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How to trade successfully in the Forex Market
Author: By: articles_s2p@yahoo.com
This article is about money management and trading psychology. This is the
lesson that you never get with 99% of other Forex systems that you have come
across.
I find it interesting that most of the systems out there don't
include this because if they actually were successful traders, they would know
that this was the key to success and to leave it out makes an incomplete system
that won't work!! This tells me that the people that wrote them or are selling
them aren't traders at all. They are just in the business of selling HOPE!
Well, if you haven't noticed yet, I am a trader, and I am different than
the others. Don't get me wrong, there are honest trainers out there, I learned
from one and I am eternally grateful to him.
So let's get on with this.
First of all, this is my own interpretation of several sources, and the
practices that have worked for me. Please read EVERYTHING you can find on
trading psychology, and money management. There are a lot of slightly different
views but overall, they are very similar and the main important points are all
pretty much the same.
There are two main issues that cause 99% of the
problems. Can you guess what they are?
If you answered FEAR and GREED, you
are correct. These two emotions are probably responsible for 99% of the worlds
problems as well but that is beyond the scope of this course À .
So, now
that we know what the big obstacles are, let's try and figure out how to
overcome them. In the course of my lessons, I have listed a few but I will put
them all together here in one place so that it is easier to follow, and perhaps
make it easier for you to develop your own system to help you trade better.
We can't eliminate fear and greed. They will still be there in your
heart and mind, but we can make some rules so that they don't interfere with
your trading success. We can come up with systems and procedures to follow,
since we KNOW ahead of time that fear and greed are major problems. I'm sure you
have heard the statistic that 95% of all speculative leveraged traders FAIL.
This is absolutely true. Here is another statistic that I believe... 100% of
traders that don't know how to overcome fear and greed will FAIL. So does that
mean that if I can teach you how to overcome these problems that your chance of
success is 100%? Of course not. But I can tell you that you cannot be successful
if you don't protect yourself from yourself.
In lessons 1-3 I have
outlined a trading system. The first thing you must do, whether you follow my
system, another system, or your own system is to follow the rules of the system
WITHOUT FAIL. If your system calls for a certain entry point, do not enter until
there is a signal to enter.
Systems are designed for a reason. That is
why it is called a system. What do we learn from this? Patience. Perhaps the
stupidest thing you can do is enter a trade on a hunch.
This brings us to
our first FACT:
The odds are in your favor before you enter a trade.
This is true for most trading systems. Void of fear and greed, if you follow
each system exactly, you will profit. Some systems may offer better profits than
others, but overall you should be able to profit with any system, IF you have no
fear and no greed.
This brings us to THE BIG SECRET. Other than omitting
trading psychology, other systems also don't tell you that you are playing a
game of odds. Let's say for example that we are playing "coin toss."
Theoretically, for 100 flips of the coin, 50 will come up heads, and 50 will
come up tails. Of course, the first 100 may be 55/45, but the more you play, the
closer to 50/50 the numbers will get. Our system for "coin toss" is as follows:
We play for 20 hours, and flip the coin exactly 5 times each hour, and for every
heads that comes up, we get paid $2, and for every tails that comes up we pay
$1. This should be a profitable system. After our game we see that heads came up
50 times and tails came up 50 times. (Stay with me here). So at the end of 100
tosses, we have paid $50 and received $100. A profit of $50.
So let's
say that during our second game of coin toss, we decide that we are going to let
the flipper(hint: the market is the flipper) keep flipping the coin for an hour
while we take lunch but we are not going to pay or be paid for those flips.
During our lunch hour, heads comes up 5 times in a row (which is theoretically
possible, and not that unlikely). And now we are back from lunch, and we are
down $10 for the hour. Now, theoretically the odds of 5 tails in a row coming up
after 5 heads in a row are pretty good because for every ten tosses, you should
have about 5 heads and five tails. So now we get 5 tails in a row and now we are
down another $5, for a total of $15. So not counting the 5 tosses during lunch,
this leaves 90 tosses that we still have to account for and let's say that they
were 45 heads and 45 tails. Our profit for these tosses is $45 (45x2 minus
45x1), now if we take away the $15 for the tosses we didn't take, and that
string of losers, we are left with a profit if $30. So lunch and 5 lousy spins
cost us 40% of our profits.
Now this is theory but it absolutely applies
to this market. If you are picky about what trades you want to take and what
trades you don't want to take, you are MESSING WITH THE ODDS. My point for this
whole big story about "coin toss" is this: If the conditions are met, TAKE THE
TRADE without hesitation. The odds are in your favor, but only if you take ALL
of the trades that meet the conditions. When I say ALL trades I know the market
is open 24 hours a day and you can't possibly take every trade. You need to pick
a time frame and stick to that same time frame everyday and take ALL trades
during that time frame.
I can tell you that in the month before I
realized this (my first month of trading real money actually), my total profit
was 92 pips. I had an idea of what I was doing wrong so I was keeping track of
the trades that I didn't take along with the ones that I did. I included entry
point, day, time, and whether the profit target was hit or if it was stopped
out. Don't get me wrong, I was extremely happy to be in profit after trading for
only one month with real money. But then I went back and looked at the numbers
for "what could have been." Guess what? Had I taken every trade that met my
conditions, my profit for the month would have been 355 pips! I was not happy.
But soon I realized that I had messed with the odds. After realizing what I had
done wrong (or not done right in this case) I began to have more confidence in
my systems. The very next month my total profit was 515 pips, or a 560%
improvement just for taking all of the trades that met the conditions. I think
that is enough said about that.
Sorry to stay with the coin flip game
here but it actually works very well in teaching these principles.
This
brings us to:
FACT #2. You do not need to know what is going to happen to
make money. If we know that we are going to make $2 fifty times and pay $1 fifty
times as long as we flip the coin, are we going to play? Of course! Well, all
trading systems have similar odds. From my testing, I know that this system on
average will produce 9 wins of 20 pips for every 1 loss of 40 pips (that number
may vary but that is the maximum loss I ever take). So we know ahead of time
that 9 wins at 20 pips is 180 pips, and minus the loss of 40 pips, leaves us
with 140 pips profit. Now keep in mind that you may be 8 and 2 this week and 10
and 0 next week. We never know when a loss is going to come. We may even lose
every trade for a week, but not lose a trade for the next 9 weeks. Believe me it
happens. You do not need to know exactly what is going to happen, you just need
to take every trade that meets the conditions and then count your profits at the
end of the month/week/year etc.
This section deals with money management
as well as psychology. Back to coin toss for a minute. We know that each win
brings us $2. And we know that for each win in this trading system we get 20
pips. We know that each tail that comes up costs us $1. And in our system we
know that each loss is 40 pips. If we know what our loss is going to be ahead of
time, we know what it is going to cost us to find out "what is going to happen."
From this we can decide how much we want to risk based on our account size.
FACT 3: You know how much it will cost to find out. I have decided not
to ever risk more than 5% of my account on any one trade. So knowing that, I can
figure out how many lots to trade ahead of time based on my account size. It may
cost $250 in margin for a 1 lot position but this is not what we are risking, we
are actually risking ten dollars times the number of pips in our stop. If our
stop is 40 pips, we are risking $400. Now we know that we better have at least
$8000 in our account to take a position of this size. If this trade turns out to
be a loser, and our balance falls to $7600, we know that we can't afford to take
that trade again because a loss of $400 is more than 5% of our balance. We would
need to adjust our number of lots down accordingly to keep our risk.
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