How to trade successfully in the Forex Market
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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