Now that you’re about halfway through our College of Forex, here’s one piece of advice you should always remember. Be your own trader. In other words: Don’t follow someone else’s trading advice blindly! Just because someone may be doing well with their method, it doesn’t mean it will work for you. We’re all in different situations in life, and we all have different market views, thought processes, risk tolerance levels, and market experience.
A trading plan will make trading simpler than it would be if you traded without one. Think of when you use a GPS device. You enter where you want to go. It then figures out where you currently are and then shows you how to get to where you want to go. You’re able to constantly check on your GPS to see if you’re still on the right track. When you make a wrong turn, it knows to make adjustments, and it points you back in the right direction.
What’s wrong with deviating from your forex trading plan if you make a profit anyway? Making an occasional winning trade, even when you throw your trading plan out the window, may provide a short-term pleasure, but entering trades haphazardly can adversely influence your ability to maintain discipline in the long term. Trading is a marathon, not a sprint!
The first step in building a trading plan is to realistically take a holistic view of yourself. The foundation of your trading plan starts with your self-reflection because you will be the only one using it. This self-reflection will reveal your trader profile, which is basically who you are as a trader.
Why do you want to become a forex trader? Is it to become filthy rich? Is it for the thrill? Is it because you want to do something challenging and exciting? Is it because the girl you like trades currencies and you want to impress her?
How are your personal finances? You need to determine if you can even afford to trade. Forex trading should only be done with risk capital. Risk capital is money that, if lost completely, would not have an overly harmful impact on you financially.
You need to seriously consider how much trading will affect your current lifestyle. How much time each day/week/month (whichever is most appropriate) can you dedicate to the various requirements of forex trading and managing a trading system?
I want to make some money! Ahhh. Of course, anybody who’s interested in forex trading certainly has ambitions of raking in some dough. Trading involves risk, and we expect to be compensated for those risks. There’s no doubt that every currency trader expects to make a profit. The questions that you should ask yourself though are this:
What is your daily pre-trading routine? Waking up doesn’t count. Having a pre-market routine is important. Don’t think you can just jump out of bed, plop in front of your computer, fire up your forex broker’s platform and start easily grabbing pips as if they were apples from a very short apple tree.
What “toys” will you use for your forex trading profession? Write down the hardware, software, data feeds, furniture, and internet access that will comprise your currency “trading desk.” Don’t forget backups! Make sure you have a backup plan for everything just in case your main tools fail while you’re in a trade. What if your computer crashes and doesn’t boot back up? What if your internet connection goes down?
One of the leading causes for the failure of many businesses is their lack of planning. If you want to be successful in life and business, you need to have a plan for how to obtain that success. Trading is no different from any other business. It is important to have a written business plan for your trading just as you would for any other business.
A forex trading plan is only effective if it’s followed. You have to stick to it. It sounds simple to do. It is really just common sense but most traders still can’t do it. Why, oh, why? Trader incompatibility. A trading plan should be a personalized plan for you, a plan that fits your own goals, risk tolerances, and individual lifestyle. You must develop each component on an individual basis, never losing sight of the fact that it must be custom-tailored to YOU and YOUR needs.
The difference between making money and losing money can be as simple as trading with a plan or trading without one. A trading plan is an organized approach to executing a trading system that you’ve developed based on your market analysis and outlook while factoring in risk management and personal psychology. No matter how good your trading plan is, it won’t work if you don’t follow it.
Each trader is unique. There are over 8 billion people in the world (including space aliens disguised as humans and automobiles) and not one person is exactly the same as another. Even identical twins will have different fingerprints. Everyone has their own look, personality, talents, and pizza topping preferences (we like pepperoni and potato chips). We all like different things and are unique in our own way.
Scalping is like those high action thriller movies that keep you on the edge of your seat. It’s fast-paced, exciting, and mind-rattling all at once. Scalp trading, also known as scalping, is a popular trading strategy characterized by relatively short time periods between the opening and closing of a trade. These types of trades are usually only held onto for a few seconds to a few minutes at the most!
Day trading is a popular trading strategy where you buy and sell a financial instrument over a time frame of a single day’s trading with the intention of profiting from small price movements. Day trading is another short term trading style, but unlike scalping, you are typically only taking one trade a day and closing it out when the day is over.
Swing trading refers to the medium-term trading style that is used by forex traders who try to profit from price swings. It is trading style requires patience to hold your trades for several days at a time. Swing trading stands between two other popular trading styles: day trading and position trading. Swing traders identify a possible trend and then hold the trade(s) for a period of time, from a minimum of two days to several weeks.
Position trading is the longest term trading and can have trades that last for several months to several years! Position traders ignore short-term price movements in favor of pinpointing and profiting from longer-term trends. It is this type of trading that most closely resembles “investing”. The crucial difference is in markets outside forex, “investing” usually means you hold positions that are long.
In the previous lessons, we went through a variety of trading styles. Hopefully, you can identify which one may match you the best. If you already forgot what trading style is which, fortunately, for you, it’s time to review!
So far, we’ve taught you how to develop your trading plan. We’ve also discussed how important it is for you to discover which type of forex trader you are. Now it’s time to teach you how to add some meat to your thin trading plan by showing you how to create a forex trading system. More specifically, we’re gonna teach you all about forex mechanical trading systems.
The main focus of this lesson is to guide you through the process of designing your own forex trading system. While it doesn’t take long to come up with a system, it does take some time to extensively test it. So be patient; in the long run, a good forex trading system can potentially make you a lot of money.
Now that you’ve learned the basics of technical analysis. Let’s now combine all this information and build a simple trading system. This should give you an idea of what you should be looking for when you develop your own forex trading system. This system is moving average crossover system, which uses moving averages to determine whether to go long or short. Additional technical indicators are also used for confirmation before entering a trade.
What time frame should you trade your system on? The smaller the timeframe, the more difficult it is to develop a successful system. In other words, developing a system to trade on a 5-minute chart is more difficult than developing a system that trades on a daily chart.
As you can see, we have all the components of a good forex trading system. First, we’ve decided that this is a swing trading system and that we will trade on a daily chart. Next, we use simple moving averages to help us identify a new trend as early as possible. The Stochastic help us determine if it’s still ok for us to enter a trade after a moving average crossover, and it also helps us avoid oversold and overbought areas. The RSI is an extra confirmation tool that helps us determine the strength of our trend.
There are many systems out there that work, but many forex traders lack the discipline to follow the rules and as a result, still end up losing money. Your mechanical trading system should attempt to accomplish two goals: 1. Be able to identify a trend as early as possible. 2. Be able to find ways to avoid whipsaws (confirm your trend). If it is profitable, then you trade your forex system live on a demo account for at least 2 months. This will help you get an idea of how you would trade your system when the market is moving. It is a lot different trading live than manually backtesting.
You need to keep a trading journal. Journaling?!? Isn’t that only for silly high school girls who write about their silly crushes on silly high school boys? Heck ya! Ok, not really… high school girls keep DIARIES. Boys also (we don’t discriminate).
Okay, enough with the doom and gloom. Let’s just say that most expert traders keep a trading journal and review their trades consistently. And you know what most expert forex traders are? Even though some won’t admit it… They are BALLERS! They got the money. They got the cars. They got the clothes. They got the ice. We might be exaggerating, but only by a little bit. Besides helping you in your journey to baller status, there are other personal benefits to journaling…
The answer to that question is simple…Everything!!! You record everything you feel and do before the trade, during the trade, and after the trade has been completed. Trading is a performance skill, regardless of your trading style or method. Your outcome is determined by how well you analyze the market environment, your ability to create a plan or trading method, how well you execute that plan, and luck. There are many variables that lead to success, so you have to write down everything to determine your weak and strong points.
You need to have a valid reason for every trade you enter. This is also known as logic or rationale. You are not a caveman. Nor are you a gambler, right? Why are you looking at this area to enter? Where are you looking to pull the trigger?
The entry trigger tells you when to “fire!” Your entry trigger tells you that once you’re in the potential trade area, when to actually enter the trade. This is your specific entry technique. Now that you’ve decided on where you’re looking to enter a trade, now you have to decide how to actually enter the trade. Do you just blindly enter? If you want to cross the street, do you simply just start walking across?
How big should your position be? This is the easy one. You must decide, based on your risk management rules in your forex trading plan, what your position size will be. This allows you to know your maximum risk.
You need to have a game plan in place BEFORE you even consider getting in the trade. That game plan tells you how you will manage this trade, whether it goes for you or against you. Entering a trade is the easy part, it’s exiting a trade where you’ll determine whether you make or lose money.
Being retrospective means to take a look back at events that already have taken place. Once you’ve finished trading, it might be tempting to call up yo homies to hit up happy hour, kick back shots of Patrón, and splurge on bottles of Dom Pérignon, but it’s crucial that you review how your trade went, win or lose. You want to look back over the whole process to understand what you did right and wrong. Here are some questions to ask yourself:
While your bottom line (total profit or loss) can easily tell you your overall trading performance, keeping statistics is a great way to find out what parts of your trading system are keeping you from running like a finely tuned race car instead of a junkyard clunker.
After a good number of trades, you will have collected a lot of fancy-schmancy data and observations on the market and yourself…how do you analyze it all?? It’s pretty simple: 1. Find what works and keep doing it 2. Find out what doesn’t work and stop doing it. And finding what works and doesn’t work is all about keen observation and asking the right questions.
Keeping a trading journal is hard. But so is losing all your trading capital, failing as a forex trader, giving up, never to return to forex trading ever again. And reminiscing about the good ‘ol simpler days of being happy when there were only five TV channels to choose from. Which would you rather choose? Entering trades in a journal forces you to view the trades in black and white, rather than simply relying on your memory, which for most humans, is a stretch. More importantly, a trading journal allows a trader to step back and view their trades as a group of trades, and not as individual and ultimately random transactions.
Your trade journal is a log of all trading activity. A trading journal provides any serious trader who wishes to make money a tool to help them evaluate themselves objectively. There are three elements for sustained successful trading: 1. Having and executing a good trading PLAN. 2. Having a good trading system as part of that plan. 3. Review and improve your trading performance and plans.
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