7 Simple Steps to Drastically Improve your Forex Trading
I have written about a lot of genuine Forex trading topics in the last few years on this blog, but in this article, I wanted to do something different. Today I wanted to go over some important points that I think traders should focus on, this article will be a summary of the most important things you can do right now to improve your trading ability and mindset… I am sure you will enjoy this one ..
Every Forex trader wants to improve their forex trading success. By following the 7 simple steps outlined in this article you will gain great insight into some concrete strategies you can begin implementing immediately to take your Forex trading success to a new level. For all those traders who are struggling to make money in the markets each month and are looking for some no-nonsense ideas to get on the path towards profitable forex trading, this one’s for you!
• Treat your trading like a business…not a casino or hobby.
Stop and think for a few minutes about how you have been behaving in the Forex market for the past month. Have you been viewing each trade as a business transaction with risk and reward associated with it? If not, you should be, there is risk associated with any business; a restaurant runs the risk of having slow customer turnout and thus poor sales, if a restaurant’s total costs are more than the total revenue it brings in, it will have a loss at the end of the month. Similarly, if the costs of your losses are greater than the revenue from your winners each month, you will lose money in the market at the end of the month.
The example above is meant to get you thinking in terms of business transactions. When you view each interaction with the forex market as a potential cost to your trading business, you will be more cautious of the trades you take and you will use more discretion. Forex trading is a business, unfortunately many; if not most forex traders treat their forex trading not as a business but as a trip to the casino. This would be analogous to the owner of a restaurant literally going to the casino each day and gambling away the revenue his restaurant brought in for the month instead of continuing to run his business as effectively and efficiently as possible. Starting right now you are to begin viewing your interactions with the forex market in terms of costs (losing trades) and revenue (winning trades). The aim of any business is to keep costs as low as possible and revenue as high as possible. In forex trading this is done by effectively managing the risk to reward on every trade you take.
• Use position sizing to manage your risk and reward effectively.
Positing sizing and risk to reward scenarios are how a forex trader effectively keeps track of and manages his or her forex trading business. Understanding how many lots to trade for every trade setup you take so that you can maintain your pre-determined risk amount is crucial to making your forex business grow consistently and without massive drawdowns. Many traders make the mistake of risking more than they should or want to on a trade simply because they forget or don’t understand how to adjust their position size to meet the necessary stop loss. Stop loss distance should always be determined first and then position size should be adjusted accordingly to maintain desired risk amount.
Forex traders must use position sizing to not only manage their risk but also their reward on each trade. When you know before entering a trade how much you will have at risk (your cost of doing business with the market), you can then define a logical and obtainable reward as a multiple of your risk (revenue). Typically a reward of at least 2 times your risk amount is what you want to aim for, a reward of 3 or 4 times risk is even more preferable. This way you can make sure that you are using position sizing and risk to reward to effectively make your forex business grow each month. The only other catch to be aware of here is that you must learn to not over trade and to pick only high probability trade setups. If you over trade and have many more losers than winners, even a risk to reward scenario of 1:4 will lose money over time, this is why it is critical to pick and choose your trades and wait for the most obvious ones. Check out this article for help on understanding risk reward & position sizing in forex trading.
• Over-trading; a real problem for most traders and how to stop it.
As we alluded to in the above paragraph, over-trading is a big problem for most traders and it is critical that you stop it if you have been guilty of it and to be aware so that you don’t start if you are currently not over-trading. Over-trading in the forex market is analogous to a business running up their costs unnecessarily; this would work to reduce their monthly revenue and thus their monthly profit. As forex traders we want to do everything we can to make as much profit each month as possible. When traders over-trade they invariably reduce the strike rate or accuracy of their trading strategy, this works to lower their monthly risk to reward and thus lower their profit or even cause them to incur losses. There are certainly times when the forex market provides more high-probability trade setups than other times. However, many traders end up forcing trades when no real setup is present, as a result of either over confidence after a string of winners or anger after a string of losses. We want to keep our winning percentage as high as possible each month and take full advantage of the power of risk to reward scenarios, this can only be done by using sharply honed chart reading skills in order to enter into only the best trade setups.
• Learn a handful of simplistic price action based strategies and master them.
This step is critical for learning how to not over trade. Learning to trade off simplistic price action based strategies, and truly mastering them, will give you the discretionary skill required to not fall victim to the over-trading bug that plagues so many forex traders. When you learn to master such price action based strategies you will also drastically improve your overall trading accuracy which will work to maximize the power of position sizing and risk to reward scenarios. It is important to demo trade for a few months before trying to trade with real money so that you obtain some discretionary skill taking only the best price action setups. Mastering these setups is something you will get better at overtime so it is critical that you have patience in the beginning while you learn the different between a high probability setup and one of lesser quality.
• Have a trading plan.
Having a pre-defined forex trading plan is a necessary component to treating your forex trading like an actual business and drastically improving your trading success. Any profitable business has a business model or plan that the business was built around and continues to function off of. The reason businesses have pre-defined plans is because they must know how to properly react to all possible situations that might arise in order to create and maintain consistency within the company. Similarly, in a forex trading business you must pre-define all aspects of your forex trading if you wish to develop consistency and profitability in your forex trading. It is possibly even more important in forex trading than in other businesses to pre-define all aspects of your interaction with the markets because this is the only way you can guarantee that you don’t fall victim to emotion based trading mistakes like over-trading and over-leveraging.
Here is a good article on developing a forex trading plan.
• Use printed affirmations to keep your mindset on track, put them on your office wall or computer monitor.
Daily affirmations can be a great way to keep your trading mindset in the realm of objective thinking so that you don’t fall prey to the many emotional pitfalls waiting for you as you trade the forex market. It is important that you print out or physically write down these affirmations so that you have a tangible reminder of what you need to do to stay on track. There is a difference between actually reading something and just thinking about it. Many traders think they don’t need to physically write out their trading plan or daily affirmations because they can just mentally rehearse them. However, this often leads to slacking and forgetting to follow your plan or affirmations due to the simple fact that there is no tangible evidence. Posting up daily affirmations and your trading plan somewhere obvious so that you almost force yourself to read it every day is a really good way to maintain conscious awareness of correct trading practices. Make it a trading habit to remind yourself every day before interacting with the market what you need to do to stay on the right track and you will very likely see a turn for the better in your forex trading.
Example: Use Post it Notes and stick them on the side of your computer monitor or office wall. Affirmations as they relate to successful forex trading might include things like:
- “Remember to manage my risk on every trade”
- “Forex trading is a business not a trip to the casino, treat it as such”
- “Be Patient, you don’t have to trade today, the market will still be here tomorrow”
- “Don’t fight the trend”
- “Take profits when they are 2 times my risk or slightly greater, don’t hold out of greed”
- You can really make your affirmations say whatever you want. The idea is to write them down when you are thinking objectively and NOT trading, that way you will have an objective reminder to read before you trade so that you are consciously aware of what you need to do to not fall into a habit of emotional trading mistakes. The other big thing with affirmations is to make sure you actually read them after you write them.
• Trade what you see and believe in, don’t doubt yourself or become a “hindsight trader”; meaning do not enter a trade due to regret or for no logical reason.
Beginning Forex traders very often make the mistake of trading off of an emotional feeling about the Forex market rather than an objective observation on price movement. Before entering any trade it is important to stop and take a deep breath and really ask yourself why you are entering the trade. Is there an obvious and strong price action signal on the chart or are you just trading because you want to be in a trade? It is very easy to jump into the market on a whim for any number of reasons…you might feel regret because you let a good trade setup get away, or maybe you just had a losing trade and are feeling angry with yourself or with the market and as a result you decide to jump right back in on a less than quality trade setup. There are a number of emotional reasons like these that cause traders to trade for no real logical reason instead of trading based solely on the objective price action on the chart in front of you.
Remember to implement the above 7 steps every time you interact with the market, and above all, when it comes to your trading method, focus on always using a non-cluttered approach such as price action trading which will greatly increase not only your ability to trade successfully, but will help keep you in a clear mindset so that you can better follow the concepts in this article.