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:
Step 9: 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 example:
• 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:
Step 10: 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.
Step 11: 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.
Step 12: 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…
Now that you’ve finished this mini-series on becoming a professional trader, you should have learned a lot and have a deeper understanding of what pro trading is all about. I am not implying that you will be a professional trader just because you read this blog series. You need to understand that becoming a pro trader is the result of months and likely years of disciplined trading and making small steps toward your ultimate goal of professional Forex trading.
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. To learn more about the professional Forex trading concepts discussed in this mini-series and my personal approach to trading the markets, check out my price action Forex trading course and members’ community. If you have any questions or feedback you can contact me here.