9 Tricks Of The Successful Forex Trader
Step
1. Define your goals and then
choose a style of trading that is compatible with those goals. Be sure
your personality is a match for the style of trading you choose.
Before you set out on any journey, it is imperative that you have
some idea of where your destination is and how you will get there.
Consequently, it is imperative that you have clear goals in mind as to
what you would like to achieve; you then have to be sure that your
trading method is capable of achieving these goals. Each type of trading
style requires a different approach and each style has a different risk
profile, which requires a different attitude and approach to trade
successfully. For example, if you cannot stomach going to sleep with an
open position in the market then you might consider day trading. On the
other hand, if you have funds that you think will benefit from the
appreciation of a trade over a period of some months, then a position
trader is what you want to consider becoming. But no matter what style
of trading you choose, be sure that your personality fits the style of
trading you undertake. A personality mismatch will lead to stress and
certain losses. (For more, see Invest With A Thesis.)
Step
2. Choose a broker with
whom you feel comfortable but also one who offers a trading platform
that is appropriate for your style of trading.
It is important to choose a broker who offers a trading platform that
will allow you to do the analysis you require. Choosing a reputable
broker is of paramount importance and spending time researching the
differences between brokers will be very helpful. You must know each
broker’s policies and how he or she goes about making a market. For
example, trading in the over-the-counter market or spot market is
different from trading the exchange-driven markets. In choosing a
broker, it is important to read the broker documentation. Know your
broker’s policies. Also make sure that your broker’s trading platform is
suitable for the analysis you want to do. For example, if you like to
trade off of Fibonacci numbers, be sure the broker’s platform can draw
Fibonacci lines. A good broker with a poor platform, or a good platform
with a poor broker, can be a problem. Make sure you get the best of
both. (For related reading, see How To Pay Your Forex Broker.)
Step
3. Choose a methodology and then be consistent in its application.
Before you enter any market as a trader, you need to have some idea
of how you will make decisions to execute your trades. You must know
what information you will need in order to make the appropriate decision
about whether to enter or exit a trade. Some people choose to look at
the underlying fundamentals of the company or economy, and then use a
chart to determine the best time to execute the trade. Others use
technical analysis; as a result they will only use charts to time a
trade. Remember that fundamentals drive the trend in the long term,
whereas chart patterns may offer trading opportunities in the short
term. Whichever methodology you choose, remember to be consistent. And
be sure your methodology is adaptive. Your system should keep up with
the changing dynamics of a market. (For related reading, see What is the
difference between fundamental and technical analysis and Blending
Technical And Fundamental Analysis.)
Step
4. Choose a longer time frame for direction analysis and a shorter time frame to time entry or exit.
Many traders get confused because of conflicting information that
occurs when looking at charts in different time frames. What shows up as
a buying opportunity on a weekly chart could, in fact, show up as a
sell signal on an intraday chart. Therefore, if you are taking your
basic trading direction from a weekly chart and using a daily chart to
time entry, be sure to synchronize the two. In other words, if the
weekly chart is giving you a buy signal, wait until the daily chart also
confirms a buy signal. Keep your timing in sync.
Step
5. Calculate your expectancy.
Expectancy is the formula you use to determine how reliable your
system is. You should go back in time and measure all your trades that
were winners versus all your trades that were losers. Then determine how
profitable your winning trades were versus how much your losing trades
lost.
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Take a look at your last 10 trades. If you haven’t made actual trades
yet, go back on your chart to where your system would have indicated
that you should enter and exit a trade. Determine if you would have made
a profit or a loss. Write these results down. Total all your winning
trades and divide the answer by the number of winning trades you made.
Here is the formula:
E= [1+ (W/L)] x P – 1
where:
W = Average Winning Trade
L = Average Losing Trade
P = Percentage Win Ratio
Example:
If you made 10 trades and six of them were winning trades and four were
losing trades, your percentage win ratio would be 6/10 or 60%. If your
six trades made $2,400, then your average win would be $2,400/6 = $400.
If your losses were $1,200, then your average loss would be $1,200/4 =
$300. Apply these results to the formula and you get; E= [1+ (400/300)] x
0.6 – 1 = 0.40 or 40%. A positive 40% expectancy means that your system
will return you 40 cents per dollar over the long term.
Step
6. Focus on your trades and learn to love small losses.
Once you have funded your account, the most important thing to
remember is that your money is at risk. Therefore, your money should not
be needed for living or to pay bills etc. Consider your trading money
as if it were vacation money. Once the vacation is over your money is
spent. Have the same attitude toward trading. This will psychologically
prepare you to accept small losses, which is key to managing your risk.
By focusing on your trades and accepting small losses rather than
constantly counting your equity, you will be much more successful.
Secondly, only leverage your trades to a maximum risk of 2% of your
total funds. In other words, if you have $10,000 in your trading
account, never let any trade lose more than 2% of the account value, or
$200. If your stops are farther away than 2% of your account, trade
shorter time frames or decrease the leverage. (For further reading, see
Leverage’s Double-Edged Sword Need Not Cut Deep.)
Step
7. Build positive feedback loops.
A positive feedback loop is created as a result of a well-executed
trade in accordance with your plan. When you plan a trade and then
execute it well, you form a positive feedback pattern. Success breeds
success, which in turn breeds confidence – especially if the trade is
profitable. Even if you take a small loss but do so in accordance with a
planned trade, then you will be building a positive feedback loop.
Step
8. Perform weekend analysis.
It is always good to prepare in advance. On the weekend, when the
markets are closed, study weekly charts to look for patterns or news
that could affect your trade. Perhaps a pattern is making a double top
and the pundits and the news are suggesting a market reversal. This is a
kind of reflexivity where the pattern could be prompting the pundits
while the pundits are reinforcing the pattern. Or the pundits may be
telling you that the market is about to explode. Perhaps these are
pundits hoping to lure you into the market so that they can sell their
positions on increased liquidity. These are the kinds of actions to look
for to help you formulate your upcoming trading week. In the cool light
of objectivity, you will make your best plans. Wait for your setups and
learn to be patient. (For information on determining what the market’s
telling you, read Listen To The Market, Not Its Pundits.)
If the market does not reach your point of entry, learn to sit on
your hands. You might have to wait for the opportunity longer than you
anticipated. If you miss a trade, remember that there will always be
another. If you have patience and discipline you can become a good
trader. (To learn more, see Patience Is A Trader’s Virtue.)
Step
9. Keep a printed record.
Keeping a printed record is one of the best learning tools a trader
can have. Print out a chart and list all the reasons for the trade,
including the fundamentals that sway your decisions. Mark the chart with
your entry and your exit points. Make any relevant comments on the
chart. File this record so you can refer to it over and over again. Note
the emotional reasons for taking action. Did you panic? Were you too
greedy? Were you full of anxiety? Note all these feelings on your
record. It is only when you can objectify your trades that you will
develop the mental control and discipline to execute according to your
system instead of your habits.
Bottom Line
The steps above will lead you to a structured approach to trading and in
return should help you become a more refined trader. Trading is an art
and the only way to become increasingly proficient is through consistent
and disciplined practice. Remember the expression: the harder you
practice the luckier you’ll get.
