It does still amaze me how many traders out there are not working from a consistent trading plan. In fact it?s the very first thing that we instruct our students to do when they are initially introduced to Online Trading Academy education, during the three day market timing class. With a trading plan nailed down, you are inviting yourself to become unemotional during your speculative activity. By removing the emotions you are also removing the temptation to trade without solid rules and objective reasoning. Nobody can ever predict what is going to happen next in the marketplace, therefore we need to have guidelines in place to tell us what to do when certain criteria and events occur during our trading. With these rules and regulations in place, we can then become consistent and see what works for us and what doesn?t work for us, thus tracking our performance to give ourselves a solid expectancy of what to expect in the future from our trading results.
With the dawn of 2014 fastly approaching us, I thought this would be a good time to share with you the first half of 12 rules (the rest will be in my next article) that we could all use across the coming year to implement into our trading plans:
1 ? Manage your downside?
Often overlooked and commonly misunderstood, risk management needs to be the first priority that any Trader has in their plan. The only way to make money from trading FX is to ensure in the first place that you have enough in your actual trading account to place a trade. The smaller the account that smaller the returns, therefore we need to protect our account because the more we have, the more we can protect and grow that account to make better returns over the long run. When the money is gone from our account, our trading career is over. That money in the account needs to be seen as a tool to produce a consistent return from our Forex trading but this will never happen unless this money is protected at all costs.
2 ? Get better entries
Many students always come to me complaining about how they get stopped out only to see the market move in the direction they thought it would go. I understand how frustrating this can be as it is something that has happened to me as well as many other traders. This often leads to people complaining that the stop losses are too tight. In my experience this is not correct and it is commonly down to a bad entry. Because of this many traders end up using far too large stop losses because the entries are poor and they need to give the market room to move into a profitable situation.
In class I teach people how to find imbalances between institutional supply and demand. This gives our students a precise entry that allows them to use a tight stop loss which tells us when we are wrong as soon as possible. This also allows a far greater potential for reward because we are able to buy lows and sell highs. There is always a right time and a wrong time to buy or sell a currency pair. Your trade plan needs to know the difference between the two. A good entry will always give you the strongest reward to risk ratio which in the long run allows you to be wrong more than right and still make good returns.
3 ? Understand your profit targets
Why would you ever take a trade if you didn?t know where you are going to get out for profit? While I know this question does seem a little absurd, don?t be surprised to learn that many struggling traders never actually have any idea where their profit objective is on a trade they take. Because of this they often find themselves seeing profits forming from the position, only to then watch this go all the way back to break even or maybe even into a losing situation. Personally I don?t think there?s anything more frustrating than when this happens. Nobody out there wants to be remembered as the world?s greatest break even Trader do they? One way to overcome this is to know before you actually take a trade where your profit target will be and how to do this as objectively as possible. Knowing when to get out for profit is just as vital as knowing when to get in for an entry.
4 ? Know why you?re taking the trade
One of the easiest things to do when sitting at your computer is to click the buy or sell button to enter a currency trade. Let?s face it, this does not require any skill whatsoever and is often the reason why many traders get themselves into trouble unnecessarily. They simply have no reason for entering the trade and usually as a result of either boredom or attempting to chase the market when it moves without them, they enter into a trade impulsively and without any real reason at all. In our classes and XLT online programs, our instructors teach the students how to recognize where institutions are buying and selling FX currency pairs on a price chart and this gives us our exact entries ahead of time.
When we see an area of demand we know that we should be buyers and when we recognize an area of supply we set up our orders to sell. It is as mechanical as that. This is how institutions trade, so why shouldn?t we? Trading this way removes emotion and allows you to behave in an objective and disciplined manner. It also takes the guesswork out of it which for me makes me a far happier and relaxed Trader!
5 ? Understand your Fundamentals
Some of you may be surprised to see me including this as a rule in my plan. If you have read any of my previous articles you will know that I don?t tend to use fundamental analysis as part of my reasons for taking a trade. I am a pure price action Trader by heart. However this does not mean that I ignore fundamental relationships that are common in all of today?s currency markets. This would be a foolhardy practice, as there are many intricate fundamental relationships present between currency pairs and other related markets which can help to increase the odds of success when I?m trading. Knowing the impact of the US dollar and Oil on currency, as well as a variety of other markets like bonds and stocks, can help the disciplined trader to know how to better time their entries into the FX markets. Go and study these fundamental relationships and I promise you there will be advantages to be had.
6 ? Use News the right way
My final rule for this week?s article relates to the news and how currency traders work with it. When I was first introduced to Forex trading I was told that News trading was a smart thing to do. Little did I realize how wrong that advice was. Many currency traders have the misconception that because we all receive the economic news at the same time, this gives us a fair advantage to placing trades around these violent and volatile times in the marketplace. Many times we see violent moves up or down on the candlestick chart, only to see these moves reversed in the blink of an eye, resulting in vicious stop outs and bad fills. They also lead us into the nasty habit of chasing each and every candle move up or down and costing us many losses unnecessarily.
However there is light at the end of the tunnel, and the educated Forex trader will know the news can actually provide some incredibly low risk, high reward trading opportunities if you have a good thorough understanding of pure price action and supply and demand. If your plan is to stay out of the market around the major economic releases, then I will applaud you. If you don?t know how to handle news then stay away from it, as there is plenty of other time to trade. But when you do understand how to handle it, a whole new world of opportunity will present itself to you. Just remember that news is called news because it?s already happened. It?s not the news we care about as traders but rather the price action following it that really presents us with our trades. If in doubt, then stay out.
Best wishes and be well,
Sam Evans