pips because he or she believes there is an almost 100% chance that the trade will not go against him or her by 200 pips. The fault with this logic is that typically if a trade begins to go against you with increasing momentum, there theoretically is no limit to when it may stop. And we all know how strong the trends can be in the forex market. Trader A has gotten stopped out with his or her pre-determined risk amount of 5 lots x 50 pips which is a loss of $250. Trader B also got stopped out but his or her loss was much larger because they erroneously hoped that the trade would turn around before moving 200 pips against them. Trader B thus losses 5 lots x 200 pips, but their loss is now a whopping $1,000 instead of the $250 it could have been.
We can see from this example why the belief that just widening your stop loss on a trade is not an effective way to increase your trading account value , in fact it is just the opposite; a good way to quickly decrease your trading account value. The fundamental problem that afflicts traders who harbor this believe is a lack of understanding of the power of risk to reward and position sizing. The Power of Risk to Reward
Professional traders like me and many others concentrate on risk to reward ratios, and not so much on over analyzing the markets or having unrealistically wide profit targets. This is because professional traders understand that trading is a game of probabilities and capital management. It begins with having a definable market edge, or a trading method that is proven to be at least slightly better than random at determining market direction. This edge for me has been price action analysis. The price action trading strategies that I teach and use can have an accuracy rate of upwards of 70-80% if they are used wisely and at the appropriate times. The power of risk to reward comes in with its ability to effectively and consistently build trading accounts. We all hear the old axioms like “let your profits run” and “cut your losses early”, while these are well and fine, they don‟t really provide any useful information for new traders to implement. The bottom line is that if you are trading with anything less than about $25,000, you are going to have to take profits at pre-determined intervals if you want to keep your sanity and your trading account growing. Entering trades with open profit targets typically doesn‟t work for smaller traders because they end up never taking the profits until the market comes swinging back against them dramatically. (I think this is very important, go back an re read that last sentence) If you know your strike rate is between 40-50% than you can consistently make money in the market by implementing simple risk to reward ratios. By learning to use well-defined price action setups to enter your trades you should able to win a higher percentage of your trades, assuming you TAKE profits. Let‟s Compare 2 Examples – One Trader Using the 2 % Rule, and one Trader using Fixed $ Amount. Example 1 – -you have a risk to reward ratio of 1:3 on every trade you take. This means you will make 3 times your risk on every trade that hits your target, if you win on only 50% of your trades, you will still make money:
Let‟s say your trading account value is $5,000 and you risk $200 per trade. You lose your 1st trade = $5,000-$200 = $4,800, You lose your 2nd trade = $4,800-$200 = $4,600, You win your 3rd trade = $4,600+$600 = $5,200 You win your 4th trade = $5,200+$600 = $5,800 From this example we can see that even losing 2 out of every 4 trades you can still make very decent profits by effectively utilizing the power of risk to reward ratios. For comparison purposes, let‟s look at this same example using the 2% per trade risk model: Example 2 - Once again, your trading account value is $5,000 but you are now risking 2% per trade: Remember, you have a risk to reward ratio of 1:3 on every trade you take. This means you will make 3 times your risk on every trade that hits your target, if you win on only 50% of your trades, you will still make money:
You lose your 1st trade = $5,000 – $100 = $4900 You lose your 2nd trade = $4900 – $98 = $4802 You win your 3rd trade = $4802 + $288 = $5090 You win your 4th trade = $5090 + $305 = $5395 Now we can see why risking 2% of your account on each trade is not as efficient as the trader using the fixed $ amount. Important to note that after 4 trades, risking the same dollar amount per trade and effectively utilizing a risk to reward ratio of 1:3, using fixed $ risk per trade, the first traders account is now up by $800 versus $395. Now, If the trader using 2% rule had a draw down period and lost 50% of their account, they effectively have to make back 100% of their capital to be back at break even, now, this may also be so for the trader using the fixed $ risk method, but which trader do you think has the best chance of recovering? Seriously, it could take a very long time to recover from a drawn down using the 2% method. Sure, some will argue that you can drawn down heavier and its more risky to use the fixed $ method, but we are talking about real world trading here, I need to use a method that gives me a chance to recover from losses, not just protect me from losses. With a good trading method and experience, you can use the fixed $ method, which is why I wanted to open your eyes to it.
In Summary
The power of the money management techniques discussed in this article lies in their ability to consistently and efficiently grow your trading account. There are some underlying assumptions with these recommendations however, mainly that you are trading with money you have no other need for, meaning your life will not be directly impacted if you do lose it all. While I do not recommend traders use a set risk percentage per trade, I do recommend you risk an amount you are comfortable with; if your risk is keeping you up at night than it is probably too much. If you have $10,000 you may risk something like $200 or $300 per trade.. as a set amount, or whatever your are comfortable with, it may be a lot less, but it will be constant. Also remember, Professional traders have learned to judge their setups based on the quality of the setup, otherwise known as discretion. This comes through screen time and practice, as such; you should develop your skills on a demo account before switching to real money. The money management strategy discussed in this article provides a realistic way to effectively grow your account without evoking the feeling of needing to over-trade which so often happens to traders who practice the % risk method of forex money management.
How To Become a Professional Forex Trader: Building the Foundation Becoming a pro trader is going to take time and effort on your behalf, and you will probably experience some ups and downs along the way. However, you should not be discouraged, because the sooner you accept this reality, the sooner you can get on the path to becoming a professional currency trader. Now, let‟s get cracking…
Step 1: Be honest with yourself First off, let me clarify something; becoming a professional trader is the result of first being a consistently successful trader and building up your trading account and trading skills over time. Thus, your aim as you begin your Forex trading journey should be to FIRST become a consistently successful Forex trader , but that does not necessarily mean you will become a “professional” or full-time trader right away. As I mentioned in the opening paragraph, becoming a pro trader is probably going to take a good deal of time if you are starting from a small trading account, but that does not mean you can‟t make consistent money each month in the meantime. Consistently successful trading and professional trading might sound like the same thing, but the y are not. Your aim should first be set on making consistent money each month relative to your account size, not on becoming a pro trader right out of the gate.
You see, if you have a $1,000 trading account for example, you will not be able to make enough money each month to live off of, and if you try to trade your $1,000 account like it‟s a bigger account, you‟ll end up blowing it out. So, if you eventually want to be a full-time professional Forex trader, you have to first aim a little bit lower; you need to aim to make consistent money each month while simultaneously implementing effective Forex money management. This is called being honest with yourself about what is really possible given your current financial situation, and many traders simply don‟t do this. You need to think about your trading in terms of dollars risked vs. dollars gained, not in terms of “how much money do I need to make to quit my job and buy a Ferrari”, which is how most beginning traders think. Pretend that you are trading a 1 million dollar account even if your account is only 1 thousand dollars. If you can consistently average a 3R reward each month (meaning a reward of 3 times your overall risk) then that means you are making 3 x 12 = 36R per year. Now, if your per-trade risk on a $1,000 account is $25, that would be $25 x 36 = $900 in a year, or a 90% yearly return; a very very good performance by any professional‟s standards. Now, take that 36R and imagine you are trading a $100,000 account; it would equal $90,000 over a year if you risked $2,500 per trade. The return would be $900,000 on a million dollar account if you risked $25,000 per trade. Do you see my point here? Sure, $900 a year might not seem like a life-changing amount of money, but what you need to understand is that if you are consistently making 36R per year on a $1,000 account for example, the exact same processes and thinking that resulted in that $900 and 90% return WOULD result in a lifechanging amount on a $100,000 account. So, the point is that focusing on the actual process and mechanics of trading is far more important than trying to make a lot of money on a small account . If you are pulling a number like 36R or even 15 or 20R a year, you will have no problem finding funding for your account or getting a job with a prop trading firm. Before you begin learning how to trade or before you open a demo account, you need to sit down with a pen and paper and make a monthly budget. You need to list all the expenses you have each month and then subtract them from your monthly after-tax income, if you have any 100% disposable income left over then it‟s OK to use that money to trade with. If you find you don‟t have any disposable income left over each month, you‟re better off saving your money or finding a different job until you are able to make some money to trade with. The reason why I am telling you this is because most traders never do this; instead they end up trading with money they really should not be trading with, and also because if you truly trade with only 100% disposable income you will significantly reduce the potential of becomin g emotional on any one trade. So, if you really think you have what it takes to become a Forex trader , and you are going to be honest with yourself about what is possible given the amount of starting disposable income you have, then it‟s time to move on to the next step of learning the basics of Forex trading…
Step 2: Learn the basics of Forex trading Next, if you have fully accepted that you need to focus on the process of trading rather than the money, and you know you aren‟t going to get rich quick on a small trading account, you should focus on actually learning to trade. Now, it might seem obvious that you should learn the basics first, but most beginning Forex traders simply have no clue what they are doing as they learn to trade. Many of them ignore the basics of Forex trading and of learning how to trade; this is a big mistake because if you really want to become a professional at something you have to start by understanding and building a foundation on the introductory concepts.. After you have done this and you thoroughly understand what the Forex market is, why it exists, and how to make sense of it, then you should move on to learning a real-world trading strategy like price action.
I can assure you that if you take this one extra step of learning the basics before you start buying trading systems and strategies, it will save you a lot of frustration, time and mone y, as well as put you far ahead of most beginning traders who simply dive-in head first without first building a solid foundation to trade off of.
Step 3: Learning to trade with an effective strategy After you have completed steps 1 and 2, it‟s time to learn some real-world trading strategies and really start getting into the “meat” of Forex trading. Now, there are thousands of different ways to trade the market out there, but if you want to learn how to read the raw and natural price dynamics of a market, I suggest you learn to trade forex price action strategies. By making price action trading your primary trading strategy, you will develop chart-reading skills that will last a lifetime and make an y other strategy or system you use even more effective. As you probably know by now, I am a huge proponent of “pure” price action trading, and I really feel that it‟s the best way to trade the Forex market. The price action strategies and methods that I trade with and teach my students have served me well for many years now, and it‟s because there is nothing complicated about them. I simply use my ability to read and interpret the overall market structure to find high-probability price action setups, and I watch for these obvious price action setups forming at key chart levels. Thus, there is no confusion or uncleanliness to my trading approach; it‟s all about taking advantage of high-probability price action events in the market and knowing how to make sense of and read the ever-changing market conditions.
Testing Your Trading Skills In this lesson we are going to continue where we left off last week by moving on to developing a Forex trading plan, trading journal, and demo trading. Like it or not, these seemingly “boring” aspects of Forex trading ar e essential to achieving success as a trader. If you ignore these critical pieces of the “pie”, you will quickly join the crowd of failed traders. Creating a trading plan and journal is the basis of becoming a disciplined trader and developing positive trading habits.
Why this part of the mini-series is CRITICAL to becoming a pro trader Before we dive into the next 3 steps in this mini-series, I want to take a minute to explain to you guys why the points discussed here today are absolutely critical to becoming a professional Forex trader. I know what you are thinking right now in the back of your head, “Trading plans and journals and demo trading are boring, and I don‟t really need these things”. I know you are thinking that because I thought it before too. However, I quickly realized that thinking something alone does not make it true. As much as you might think Forex trading plans and journals are boring, and maybe even demo trading, that does not change the fact that they are critical tools to developing yourself into a professional Forex trader. So, SUCK IT UP and do whatever you have to do to make yourself enjoy the process of creating these tools and using them CONSISTENTLY. If you don‟t want to follow these next three steps then I suggest you pack your trading bags now and pursue a different career, because you won‟t make it without them, here‟s why:
Step 4: Create (and use) a Forex trading plan The next step to becoming a professional trader is to turn your trading strategy into a comprehensive yet concise forex trading plan, and actually using that trading plan after creating it.
Creating a trading plan around your trading strategy is critical for refining your trading approach and developing an organized and structured trading routine that will guide you when you switch to real money trading as well as help you avoid becoming an emotional trader. Yet, the vast majority of traders never even attempt to cr eate a trading plan, instead, they think they can just “plan” on the go or that they are “so good” at trading that they just don‟t need a plan. Well, the vast majority of traders also lose money in the markets…no it‟s not a coincidence. When you actually take the time to boil down your trading strategy to its core components and create an effective trading plan out of it, you gain a deeper understanding of your trading strategy and how to use it. You also create a tangible daily guide for your Forex trading that will work to keep you objective, on-track, and disciplined, THIS is the most important reason for creating a good Forex trading plan. After first trying to trade without a trading plan like most traders do, I found that I was straying off course a lot and starting to just gamble my money in the markets rather than sticking to my high-probability forex price action trading edge. I soon realized that it’s one thing to understand your trading strategy in your mind, but it’s another thing all together to actually execute it with discipline and consistency in real -time market conditions. HERE is where a Forex trading plan comes in. It is a written (or typed) outline of your overall trading approach, and you have it by your side whenever you are trading. Your trading plan helps you stay true to your trading strategy and to the principals that you decided were best to trade with when you created your trading plan and when you were thus totally objective and unemotional. So, a Forex trading plan gives you a predefined guide to make your decisions off of while analyzing the markets, this allows you to make logical and objective trading decisions rather than the emotional knee-jerk trading decisions that so many traders end up trading off of. If you don‟t know how to make a Forex trading plan you should read this article: how to make a Forex trading plan. Oh, and don‟t make the common mistake that many traders make of spending the time to create a trading plan and then never using it. If you don‟t actually use your trading plan it‟s not going to help you (surprise surprise!). Also, you may need to tweak your trading plan as you progress as a trader; nothing wrong with this, as long as you are working on your trading plan while you are not in the market and thus totally objective, you are on the right path.
Step 5: Create (and use) a Forex trading journal After you‟ve created a successful Forex trading plan, it‟s time to create a Forex trading journal so that you can track your progress as a trader. Your trading journal can be thought of as the “engine” that keeps your trading moving in a disciplined and organized manner. Here are the main reasons to create and use a Forex trading journal if you want to become a pro Forex trader: • Trading journals keep you disciplined – Whilst creating a trading plan will help you become a disciplined trader, it can be another thing all together to remain a disciplined trader. Becoming a disciplined trader means nothing if it all goes out the window after you hit a few losing trades and start trading emotionally as a result. A trading journal provides you with a tangible tool that helps you stay accountable, in essence, you become accountable to your trading journal. At least that‟s how you need to think about it. Your trading journal will be a direct and in-your-face reflection of your ability as a trader. If your trading skill is not quite where it should be, you will see this reflected in your trading journal, if your mindset is not quite where it should be, you‟ll see this reflected in your trading journal as well.
You are creating an on-going journal of your ability or lack thereof to trade the markets successfully. The longer you maintain your journal and trade your trading plan in a disciplined and consistent manner, the more
discipline and consistency you will see in your trading results. Over time, you will begin to think of your trading journal as a testament to your ability to trade, and you will be PROUD of it, as you should be. This will work to reinforce your desire to maintain positive trading habits a nd to not stray off course into emotional-gambler trading land. • You need a track record – You need a track record if you want anyone to take you seriously as a professionally trader. If you are trading Forex with a small account and hoping to find an investor to fund you, you absolutely have to have a consistently documented track record that shows 6 months or more of successful trading, in most legitimate cases that is. Furthermore, even if you aren‟t looking for funding, your track record should be viewed as an integral part of your overall trading strategy that you passionately love to maintain, if you think of it like this I promise your trading will improve. • Trading journals develop winning trading habits – As I mentioned previously, a trading journal will work to develop and reinforce positive trading habits. The process and routine of keeping a running journal of all your trades will work to make trading seem like more of a business. Since you need to learn that Forex trading is a business anyways, this is a good way to do that. You will work to reinforce the benefits of discipline and patience when you keep a trading journal. Once you see your discipline and patience paying off over a period of time, you will gain a deeper understanding of why they are important and this will work to make you ENJOY being a patient and disciplined trader, rather than wanting to “run and gun” like so many other traders do.
Step 6: Demo trade first After you‟ve completed steps 1-5 of this series, it‟s time to try out your trading strategy, trading plan , and trading journal in real-time market conditions. The process of demo trading is a good testing-ground for traders, and it‟s essential for working out the kinks in your trading plan and really forging it into something you can be confident about when you move on to real-money trading. Now, let me first say that there are some obvious psychological differences between demo trading and live trading, but that doesn‟t make the process of demo trading insignificant. Demo trading is an important step for any trader to take after they master their trading strategy and develop it into a solid trading plan. It can also be a tool to use to rehabilitate yourself if you‟ve been on a big emotional losing streak in the markets. So, if you find yourself “out of control” in the markets, stop real-money trading and go back to demo until you have successfully regrouped and gained your discipline back. After you have traded your demo account with consistent success for a period of 3 to 6 months, you can then try your hand at real-money trading. However, don‟t take demo trading lightly; you really need to see profitable trading results that were born out of consistently following your trading plan and updating your journal for 3 months or longer before trading live. In Part 3 of this mini-series (click here to view), we are going to discuss the transition from demo trading to real-money trading, trading psychology, and managing your risk in the market. Stay tuned for that because the topics discussed next week are what really separate the amateur Forex traders from the professionals. If you want to learn more about my price action trading strategies and the topics discussed in today‟s lesson, check out my Forex price action trading course and members‟ community.
Taking Off the „Training Wheels‟ Trading with real money is significantly more intense than demo trading, thus it requires that you are aware of and accept the reality of real-money trading before you take the plunge. Most beginning traders simply dive in to the markets head first, risking their hard-earned money with n o real plan in place. Hoping that you will somehow “figure it out” on the fly is not a plan; it‟s what gambling traders do. Thinking that you will somehow parlay your trading account money into a small fortune within a short amou nt of time without any plan or strategy in place puts you on a fast-track to failure as a trader. The truth is that reaching a point where you can honestly trade for a living without having any other job is a result of not trying to get rich quick, and of accepting the reality of what it takes to become a consistently profitable trader and doing those things consistently.
Step 7: Making the jump to live trading – Preparing yourself for the emotions When you are demo trading the markets you naturally have no emotional problems to battle with, because you have no real money on the line. Thus, many traders do exceptionally well when demo trading only to find that their fake-money success goes out the window when they switch to real-money trading. That‟s because there are drastic psychological differences between demo trading and live trading that you need to come to grips with prior to switching to a live account. Here are some points to consider before you begin risking your hardearned money in the markets: • How to trade like you did on demo – As I mentioned previously, traders usually do better on demo than they do on live accounts as a result of the fact that there is naturally no emotion in the mix when you aren‟t risking real money. While it is certainly easier said than d one, what you need to do on your live account is forget about the real money you are risking, here‟s how you do this… • ONLY trade money you are OK with losing – In order to not get emotional while trading with real money you need to never trade with money that you need for anything else in your life, as well as never risk more than you are truly OK with losing. If you can manage to consistently do these two things, you will experience little to no emotion on any one trade. Most traders end up trading with money they really shouldn‟t be trading with, or they risk more than they are OK with losing per trade, thus they become emotional. • Understand you CAN lose on ANY trade – You are much more likely to have a calm and objective trading mindset if you always remember that you can lose on ANY trade you take. Even if you see what you think is a “perfect” price action strategy in a very strong trending market, it can still fail. The truth is that you can never know for sure what is going to happen on any given day in the market, so if you truly accept that and believe it, there is no reason to ever risk more than you are comfortable with losing. • Don‟t get caught-up over-analyzing the markets – If you want to become a professional Forex trader you are going to have to learn how to accurately read and trade off of the daily charts first. Most traders end up taking the opposite approach; they start by trying to trade off of lower time frames like 5 minute or 15 minute charts, and then after they lose enough money they eventually figure out the daily chart is a lot more conducive to trading from a relaxed and objective mindset. • Not every trading opportunity is created equal – Understand that you shouldn‟t stray from your trading edge once you start trading live. You probably traded your edge very consistently on demo, because you didn‟t feel any “urge” to make money, try to recapture that same feeling when trading live and forget about the money. Over-trading is a result of feeling “pressure” and greed to trade. The more you feel these emotions the more likely you are to trade when you shouldn‟t and thus lose money.
Ultimately, there is a fundamental difference in how amateur traders think vs. how professional traders think. The difference lies mainly in the amateur‟s “need” to make money from their trading as well as their inability to trade emotionally undetached from any one trade. Essentially, professional traders do not become emotional from any one trade because they know their success is defined over a large sample of trades, not by one or two. Professional traders also know that the key to keeping the emotional trading demons at bay is to consistently control their risk in the market. Your trading psychology is wh at dictates how you interact with the market, and this psychology is almost entirely a result of how well you manage your money as you trade.
Step 8: Managing risk effectively – The KEY to successful Forex trading As I just mentioned, risk management is the “key” to managing your emotions correctly; and thus it is also the key to becoming a successful trader and eventually a professional trader. If you practice p roper risk management on every trade, it will make managing your emotions and maintaining the proper trading psychology a very simple task. However, most traders do not manage their risk effectively, and as a result they experience huge emotional swings in their trading, as we all as in their equity curves. To avoid the account-destroying emotional trading mistakes that most traders make, there are some specific forex money management guidelines that you can follow: • Trade with only disposable income – I mentioned this in the previous section, but it‟s worth mentioning again because it really is your first line of defense against becoming an emotional trader. If most traders would only take the time to honestly decide how much truly disposable income they have to trade with and ONLY trade with THAT money, there would be a lot more successful traders in the world. • Understand risk / reward and position sizing – It really is amazing how many traders start risking their hard-earned money in the markets without a thorough understanding of risk reward and position sizing. If you take the time to understand the math behind the power of risk to reward ratios, it will allow you to see that you can actually lose on the majority of your trades and still make money, to learn how this is possible see this article: Case Study – Random Entry & Risk Reward in Forex Trading
Position sizing is equally important, yet many traders seem to hav e no idea that they can still trade a their ideal risk amount even if they need to place a large stop loss on a trade. I get questions about this everyday; “Nial how can I trade the daily charts with a small account, am I not better off trading the smaller time frames?” The answer is you simply need to reduce your position size down to meet the larger stop requirement of daily chart time frames compared to smaller time frames. There are no advantages to trading 5 minute charts on a small trading account or on any account really. • Know what your risk -per-trade tolerance is and STICK TO IT – Professional traders know before they enter a trade how much they are going to risk on it and how much they are emotionally OK with risking on it. If you are staying up all night watching your trades, you are risking too much. You should risk an amount that truly allows you to set and forget about each trade you take, because being preoccupied with every trade you take all the time is a sure sign you are risking too much. • Avoid taking on more risk from adding positions – Some traders like to trade multiple markets at the same time, and they will actually double or triple their normal risk while doing so. This is basically trading account suicide. First off, if you are a shorter-term swing trader like me, you are only in the markets for 1 to 3 days on average, sometimes a bit longer depending on the trade. But, there‟s really no reason to be in 5 different trades at the same time unless it‟s part of a long-term diversified investment strategy. If you do see a good reason to trade multiple Forex pairs at the same time, make sure you divide up your risk amongst them so that your pre-defined risk tolerance is always maintained.
• Measure risk and reward in dollars, not pips or percentages – If you are still calculating your risk and reward by percentages or pips, you need to stop. Think about it for a minute; if you risk 100 pips on a trade that doesn‟t really mean anything because you can trade many different position sizes for that amount of pips. One trader might have $10 at risk on 100 pips and another trader might have $1,000 at risk on 100 pips. Thus, through position sizing, a trader can risk different dollar amounts than another for the same stop distance. So, the point is that you calculate your risk and your reward in terms of “R”, R is the dollar amount you risk per trade. Check out this article later on how to measure your trades in dollars not pips or percentages to learn more.
Finally, as you progress from the early stages of learning your trading strategy, building a trading plan, and demo trading, you will move to the “big leagues” of real money trading. I hope that the points discussed in today‟s lesson provided you with some insight to get you ready. In the end, no amount of advice or insight can substitute for real trading experience, but it can help you to accept the realities of trading and let you know what to expect. In part 4 of this mini-series (click here to view), we discuss trade management and exit strategies. These are probably the two most difficult aspects of trading, so make sure you tune in next week for some solid training on these two very important aspects of becoming a professional Forex trader. If you want more help with making the transition from demo trading to live trading, check out my members‟ trading forum. There you will find a genuine group of price action traders all helping each other and discussing potential setups in realtime market conditions, for more information check out my Price Action Trading Course page here. If you have any questions or feedback you can contact me here.
Putting It All Together In Part 3 of this mini-series we discussed how to “take off the training wheels” of demo-trading and progress on to trading with a real-money account. If you missed Part 3 click here. Here‟s a quick review of the main points we covered last week: Step 7: How to handle the emotions of trading with real money Step 8: Successful Forex trading money management We are going to wrap up this 4-part blog mini-series in today‟s lesson by discussing how to “put it all together”. I am going to walk you guys through an example of how a professional trader operates in the market by taking you through a trade step by step. Hopefully, in today‟s lesson you will understand how all the steps in this series work together to provide you with an effective trading approach. Now, let‟s check out how a pro price action trader would progress through a trade:
Finding a price action signal If you‟ve completed all the previous steps in this mini-series, you will be ready to take the next step which is to actually look for a price action signal to trade on your real-money account. This is where your Forex trading plan comes in; it will give you a checklist to guide you through the process of finding a valid price action signal. It is not a concrete rule-set, but rather a guide or an outline that you follow to make sure any potential setup that you find meets certain criteria. Here‟s an ex ample: • What time frame am I looking at? The daily chart time frame is best. • What market am I trading? Is it a major Forex pair or a more volatile exotic pair?
• What condition is the market in? Trending, consolidating? • Where are the obvious key support / resistance levels in the market? Have I drawn them in? • What are the 8 and 21 daily EMAs doing? Where is price in relation to them? • Is there an obvious price action signal on the chart? • If there is an obvious signal, does it have confluence? • What confluence does it have? Trend, static support / resistance, dynamic support / resistance, 50% retrace level? Event area? The more the better… • Is the signal showing rejection of a key market level? • Is the signal showing a false-break of a key market level? These are just some of the things you would want to look for as you analyze the market and try to find a high probability price action setup; it‟s not a „complete‟ trading plan or checklist. A professional Forex trader will have gone through the process of making sure any potential trade setup meets his or her checklist so many times that it turns into a habit and gets ingrained into their mind. Trading success is all about developing and maintaining the proper trading habits. Here‟s an example chart of the Kiwi/Yen pair, we can see this was a pin bar trading strategy that formed at a key level in the market and with the dominant daily trend. This was a very obvious price action setup that any professional trader trading this market would have caught. Note that it provided a very nice profit as the trend took off after the pin bar broke out to the upside:
Calculating the risk to reward ratio of the trade After a professional Forex trader finds a valid signal to trade, the next thing they will do is concentrate on the risk. That‟s right; the RISK is the first thing a pro trader concentrates on…not the reward, like most amateurs. Depending on the particular setup you are trading and were the nearby key support or resistance levels are, a pro trader will place their stop loss at the most logical place that gives the trade room to breathe. Logical stop placement is a crucial difference between winning and losing Forex traders. Winning traders will take the time to focus on finding the “safest” place to put their stop, while beginners usually place too tight of a stop just because they want to trade a bigger position size…or they place no stop at all, which is just insane. Professional Forex traders calculate their risk reward ratio in terms of dollars at risk. So, if you have 100 dollars at risk, 1R (1 times risk) for you is $100, 2R is $200, and so on. Most pro traders are not very concerned with percentages or pips, because at the end of the year all that matters is how much money you lost relative to how much money you won. That‟s why I measure my risk and reward in dollars, not percentages or pips. In the chart below, we see the same NZDUSD pin bar trade, but this time we are calculating the potential risk reward on the trade. This trade actually ended up moving about 5R higher, meaning it would have returned 5 times what you risked if you had your stop loss just below the low of the pin and you entered at the high; a very good risk reward ratio indeed.
Managing the trade after it‟s live Managing trades after they are live is perhaps the part of trading that gives traders the most trouble. The reason why traders have difficulty managing their trades is primarily because they over-complicate the process. I am a strong believer in “set and forget Forex trading”, and indeed this is a core part of my overall trading philosophy. Meddling in your trades after they are live and second-guessing your trade setups are things amateur traders do. Professional traders only take trades they are 100% OK in risking their hard-earned money on, thus they don‟t second-guess themselves usually, and they rarely meddle in their trades. If you have a Forex trading plan and actually follow it, there should be no reason to mess around with your trades a lot after they are live. I personally have found that just letting the market run its course is usually the most lucrative forex trade management technique out there. In the NZDUSD pin bar trade below, we can see this market easily presented us with more than a 2 times risk reward. I personally almost always take a reward of two times my risk, as more often than not, the market is ready to retrace substantially after pushing in one direction long enough to net me 2 times my risk. However, in strong trending markets like in our example trade below, there is usually a good probability you can get a reward of more than 2 times your risk. Indeed, in the example below this NZDUSD trade provided a 5 times risk reward.
I get a lot of emails about exits and how to manage them. The simple truth is that I almost always set and forget my trades; it‟s a rare occasion that I meddle in my trade by closing it out before it hits my stop or by moving my profit target further away. I like to either take the loss or take the profit. Over a longer period of time, this trade management technique will work out in your favor, because you are not acting emotionally. Most traders who meddle in their trades are trying to “control” the market or force their will upon it. You are far better off just entering your high- probability price action setup and letting the market “do its thing”. You will get better at this and at taking profits from your Forex trades, but it‟s not something that will magically happen overnight. It takes a solid understanding of price action and market dynamics as well as putting in the screen time to develop your discretionary price action trading skills. All of this adds up to obtaining a keen “sense” of how to read and trade the raw price action in the market, and this is an art and a skill which will reward you many times over.
Controlling yourself after a trade Finally, we come to the last step of this mini-series on becoming a professional trader, and it is perhaps the most important one: I know that most of you have had some good trades and made some money in the markets. But, what did you do after your trade? The honest answer to that question is truly what defines a professional trader. Your mindset right after a trade is at its most fragile, because you are likely either feeling a bit euphoric over your winnings or angry and frustrated over your losses. Granted, you should not experience these emotions too intensely if you‟ve manage your risk properly, but you will likely still feel them to some degree no matter what, after all, you are risking your hard-earned money.
Whether you win or lose on a trade, you are at the greatest risk to make an emotional trading decision immediately after a trade closes. While there is no miracle-formula for making sure you avoid these emotional trading errors, if you understand and accept the following points you will be far less likely to make them: • If you have just lost on a trade, remember that jumping in the market again to try and “make back” what you lost is an emotional reason for trading, not a logical one. Do not enter another trade right away unless there is a valid price action trade setup that meets the criteria in your trading plan. • If you have just won on a trade, remember that you are not some “perfect” trader who can do no wrong in the markets. Beginning traders tend to get over-confident after a winner or a string of winners, this can cause them to veer of course and “run and gun” rather than trading Forex like a sniper . • Remember, your trading success is not defined by your last trade; rather it is defined by the result of a large series of your trades. To become emotional and react defensively to any one trade is to say that you think your success as a trader hinges on one trade, and it simply does not. You have to learn to take your losses as just a part of doing business in the Forex market. • In regards to taking losses, it will be a lot easier to swallow the inevitable losses if you are only risking an amount per trade that you are truly OK with losing. When you start trading with money that you need for other life expenses, or risking too much per trade, you put yourself at a very great risk for wanting to enter a “revenge” trade after you lose. • Perhaps the best way to control yourself after any one trade is to simply take some time away from trading. Rarely are you going to exit a trade and then get another high-probability opportunity immediately after that. It usually pays to separate yourself from your charts for at least 24 hours after you exit a trade, whether it was a winner or loser. This will give your emotions time to die down and cool off before you begin analyzing the charts gain.
Where to go from here… The first thing you should aim to do now is to follow all the insight in this series and aim for making small yet consistent gains each month on your trading account. If you are making money each month while managing your risk effectively on every trade and trading like a sniper…YOU ARE A SUCCESSFUL TRADER. You don‟t need to be a professional / full-time trader right out of the gate to be a winner. Rather, this should be a longer-term goal that will sort of just “happen” if you trade consistently and remain disciplined over a long enough period of time. Every trader is different, and so every trader will take a different amount of time to become successful. But, I promise you that if you learn and master a high-probability trading strategy like price action, and combine that mastery with a realistic attitude and a disciplined trading approach, you will be well on your way to becoming a profitable trader.
What are Your Chances of Success as a Forex Trader? Most traders have heard or read that 95% of people who try their hand in the markets fail to make money; this is a very common myth that is widely circulated around the internet and elsewhere. However, this myth is not based on any solid evidence or statistics, rather it is a general statement that is factually incorrect and usually based on broad assumptions and flawed logic. Unfortunately, this myth also inhibits many traders from reaching their full potential and instills misplaced fear into their minds from the very start of their trading career. So, what are your chances of succeeding as a Forex trader?? This is a very important question that deserves some logic-based discussion, rather than the vague general statements that we so often read on the internet. Let‟s tackle this question head-on with some supporting evidence and logical thought, this will hopefully give you some confidence and eliminate some of the “I‟m just another doomed trader” thoughts that you no doubt have had or are currently having. What Percentage of Traders Make Money but are not “Professional”?
This is a very important question with far-reaching implications. Basically, there are alwa ys people making money in the markets; in theory, for every loser there is a winner. However, consistently making money is a different story, so over the long-term there are going to be fewer traders who have made money than who have lost money. But, while 95% of traders may not be professional or full-time traders, this DOES NOT mean that 95% of traders don‟t make money over the long-term. Let me explain… As traders, we don‟t need to aim to be “professional” right out of the gate, in fact, having such unrealistic expectations is often what causes beginning traders to over-trade and over-leverage their accounts. Your goal as a Forex trader should initially be to turn a profit each month, if you can do this for an extended period of time, you are a profitable trader, not “professional” yet, but profitable. Thus, by just aiming to make a profit each month, your statistical chances of “trading success” will jump incredibly. As you learn and become a more skilled trader, you can shift your goal up from profiting each month to profiting each week, and then eventually to pro-trading; over-time you will see your trading improve and your trading account grow. But, for now it is important to understand the distinction between “professional” or full-time trading and simply being a profitable trader or part-time Forex trading. Thus, it stands to reason that traders who aim to just make money and become good traders, rather than aiming to become a “professional” trader right away, will have a far greater chance at succeeding in the markets over the long-term. There are reasons why this is so, I alluded to some of these in the previous paragraph, but it‟s worth explaining them in more detail… The primary reason why you are more likely to experience success in the markets if you dial-down your expectations of “professional” trading right out of the gate, is because it puts you at a much more advantageous emotional point than expecting to be a pro the first month you start trading. When your expectations are more in-line with the reality of trading, you will have less desire to over-trade, and you will feel less desire to trade large position sizes as well. Since you are just aiming to make some profit each month, your temptation to over-trade and over-leverage is far less than what it would be if you felt “forced” or compelled to make a living from your trading as soon as possible, which is unfortunately what most beginning traders feel they need to do. Since you feel no pressure to rely on your trading exclusively for income, you release most, if not all of the emotional attachment to your trades and to the money you have at risk. This is a very important point that has far-reaching implications on your success as a trader. Releasing your emotional attachment from the market as much as you can is the easiest and quickest way to experience success in the markets, and it is done by having realistic expectations, meaning not expecting to be a full-time trader right away, in other words, Forex trading
success comes from within. So, given the fact that you can trade profitably as a part-time trader, the statistics of people who trade and actually make some money each month are probably closer to 20 to 30%, maybe even more, this is far higher than the 5-10% we so often hear about. So what are your Chances of ACTUALLY Making Money as a Forex Trader?
Ok, now let‟s get down to some actual facts and figures, so that you can see for yourself what your approximate chances are of making money as a Forex trader with an effective Forex trading strategy vs. a trader without any strategy at all. I am going to approach this in terms of risk reward, basically the risk reward ratios will be the “control group” and the trading strategy or entry method will be the “variable group”, for all of you science freaks out there. So, let‟s first look at what it takes to be a break -even trader in terms of risk reward. As you can see in the chart below, with a risk reward of 1:1 you have to win 50% of your trades to breakeven. As your risk reward moves up you can win less of your trades and still breakeven; a risk reward of 1:2 requires only winning about 33% of your trades to get to breakeven, and a risk reward of 1:3 requires you only to win about 25% of your trades to breakeven, take a look at the chart:
If you want to be a trader who simply makes 1 times risk on each trade, you have to win 66% of time with a risk reward of 1:1, 50% of the time with a 1:2 risk reward, and with a 1:3 risk reward your winning percentage can be as low as 33% to make a 1R profit.
I often discuss the power of risk reward in Forex trading, and for good reason, it is a concept every trader must understand and it is the best way to see how letting your winners out-pace your losers makes successful trading easer to achieve. However, risk reward is not the only thing that makes a trader profitable over the long term. You also need a high-probability trading edge like price action. This will greatly increase your overall odds of making money on a regular basis in the markets, as we will see below. The chart below on the left displays how many winners are required to breakeven with no particular trading edge, basically, over a long-series of trades, you will breakeven by winning 50% of the time on a 1:1 risk reward ratio, 33% of the time on a 1:2 risk reward ratio, and 25% of the time on a 1:3 risk ratio. With only random entry and risk reward in Forex trading, you are likely to just perform around breakeven over the longrun. Now compare this random entry risk reward model with the chart on the right; it shows your approximate chances of winning using a high-probability trading edge like price action trading strategies in conjunction with the power of risk reward…
Note that your chances of winning actually decrease as the risk reward ratio increases, this is because your target is further away and your stop loss stays the same distance, thus the percentage of your stop getting hit increases as your target increases, so we need to stack the odds in our favor as much as possible by using a high-probability entry method like price action. By analyzing the images above we can clearly see that the an educated trader who has a solid Forex trading plan and who knows exactly what their edge is in the market, has a much higher probability of making money than a non-educated trader who is essentially entering randomly. The reason why the majority of traders lose money is because they number 1; don‟t understand risk reward and forex money management, and number 2; they have not truly mastered a highly-effective trading strategy like price action. So, your first priority as a trader should be to master these two things. Making money in Forex is NOT unattainable…
The odds of you becoming a profitable trader are very good if you do this, notice I did not say “professional trader”. The reason I didn‟t say “professional trader” is because as we stated above, your aim at first should be to become a profitable trader each month. This is a much more attainable goal right out of the gate. Doing this will lift your chances of success dramatically because it will give you a REALISTIC GOAL and will allow you to avoid the common mistakes so many traders make due to the fact that they try to rush into being a pro right away. Start out with a plan to trade part-time successfully, you‟re attitude should be to trade less and profit more / set and forget. In closing, I would just like to say that I get feedback from my member‟s all the time; emails and testimonials from people who truly are turning the corner in their trading, not because they are professional full-time traders, but because they have stopped the bleeding and are starting to see the power of effective money management and price action trading in combination with one another. Simply having a solid education in an effective trading strategy and truly “mastering” it greatly increases your chances of making money consistently in the markets. As a Forex trading coach it is my aim to push traders onto the correct path that gives them the best chance at success in the Forex market. So, it gives me great satisfaction to know that I have helped so many traders through the quality content that I offer and the repetition of the concepts I teach, because this gives traders a far better chance at making money consistently than if they have no formal Forex trading education or no effective trading method.
A Guide On How I Enter Forex Trades Today‟s lesson is going to be a complete walk -through of exactly how I find, enter, and manage my Forex trades . I am going to use the GBPUSD pin bar setup from last Friday that I traded as an example to illustrate my analysis and thought process behind taking a trade. Today‟s lesson will provide you with a “window” into my mind as I trade the market so that you can better under stand how to successfully trade simple price action setups on the daily charts. How I find an entry signal
The first step to finding an entry signal involves scanning your charts. You need to decide the best Forex pairs to trade and then scan the daily charts first; you should do this around the same time each day. The best time to analyze your daily charts is between the New York close and the European open. This is when the market
action dies down from the previous day and the new day begins in Asia, which is typically not as active as the NY or euro sessions. As I scan through the markets I am looking mainly for the following things: trends, levels, and price action. I will first determine if the market is trending or not, this is not an exact science, but for me I like to see patterns of higher highs and higher lows or low highs and low lows and I also look at the direction of the 8 and 21 daily EMAs. I then mark any core levels that I see on the chart, this is important because simple horizontal levels and price action is a very powerful combination. Now, I don‟t go crazy with drawing levels, I only draw in the “core” obvious support and resistance levels that I see on the chart, you will get better at this with enough screen time. For now, check out my example below of the GBPUSD daily chart:
Note the pin bar setup in the chart above. After I‟ve determined whether the market is trending or consolidating and drawn in the core horizontal levels, I will look for obvious price action signals forming within the structure of the market. I like to trade with the trend as much as possible, and from points of “value” (support or resistance) within the trend. But, sometimes the market is not trending, and at these times we can look for price action setups near core support and resistance levels in order to trade a range-bound market or for counter-trend setups. In the case of the GBPUSD pin bar setup above, we can see the market was just starting to trend lower which was made evident by the 8 / 21 daily EMAs crossing lower and price recently breaking down out of an obvious sideways trading range. The pin bar that formed was in-line with the recent downward momentum, clearly rejecting the old support / new resistance near 1.5900 and was well-defined and obvious. So, since this pin bar met all the parameters in my forex trading plan, I decided it was a good signal to trade. How to place a stop loss
Determining proper stop placement is also not an exact science, but there are some general rules of thumb that you can operate by: First, you want to try and place your stop at the most logical level possible. So, on the pin bar setup below, I put my stop just above the high of the tail of the pin bar, because this represented the point at which the signal would be invalid for me. Note, you always want to enter your stop loss at the same time you enter your entry order, never expose yourself to the market without a stop loss in place. We can see in the chart below that I had a stop loss distance of 100 pips; stop at 1.5887 and entry at 1.5787, this is important to know when figuring out our target, which we will discuss next.
How to find a target
When I set my target I am looking to get a risk reward of at least 1 to 2 or more. In the case of the GBPUSD pin bar trade below, my risk was 100 pips, so I am looking for a 200 pip reward distance or more. Note, I am only using „pips‟ here to measure distance, not risk.I check to make sure there are no „core‟ support or resistance levels in the way of my desired target placement. If there is no major level in the way I will place the target, if there is a core level that comes before two times risk, I will then use discretion to d ecide whether or not to take the trade. Sometimes I will take a reward of 1.5 times risk if I feel the setup is sound but there is a core level coming in just before 2 times risk.
Exiting trades is probably the most discretionary part of trading and it‟s something you get better at over time. The biggest problem most traders make in regards to exits is not exiting in hope of bigger profits. Don‟t be a greedy trader; take your profit of 1:2 or greater if it‟s there. If you have pre-defined that you will trail your stop in hopes of a larger profit based on your analysis of current market conditions, that‟s OK too, just don‟t get into a game of setting your target and then moving it further away once price gets near it, or always thinking the market is going to run in your favor forever. Placing the trade in your trading platform
I can‟t go into too much detail about actually placing the trade with your broker since we are not all using the same trading platform or broker. But, there are a few general comments about this that I would like to make: Be sure that all your parameters are correct; your stop, entry and target. Double check everything before you hit the button to send the order. There is nothing worse than losing money because you entered your trade incorrectly or too quickly. It‟s best to slow down and take a little extra time to make sure you have entered everything correctly. Managing the trade
After you‟ve entered the trade the “real” work begins. For most traders Forex trade management is where they mess everything all up. You don‟t really need to do much after you‟ve entered the trade besides maybe check on it once a day. After I entered the GBPUSD pin bar setup above I literally did not look at it for 24 hours. When I came back the next day I noticed I was up over 1 times risk, I didn‟t do anything at that point but set and forget for another day. I then came back the next day (Wednesday of this week) and decided to exit the trade for a profit of approximately 2.5 times risk. Some of you will remember that I mentioned in the GBPUSD thread in the members‟ forum that I was going to let this trade run into the 1.5445 area. Whilst I had pre-defined my strategy as letting this trade run for a bit, I decided to exit earlier once I was up 2.5 times risk. There‟s nothing
at all wrong with using discretion to exit a profitable position, just make sure you aren‟t acting out of greed b y NOT exiting a profitable trade or at least locking in some profit if you are up over 2 times risk. Handling the emotions of the trade
Perhaps the best way to make sure you do not trade emotionally is to not risk too much money on any one trade. I get many emails from traders telling me they are losing money and that they are up all night staring at their trades or that they can‟t stop thinking about them. The only reason traders do these things is because they are risking too much money or over-trading. You need to risk an amount that you are TRULY ok with losing, because you COULD lose it on ANY trade. Yes, price action trading is a high – probability trading strategy when used with discretion, but you still never know for sure which trades will win and which will lose, so you MUST manage your risk effectively on every single trade you take. The reason why traders risk too much and over-trade is because they have unreal expectations about the market. You need to seriously consider that fact that you aren‟t going to get rich quick in Forex. You should aim for slow but consistent profits, and then over time you will build your trading account up. But, most traders don‟t seem to have the patience for this, thus they end up getting caught in a perpetual cycle of emotional trading. After the trade
After you have exited a trade for a profit or a loss you need to record exactly what happened in your Forex trading journal. It‟s important to have a trading journal so that you can develop a track record and so you have a tangible piece of evidence reflecting your discipline or lack thereof. As you can see, there is nothing complicated to the way that I trade the markets. Just simple logic combined with discipline and my discretionary trading skill. You can learn the same price action strategies that I use by taking my trading course and joining my members‟ community. After you practice them for a while you will develop your own discretionary trading skill that will help you to only take obvious and confluent trade setups like the GBPUSD pin bar signal discussed in today‟s lesson. Here‟s the „real-time‟ commentary that I posted of the above GBPUSD pin bar setup: before and after
The Secrets to Profitable Forex Trading Today I am officially letting the “cat out of the bag”; I am going to give you my 9 BIG secrets to profitable trading…OK OK, they aren‟t really “secrets”, but they are 9 very important things I personally do or have done that have helped me become a better trader. Unfortunately, there are no “secrets” to making money in the markets, but there are things that you need to do that you most likely aren‟t doing, which will greatly increase your odds of becoming a profitable trader. So, without further ado, here are my 9 not-so-secret secrets to successful Forex trading: 1) PICK ONE trading method and keep it clean and simple. Don‟t go wasting time trying to make sense of 15 indicators plastered all over your charts like a piece of abstract art. The truth about trading strategies is that finding one that gives you a high-probability edge in the market is not that difficult. But if you overcomplicate it and confuse yourself in the process, you are going to do a great deal of harm to your trading account. Look, your trading strategy should make sense and it should be effective, but it should also be so simple that you could explain to a 5 year old, I‟m serious.
The trading method that I have used for years is price action (duh); it‟s simple, effective, and flexible, and it doesn‟t take rocket science to understand or implement. If you want to master trading you can pick one price action strategy and learn how to trade it in every market condition; make it your bi$#!….REALLY master it before moving on.
For example, say you choose to learn the pin bar setup first, the best way to learn this setup is to trade it from key levels within the structure of a trending market, do that first, and make sure you are consistently profitable for 3 months or more trading only that strategy before moving on. 2) ANTICIPATE your trades and follow some kind of written plan. What I mean by “anticipate” your trades is to make sure you never jump in the market on a whim or without any pre-defined reason. You want to always make sure you are basing your trades on logic and objectivity, not irrationality and emotion (like most traders). So, you should have all the key levels drawn on your charts, and assuming you have mastered price action trading, you can simply sit back and wait for a setup to form at a key level in the market. This is called “pre-empting” your trades…instead of randomly jumping in and out of the market, you are watching predefined areas in the market and waiting for price action setups to form near them. Once your trade setup forms, you plan your entry, enter the stop and target, and then let the market do the “hard work”. Seriously, go play golf or something, don‟t sit there and think about your trade after you enter it, stop thinking for a while and you might just make some money in the markets. 3) MAKE A DIARY OF YOUR TRADES to keep a written on-going track record of your progress. I cannot tell you guys with enough emphasis how important your trading journal track-record is, except to say that if you don‟t keep a trading journal or at least regularly analyze your trading history and equity curve, you are extremely unlikely to ever make consistent money in the markets.
The actual process of updating your forex trading journal will help you stay disciplined and organized. This is part of developing the positive trading habits that are so crucial to becoming a long-term profitable trader. I don‟t care if you think updating your journal is boring right now, stop complaining and start doing the things that YOU KNOW you need to do to become successful. I can promise you that if you keep screwing around by being unorganized and half-assing it, you are never going to pull the sort of money from the market that you want. You NEED to look at your track record on a regular basis to see something tangible that reflects back to you your ability or inability to trade. This will work to keep you on top of your game. 4) DON‟T LISTEN TO ANYTHING BUT THE CHART, because the chart reflects everything! That‟s right, the price movement on a raw, indicator-free price chart, reflects all variables that affect a market. So, don‟t get bogged down analyzing economic news and watching CNBC, just learn to read the price chart and then let the price action dictate your trading decisions, not what some talking head on TV thinks. Also, NEVER trade what you think is going to happen, only trade what you actually see happening in the charts. What I mean is this, just because you “think” the EURUSD is going higher doesn‟t mean it actually is, and your thoughts have no bearing on the EURUSD or any other market. The only thing that matters is what the price chart is telling you, so learn to read and trade from that instead of outside sources. 5) DON‟T GET GREEDY or you will never make a profit. Greed is perhaps the most prevalent reason why most traders fail. The late Rene Rivkin, a famous Australian stock broker and trader, had a classic line about greed: “Leave some for the next guy”. Here are some tips on how to avoid letting greed get the best of you:
• Aim for a target before you place the trade – Yes, that‟s correct; you should already have a target in mind before you enter a trade, and it‟s best to pre-define your exit before you enter. Exiting is not an exact science, and there are times when deviating from your initial exit plan makes sense, but you should always decide before you enter a trade what your ideal exit strategy is and then try to stick to that plan as much as possible. Don‟t change your exit strategy once your trade is live just because you “think” the trade is going to charge on in your favor forever, only change it if you have a very obvious price action-based reason to do so. • Never move your stop loss further from entry – What I mean by this is entering a trade and then the market starts to move against you immediately, do you move your stop further away from the market price, or do you hold it in place? Obviously, the only logical course of action is to accept your loss and hold your stop where you pre-defined it, yet many traders email me saying they have moved their stop away and now have a very
big open loss they don‟t know what to do with. The answer is you have to take the bigger loss because you did not take the smaller loss…always take the smaller loss by not EVER moving your stop further from entry. • Be happy to take a logical profit – If you have a nice 1:2 risk reward profit and there is no obvious reason to try and trail your stop, then by all means take the profit! Don‟t just leave a trade open because you are mesmerized by the potential for the market to move further in your favor. Come back down to reality and realize the market ebbs and flows and it‟s more likely going to move back against you soon then move in your favor if it‟s already given you 2 times your risk. • Only trail stops once your trade is well into profit – I only attempt trailing my stop if my trade is up about 1.5 times my risk and I am in a runaway trend or a strong breakout move that clearly has potential to keep going. Don‟t start moving your stop up just because the trade pops in your f avor the first 10 minutes you enter. Give the trade some room to grow and breath. Trading is like a garden, you have to give it time to grow to taste its fruit. • Don‟t live in hope – I like to think of hope as the catalyst for greed. Traders often hope that their trades will go on forever in their favor, or they hope that if they move their stop loss just a little further away, the trade will come back for them. While hope is generally a good thing in every other area of life, in Forex trading it can cause you to do irrational things that destroy your trading account. 6) GET SOME BALLZ , because trading is not for the emotionally weak or for wussies. That‟s right, if losing 5 trades in a row makes you cry and whinge, then forget about becoming a trader. Don‟t trade if you don‟t have the money to lose, it‟s really that simple. You can lose money in trading, many beginners seem to forget or ignore this fact. So, you should not be trading with money that causes you to treat every trade like it‟s life or death, you really should almost not care at all if you lose on one trade, because ONE trade DOES NOT define you as a trader. Your success as a trader is the result of many months of trading results, not just one or two. Don‟t get all excited if you win a trade either, or a series of trades. Instead, stay neutral and act like a strong minded professional with skill, rather than a little school bo y who just won $100. You need to be strong to be a successful forex trader ; you to focus and believe in yourself, and it‟s OK to bet a little harder on a trade if you are confident, but keep in mind this is only advisable if you are 100% sure you have mastered your trading strategy already. 7) DON‟T CHANGE YOUR METHOD> STICK TO IT< BELIEVE IN IT, because all trading methods will have losses and losing periods. So, don‟t run away and freak out in the face of some losing trades. Instead, you need to hang in there and tough it out, just make sure you are consistent with your strategy and that you are using something like price action that is simple, logical, and has proven itself over time.
A random entry method based on flipping a coin would probably make more money than a trader following 3 different trading methods and running around looking for the Holy Grail every day. The Holy Grail to long term success is in fact…sticking with something, believing in it… and not h esitating when the opportunities present themselves. MAKE SURE YOU CAN SLEEP AT NIGHT, because if you are having trouble sleeping due to your trading, it means you‟ve risked too much. Don‟t take a position size that you know is too big, because then you almost certainly will be too emotionally involved with the trade which will result you in not sleeping and becoming even more emotional. Not to mention, your frazzled and obnoxious existence from risking too much will probably make your wife or roommates want to kill you or send you to the loony bin.
You need to learn to RELAX…the market is not going anywhere, you need to trade a position size that you can handle emotionally, not one that causes you to have a near melt-down every time the market moves against you by a pip or two. If you find you are waking up over and over to check the latest quote on your laptop or iPhone, you know you are IN OVER YOUR HEAD. Some people risk too much money for the “rush”, some do it out of stupidity or greed, whatever the case, make sure you are risking a decent amount, but
not an amount that makes your heart pound, and not an amount that causes you to fall asleep at your computer desk! 9) ALWAYS PAY YOURSELF, because if you don‟t, who will? When you make money in the markets you need to pay yourself, don‟t re-invest all your profits in some vain attempt to grow your account to infinity. Let‟s be honest here, you are in the markets to make money so that you can buy things, whether it‟s a house, a car, or trying to buy freedom from your job, you aren‟t going to buy anything if you keep all your money in your account. Pay yourself and reward yourself, it will help to motivate you and will reinforce positive trading habits.
Low-Frequency Vs High-Frequency Forex Trading
Many Forex traders seem to think that by trading more frequently they are opening themselves up to more opportunity and that this will cause them to make more money. This is wrong ; in fact, the main thing that high-frequency trading does is cause you to become stressed, frustrated, and take low-probability trades. The truth is that if you know what you‟re trading edge is and you are 100% certain of how and when to trade it, you will find that you don‟t really need or want to trade that much. There is indisputable evidence that day-traders and scalpers make less money on average than lower-frequency traders. We will discuss that and more in today‟s lesson, so let‟s get started… After you read today’s lesson, please leave me a comment! Tell me if you learned anything in today’s article, and if so, how will you apply it to your own trading?
We are strictly referring to retail human-being high-frequency traders in this article, not Qui ck note: proprietary commercial computer trading programs or algorithmic trading which sometimes results in thousands or tens of thousands of trades a day.
The quickest way to improve your trading is to… …Stop trading so much! It is just a fact of human nature that the more we stare at a price chart the more we get tempted to click our mouse button and enter a trade. The fact that we worked extremely hard for the money in our trading account seems to go right out the window after staring at a 5 minute chart for a while. We also tend to over-estimate our own capabilities of predicting the market‟s movement as well as ignore the real potential of losing the money we are about to risk. More trades equal more time and more stress. I personally believe in trading the daily chart with low frequency, meaning I take much fewer trades than most traders. We all know most traders lose money…most traders also trade a lot, so commonsense dictates that simply trading less often (doing the opposite of most traders) will improve our returns over the long-run.
By knowing what your trading edge is and being 100% confident of how and when to trade it, you will find that it‟s a lot easier to ignore the market when your edge is not present. When you trade less you can also risk a bit more per trade if you‟re comfortable with it. Think about it, one trader trades 30 times a month and the other trades 3 times a month, obviously the guy trading 30 times a month can‟t trade as big of a position size per trade as the guy trading 3 times per month. Not to mention that the higher-frequency trader is going to spend much more of his precious time in front of the computer, probably stressed out and frustrated. I prefer to spend less time in the markets and I also prefer to have low levels of stress, thus I mainly stick to the daily charts and I trade relatively infrequently compared to most traders.
The point is this: when you increase the quality of your trades you also increase the risk reward potential, and rather than fighting against the market you are simply being patient and acting only when the market shows your edge. This will work to accelerate your profits whilst spending less time in the markets. It‟s sort of counter -intuitive, because in most professions more time = more money, that‟s not so in trading, in fact most traders do a lot better by spending less time in the markets. Thus, you need to fight the urge to over-analyze, over-trade, or trade on low-time frames charts.
Low-frequency vs. High-frequency; An example Do you want to increase your overall R-factor whilst reducing your stress and emotion in the markets? Rfactor is basically your profit factor, and it‟s how much money you make over a period of time in terms of your risk (R) per trade. So, if you risk $100 per trade, your R-value is $100; if you made $500 in one month that would be a 5R return. This is how you should think about risk and reward, not in terms of percentages. Percentages don‟t really matter because a 50% return could mean you made $50 dollars or that you made $50,000 dollars…you see percentages are relative to your account size, what matter is dollars risked vs. dollars earned. If you are looking to build a consistently profitable track record to try and get an investor to fund you, they are ultimately going to be concerned with how many dollars you have returned relative to what you have risked. In order to show that higher-frequency trading does not equate to higher overall profits, let‟s look at a hypothetical example of a trader who over-traded on the 4hr charts during one month versus a trader who traded less-frequently on the daily chart for the same month. The key point to take away from the example below is that both traders ended up with a 3R return for the month of May, but the first trader traded over 3 times as much, taking 15 trades in the month compared to the 4 trades of the other trader. You can imagine that the trader who only entered 4 daily chart trades that month had far less emotion, frustration and stress, and far more time and ease of mind than the guy who entered 15 4hr chart trades and ended up with the same result. This is actually a relatively mild example, I know many traders who trade far more than 15 times in a month and lose money still, some of you are probably in that boat right now. So…why not try something different? TRADE LESS:
(Note: these were not actual trades; they are all made up for the sake of example) So, as we can see from the example track record above, higher-frequency trading does not necessarily mean higher-profits. Obviously, this is not a real track record, but the point still stands; when you take more trades you are naturally going to have to endure more losing trades which will need to be offset by more winning trades just to achieve the same profit factor. Note the guy who traded the daily chart had a 50% win rate with the 4hr trader had only a 40% win rate.
Treat The Market Like A Garden It might help to think about the market as a garden, and each month there are a limited number of vegetables that the garden produces, but there are a lot of weeds. The more vegetables you take out of the garden each month, the greater the chance you have of pulling a weed next time. In trading, there will typically be a limited number of high- probability / obvious price action setups each month, so if you don‟t have the patience to only trade those obvious setups, you‟re going to end up getting more losing trades (weeds) than winning trades (vegetables).
The science of why people trade too much Whilst the reasons why people trade too much can be many and varied, the primary reason is over-confidence. This is especially true after a winning trade or a series of winning trades. Traders tend to become overconfident after they hit a nice winner or winners and especially if they aren‟t following a tradin g plan and are just trading off the „seat of their pants‟. There is considerable scientific research that backs up the claim that most traders trade too often due to over-confidence. Most people over-trade due to “overweighting” their winning trades as Terrance Odean and his colleagues pointed out in their research titled Do Day Traders Rationally Learn About Their Ability?… However, when they are successful, these investors irrationally attribute success disproportionately to their ability rather than luck, leading investors to overestimate their own abilities and trade too aggressively; even investors with more past failures than successes may become overconfident by over-weighting their successes. Odean and company go on to discuss how the “aggregate performance of day traders is negative” and his research also underscores the fact that trading low-time frames and high-frequency trading become very addictive . Trading addiction is the only way to explain the fact that “over half of day trading can be traced to traders with considerable experience and a history of losses”, as quoted from their research. Why else would a day-trader with „considerable experience and a history of losses‟ continue to day -trade if not for being addicted to it? The primary thing to take away here is that you have to AVOID over-weighting your winning trades…they do not imply that you are “figuring it all out”…rather they should just be viewed as another execution of your edge. Remember that even if you are a trader who wins 70% of the time, you still never know which trades will be one of the 70% or when one of your 30% losers will pop up, thus you should never over-leverage your account or over-trade it…just trade when your edge is present, and over -time you should make consistent money. • Men vs. women
Now, I know that most of my readers are men, but the fact of the matter is that we are going to have to swallow our pride a little bit here and take a play from the women‟s trading handbook. According to a recent article on the New York Times website, men have a tendency to trade far more frequently than women, which works to drive up their costs and lower their overall returns, see here: This added trading drove up the men‟s costs and lowered their returns. The economists found that while both sexes reduced net returns through trading, men did so by 0.94 percentage points more per year. In a telephone interview, Pr ofessor Barber said, „In general, overconfident investors are going to be interpreting what‟s going on around them and feeling they are able to make decisions that they‟re really not equipped to make.‟ Shortterm financial news often amounts to little more than meaningless „noise,‟ he said. Far more than women, men try to make sense out of this noise, and to no avail. So, there are a couple important lessons to learn here:
1) Men tend to think they “know” what the market is going to do whereas women are mor e likely to accept the fact that they don‟t “know” for sure what the market will do. The fact is that the women are right; no one ever “knows” what the market will do except for insider -traders with illegal information. So, the sooner you accept that trading is just a game of probabilities where the outcome of any setup is never “certain”, the sooner you will stop taking low-probability trades only because you feel like you are “sure” about what the market will do next.
2) Women are less likely to get obsessed with financial news and in trying to “figure out what it all means”. Men need to be more like that on average, if you don‟t know why then please read my recent article on forex news and fundamentals. I personally believe that women have less of a need to “be right” all the time than men do, this also makes them better traders. The market does not care about you or your little feelings, so being right and wrong and having an ego about your trading are all totally irrelevant things to your bottom line. Leave your ego at the door when you enter your trading room, because it‟s NOT going to help you make better trading decisions; you can think you are right with every ounce of your being, but the fact is that the market doesn‟t care if you think you‟re right or not, it‟s going to do what it wants because THE MARKET is always right, not you. So, learn to trade according to these facts and not in conflict with them, we can do this by simply learning to read the price action that the market produces for us and only trading when our high-probability price action trading setups are present. Final thoughts…
Perhaps the core idea to take away from this lesson is that you should not assign too much significance to any one trade. Meaning, don‟t start over -trading just because you become overly-confident after hitting a few good winners. Remember, you can achieve the same overall R factor over the same period of time by trading less frequently. You can do this by focusing on qual ity of tr ades r ather than quan tit y of trades .
12 Surprising Reasons Why Pro Forex Traders Make Money
Most struggling traders seem to think that making consistent money in the markets is an extremely difficult achievement that always seems to be just out of their reach. Well, in today‟s lesson I‟m going to let you guys in on a little secret; making consistent money in the markets is not as hard as you think. In fact, you may even be surprised to know that you probably already have the knowledge to trade like a pro trader; you just have to make effective use of it. I want to hear from you!…leave me a comment after reading today’s lesson and tell me which of the 12 points below you need to work on the most or which ones helped you. I find that most traders who can‟t seem to make any consistent money in the markets already know what they need to do to become successful, but they don‟t make proper use of this knowledge . All traders have the motivation to make money in the markets, but most are focusing that motivation on the wrong things.
If I can boil down the primary differences between professional traders and amateurs, I would say this; pro traders are motivated by the long-term outcome of their interactions with the markets, whereas amateur traders are motivated by the short-term outcomes. Once you learn that you can only make consistent money in the markets by dropping the impulsive desire to “make money now”, you will cross the threshold into thinking and trading like a professional, and eventually you will become one. Here are 12 surprising reasons why pro traders make money:
1. Professional traders don‟t spend as much time analyzing the markets as you do Perhaps you think you aren‟t analyzing the markets „enough‟ or that you need to read more economic news to make money consistently…I can almost assure this is not the case. I can also almost assure you that you are probably spending more time analyzing and thinking about the markets than most professional traders are. Pro traders know what their trading edge is without a doubt, and they simply analyze the markets at their favorite times to do so, look for their trading edge, and then either trade or walk away. Think about it like this; why are you sitting there wasting your brain power if your trading edge is not present? Maybe you don‟t know for sure what your trading edge is? This brings us to number 2…
2. Professional traders trade what they see, not what they think or want to happen Many traders get caught up in a game of becoming so fixated on a particular thing happening in the market that they convince themselves the market is going to do what they think or want it to do. This of course causes them to do stupid things like over-commit themselves to a position or over-trade. Professional traders understand that they never know „for sure‟ what a market is going to do; therefore they don‟t become mentally or emotionally attached to any particular directional bias. The y simply use their price action chart reading skills to determine the most logical and probable near-term market direction and then look for price action setups that agree with it. If they don‟t see anything obvious forming that meets the guidelines of their trading plan, they go play golf, read a book, go to the gym, play with their family; but what they never do is trade just because they‟ve rationalized some „trade setup‟ in their head, simply because they have an urge to trade. Pro traders know EXACTLY what they are looking for in the markets, and they only trade when they SEE IT form.
3. Professional traders do not rely heavily on indicators I realized early-on in my trading career that indicators were not only clouding up my charts, but my thinking too. It really wasn‟t until I learned to trade with price action and I took off all the indicators that I really started to get „in-tune‟ with the market. Professional traders know they need to have a thorough understanding of how to read a naked price chart as the cornerstone of their technical analysis skills. Most traders go through an evolution where they start out looking for the “Holy-Grail” by trying every trading system, indicator, and EA out there, and then they either give up or begin to simplify their trading. I like to use the analogy of traders in the pits of the major stock and commodity exchanges; do you think those guys are looking at MACD, Stochastics, Elliot Wave or other “BS” indicators? Obviously not, they are reading tape, or price, they are basically just trading based off pure price action, and we can do that my taking off the forex indicators on our charts and learning to trade the natural price action of the market. (I know some of you are thinking that I do use indicators since I use a few moving averages, but I don‟t use them in the traditional „cross-over‟ moving average method, rather I use them to highlight dynamic support and resistance and for trend analysis, and I really only use the 8 and 21 day EMAs)
4. Professional traders rely on their brains, not on EAs or trading software I know that many of you have been tempted to buy one of the fancy sounding Forex trading robots out there, with a name like “Forex Turbo Pip-Blaster 10,000”…what unsuspecting newbie wouldn‟t be tempted? But what the guys or girls selling these „snake-oil‟ trading systems aren‟t telling you is that they are just programs that do the same thing over and over; they aren‟t flexible and the „results‟ they show you on their websites are either made up or back-fitted over a perfect sample of market history. In reality, the market eb bs and flows, and no computer program will make money as effectively as a human can over the long run. You need discretion and human brain power to navigate the markets successfully over the long run. Until we have true artificial intelligence the human mind will always be the best trading tool.
5. Professional traders don‟t focus heavily on fundamentals Whilst there are pro traders who do use fundamentals, I can assure that most do not. The ones that do use them do so because they are interested in the fundamentals more than anything, and they likely use them as „confirming‟ factors for what they see on the charts. There is simply no real reason to rely heavily on Forex news and fundamentals because all of these variables are ultimately reflected via the price movement on a naked price chart. Sure, it‟s good to be aware of the most volatile news releases like Non-Farm Payrolls or interest rate announcements, but beyond having an awareness of the timing of these releases in order to tighten stops or take profits, there is really no use in analyzing them in-depth. If you want to see how a news event or economic release affects a market, simply look at its price action, because all variables are ultimately reflected via a markets price action, so when you learn to trade price action you are indirectly learning to trade everything that affects it too.
6. Professional traders listen to themselves, not others Did you ever enter the market because of something some “expert” on CNBC said? Honestly, did you? I bet you did, I‟ve done it before, in my early trading days. It‟s an easy mistake to fall into; after all, these guys and girls do seem to k now what they‟re talking about. But, the funny thing about the economic media is that you don‟t have to look too long before you find another opposing “expert” opinion. If you read these people‟s opinions long enough, you‟ll soon either get a headache, enter a stupid trade, or just decide they are all full of crap. The latter is usually the best option. The point is this, you‟ve got to make your own decisions in trading, and no one will ever care more about your money than you do, so don‟t follow some “expert‟s” advice if you feel in your gut that it‟s wrong. Trust what the charts are telling you, not what some talking head on T.V. says. Professional traders are confident in their abilities and they don‟t let other p eople influence them or make their trading decisions for them. Take everything you hear from the “experts” with a grain of salt.
7. Professional traders are realistic You will not become a professional trader if you aren‟t realistic about trading. What I mean by „realistic about trading‟ is this; you aren‟t going to make a full-time income from the markets right out of the gate with a $5,000 account. You need to consider how much disposable income you have to trade with right now, and then decide how much money you think you are emotionally comfortable with losing on ANY one trade, and then adjust your position size accordingly. You can‟t just „run and gun‟ and think you can get away with risking 30% of your account on one trade, hit a big winner and THEN worry about forex money management. That‟s just not how it works. You have to be realistic and disciplined BEFORE you become a pro trader…you essentially have to “act as if” you are a pro trader before you are one…if you ever expect to become one.
8. Professional traders have a well-developed discretionary trading sense As we discussed in number 4, humans have the ability to be much better traders than computers, because we have the ability to use discretion. There is something called a “gut” trading instinct that the best traders have, and it comes from time, education, and practice. Price action trading is a flexible and discretionary trading method, meaning not EVERY pin bar or other setup will be traded. Instead, we only take those that meet our trading plan criteria and that “look” right…how a trade setup looks to you depends on your discretionary trading ability. Eventually, you will develop it to the point that you instantly know whether or not a particular setup is worth trading just be glancing at the market quickly. You‟ll need to use your discretionary trading sense to ultimately decide which price action setups to take and which to pass on.
9. Professional traders feel no „need‟ or „pressure‟ to make money in the markets Above and beyond everything else discussed here, not becoming emotional as you trade the markets is the most important factor that allows pro traders to make money. If you feel like you „have to‟ make money from your trading in order to be happy or have a fruitful life, you are probably relying on it too much. Most people who excel at trading don‟t feel like all their „eggs‟ are in the trading basket, and they won‟t be homeless if they don‟t make money in the markets. Essentially, you have to be at a point in your life where you are already happy and have a plan B to fall back on in case you don‟t make it as a trader, this will naturally increase your odds of becoming a very successful trader. If we put too much pressure on ourselves to win on any one trade, the whole process of trading just turns into an emotional mess of losses.
10. Professional traders are organized and disciplined You need to be organized and disciplined to harvest and maintain the proper Forex trading mindset. Having a trading plan and a trading journal and actually using them will go a long way towards turning you into an organized and consistently disciplined trader. Traders who think the y don‟t need to be organized or who aren‟t disciplined, usually behave this way out of arrogance. It‟s this same arrogance that will ultimately lead to their demise in the markets. When your hard-earned money is on the line you don‟t want to assume you will „make a trading plan and trading journal later‟…you need to do these things before you start trading real money, not after.
11. Professional traders only trade with disposable capital This point applies to normal „retail‟ traders (not investment banks and hedge funds). What is disposable capital? Basically, it‟s money that you don‟t need for any of your life‟s expenses or for retirement or anything similar. If you trade with truly disposable capital, you will not become overly-attached to any one trade, and as a result you won‟t become as emotional as you would if you were trading with money that you really needed for something else. The best way to get started in trading with an emotion-free mindset is to only use 100% disposable capital. So don‟t go taking out a second mortgage on your house or borrowing money to trade, this is usually a huge mistake and often ends in tears.
12. Professional traders use simple trading strategies Finally, many beginning and struggling traders are surprised when they find out just how simple most professional‟s trading strategies are. Pro traders know that simple Forex trading strategies like price action are the best, because it‟s simply unnecessary to analyze most variables outside of the natural price action in a market. They also know that simple trading strategies work to influence a simple and clean trading mindset,
