When you start your journey into forex trading, there is so much to know you do not know where to start. The internet is so full of information and yet sources that show you where to go are rare. What is abundant is the marketing mechanisms whose point is to extract more cash out of you, offering education that is otherwise free. You will undoubtedly on your first searches find multiple channels, websites, brokerages, and investment platforms full of attractive numbers and “professional” traders promoting their story as skilled promoters. Very rarely you will find a real example of what a prop trader does practically every day, how a trader’s day looks like. Based on these examples you can mold your own trading strategy or have an overview of what to develop first.
The First Steps
The first steps are not easy to find among all the material without substance. Whatsmore, the material you find will likely point to a direction where 90% of traders end – giving up on trading after a very fast account busting. Even though forex trading is hard to master on a psychological and technical level, once mastered it offers a very attractive lifestyle most would put into the ideal category. Getting there is the hardest part, but it does not take long, especially if you have great educational and forex technical sources. Beginners always have good motivation once they find something interesting like forex trading. The motivation becomes a mix of many other emotions after failures, eventually giving up because they have followed bad advice. In this article, we will present an example of how a developed prop trader trades, the complete process on a developed algorithm based on indicators. Your future actions can be built on the same or give you an idea of what to aim for.
On the forex market scene, traders behave as the most disciplined soldiers. They have structure and procedure before trades are entered. This structure is the algorithm and the procedure is a plan. Even though beginners should start developing a concept by concept, in the end, they build a system. Each element has a role, and each element needs to be found, tested, and incorporated into the system. So as a starter, trading education is done in small steps. Consequently, you may lose sight of the zoomed out picture of the complete system put in action.
From A to Z
Taking the information from our previous articles, let’s present the procedure from A to Z. You should be familiar with the previous topics to understand what is really going on here, yet it is not required, it is also an intro into the forex trading end result. Note that the exact system elements will not be disclosed, and it does not have to be. Traders develop according to their personality, lifestyle, mindset, and psychological context. No trader system is the same, you will likely fail if a system is given to you. If the need arises, there are already made systems you can download and plugin as a template in the Metatrader 4 and 5. Some other platforms also have this ability but you will find that availability is an issue. Additionally, copying another’s work is a shortcut leading to failure because you have not developed the two most important aspects of trading – psychology and money management.
This example is focused on the daily timeframe only. Of course, you do not have to trade on the daily only, the system is good for all, it is just this system is designed for it. The benefits of the daily chart lie in a good life-work balance, trading sessions avoidance, and so on. The daily timeframe is also a topic in one of our previous articles. Since this is a technical analysis algorithm, it is based on indicators. You probably know about the negative talk about them. Negativity comes from bad results with them and it comes from people who did not go beyond the popular indicators which are actually bad performers.
Pure Price Action Trading
Another group against indicators are pure Price Action traders who rely on blank charts to make a decision. Some of these traders are the best in the industry although it requires a special psychological set to trade this way, it takes a long time (experience) to develop such skill and it does not prove to be better when compared to technical traders. However, Price Action traders still have a procedure and a plan, similar to our example. After all, our technical prop trader example does not spend more than 15 minutes to trade per day and still have better performance than shorter timeframe trades according to testing. As per his words, you can spend a day trading on a 15-minute chart or spend 15 minutes on a daily. Trading should not own your time, and you do not have to sacrifice results to do so.
Each of the system elements has an article (on our website). After you have tested them, classified them as the best, and incorporated them into your system, it is time to apply the plan and the procedure. Backtesting is a necessary prerequisite, and it is what you can work on when not trading. Exploring interesting tools, methods and ideas are what you will do as a professional, it is how you stay at the top in this business. Testing them for your system is a must. Improper back and forward testing will cause future losses, be it by mistake or in purpose, forex will reflect your work. The procedure for backtesting is explained in detail in previous articles, it is adapted to the system structure we are using but it can be applied to other systems.
Technical Trading
Our technical trader does not look at the charts until the day session is about to close. It is the time when all the day trading activity is recorded in one candle since we are on the daily chart. We have all the data we need to make a decision. 30 minutes before closing there is not much activity on the market, most of the trading volume has subdued as banks are closed around the world. 30 minutes before day close is all we need to do all the trading per day. Depending on where you are or what is your broker server time, it can be during the working hours or in the middle of the night. If the timing is not convenient for you for various reasons, there is an alternative of course. You can trade a bit later the next day but using the data from the previous period or use pending orders instead of the market.
The first thing to check is the $EVZ, VIX Index, or other global forex volatility benchmark. It is our first information about the market conditions that affect our money management mode. Markets move in cycles, from chaotic to calm. Flat markets do not have trends we need to produce the difference or profitable trades. Calm markets also lack the momentum to push the price and trigger our Take Profit after which we are safe from losses (according to our system money management). This is a riskier environment so we adjust accordingly. Using the VIX levels we also set up exact rules on how large our position sizes are. According to our rules, if $EVZ is below 8 we risk 1% per currency, below 7 – 0.5%, and below 6 we do not trade at all. Whatsmore, our Take Profit orders close 100% of the positions, we do not follow scaling out methods we usually do when the $EVZ is above 8. Refer to our article about money management to know more about where we initially set up the Stop Loss and Take Profit orders and how it affects our position size entry.
The next step is checking the news events. We want to know if there is an event that can affect our potential trades or active trades. Such events are mostly classified as of high importance. Forex Factory is a good source for the events calendar where you have enough filters. Of course, some events are not reoccurring or recorded in a calendar, such as trade wars, Brexit, and so on, so you need to pay attention to these too. For example, we have avoided the GBP during the Brexit process, you cannot foresee a speech or some agreement result that has an immense effect on the trends, better to avoid this risk altogether. If an event is due in 24 hours that is important, you skip on that currency. If you have active trades, you exit before the event.
Tool Options
Some traders like to customize their MetaTrader platform with a plugin tool like an indicator or EA that pulls the feedback from other sources about the upcoming events and see them on the chart. These tools are not uncommon and can be found on forex-station.com, for example. Avoiding what we cannot control is just as important as getting into the right trends. Note that trading on the daily chart absorbs any small impacts less important events cause. You can write down the currencies which have an event coming up if you do not want to import any MT4 tools and keep the list with you for the chart analysis step.
If you like have a whiteboard with key info to consult before the charts are opened. Write down your active trades here. You will have them visible on the platform but writing them down and putting them in front has a positive effect on your mind. The next column is potential trades. Here you can write down pairs that are very close to generating a signal such as a volume indicator lag clearance, possible continuation trades, and similar that require attention our system does not explicitly alert. Pullbacks require a special column. All currency pairs that have shot past our baseline-ATR range can be written down for a pullback entry one candle later, if applicable. Trading other asset categories, such as Metals, Commodities, Indexes, etc, write them separately. Your whiteboard can also have your favorite quote to keep you on, companies often do this on a wall their employees can see.
Now we open the platform and first we take care of our active trades. We need to adjust the levels to new conditions. Make sure your Stop Loss and Take Profit levels are executed properly. These pending orders rely on server execution if you do not use any EA that keeps them internally. Cases where your pending orders are not executed because of the broker issues are rare, and it is most likely our mistake when entering them. Any issues with the broker need to be resolved right away, it is your capital. The broker should revert the trade if it proves it is their issue. Consider if the broker is reliable enough if these errors continue, though these are extremely rare issues.
Entry & Exit Decisions
The next step with the active trades is to check our system exit indicators. Take a look at your whiteboard, paper, or the platform and see if you need to exit. Exiting a trade does not come into question here, follow your system to the letter. Do not exit sooner or later, only when a signal is given. Your active trades might still be running and reached Take Profit level. Consider moving your Stop Loss to breakeven if it is, you can celebrate now, you can only win. Scaling out like this is done only when the market is flowing enough, you can set multiple scaling out levels if needed but do not overcomplicate trade maintenance. Setting up Trailing Stops is also an option, especially if your trade is following a long trend. You can try various trailing methods just try not to complicate, the differences are not substantial.
Once the active trades management is done we can move on to looking for new opportunities. Our whiteboard will show what currency pairs we should pay attention to. On the platform, we have a list of all currency pairs, we focus on the majors and crosses. Exotic currency pairs are not a very good proposition when it comes to risk, although if you are familiar with any adjust the risk management accordingly, and include them into trading. The first thing we look at when looking at the charts one by one is the baseline.
Once the price crosses it and about to close for the day, it is the moment we make trade entry decisions. For that, we need confirmation indicators signals to give us a green light. If not, we move on. It does not take more than a few seconds to decide, even if there are 28+ currency pairs to trade, the whole process does not take more than about 15 minutes per day. When the system generates a signal to enter, including the volume filter, we measure the ATR range from the baseline. If the price has moved beyond the 1xATR value from the baseline, we do not trade. We might write down this pair as a pullback opportunity if the price moves back into the ATR range but for now, we move on.
The system will tell when it is good to go when all elements agree, only then you enter trade if everything is according to the money management plan and our rulebook. And you do not enter a trade immediately once you find the currency pair, write it down. There might be more signals for that particular currency and splitting the risk on two or more positions is always good. Risk is proportionally lower with better diversification. Remember not to overexpose, too much capital on one currency can be easily entered by mistake.
Whatsmore, a common mistake is also to buy and short one currency at the same time by trading two pairs. You end up basically with one trade but with two different positions. For example, trading short GBP/NZD and NZD/USD. The NZD is canceled out here, better just short GBP/USD. An overexposure example is when we short GBP/NZD and buy NZD/USD, the NZD has double investments. Writing the pairs down will eliminate overexposure and redundant trades. Additionally, you will have better efficiency, organization, and overview you need to refrain from entering into the first signal you stumble on.
Continuation trades, of course, do not have baseline cross signals, they are eligible for trends that continue after a break but the price is still above or below the baseline depending if the trend is downward or up. As per our rulebook, we only check our confirmation indicators for a new signal here, ignoring the volume filter and the ATR-baseline range. Continuation trades are common, pay attention not to miss them and write them down with the rest of the signals.
After all of the assets are checked, we move on and enter the trades from the list. Now the money management plan is applied. We need to know how big the position needs to be for each pair to have optimal risk. Where our Take Profit and Stop Losses are going to be. For this, we use the ATR indicator on each currency pair to determine volatility based on which we calculate the exposure. According to our example, we use 1.5xATR for Stop Loss and 1xATR value for Take Profit level, but you can adjust this to your preference. For more details on how exactly we calculate the position size, consult our previous articles about money management. We end the process by entering the market order with the Stop Loss and Take profit levels, make sure that the trade is correct and close the platform. The rest of the day is yours, do not look at the charts, the decision has been made. Do not let market movements also move your emotions that lead to messing around with the system.
In conclusion, be like a soldier. Have a structure, build one, now you have the recipe. Take the above example and the system how you see fit. The structure you make has to be followed to the letter to get on top of the forex game. If you keep changing the structure, or the system, you will not get the consistency. Day to day procedures have to be as crisp as the algorithm, which is also an excellent way to control your emotions. Come back to this article if you ever need a guide on what to do next when you are starting your forex journey.
The first thing that any trader should do after placing their first trade is to write everything about it down on awesome paper in a trading journal if you have one. This will include things like the opening price and time, the closing price and time, how long the trade was open for, the profit or loss of the trade, what analysis you did beforehand, which of your trading rules you followed, and any other relevant information that you can think of. It sounds like a lot, but it will be worth it, this sort of information will then allow you to analyse the trade that you made (our next point) which in turn allows you to ensure that you are making even better trades in the future. This is only possible though if you remember to write things down. It does take a little extra time, time that is definitely worth it, so don’t skip this step just to save yourself a few extra minutes.
You can do this regardless of whether you did our previous point of writing things down, however, it is far easier to do if you have all the relevant information written in front of you. We now need to analyse the trade that we made in order to work out whether it would be classed as a good trade or a bad trade. A good trade is one that followed all of our trading plans and rules, you can then probably guess that a bad trade is simply a trade that did not follow all of our rules, a trade placed outside of our strategy, regardless of the outcome. If we placed a bad trade we need to work out why, what part of the trade went against our pre-planned strategy? Work that out and you will find it far easier to avoid making the same sort of bad trades in the future. The result of the trade in regards to profit or loss is not important at this stage, what is important is that you get used to trading in line with your strategy and that you gain experience with placing trades with your platform and broker.
When we place our first trade, we will have a number of different emotions flowing through us which is completely natural in this situation. We will feel nervous beforehand, during the trade we may feel a lot of adrenaline, afterward, depending on the result we may feel a high or a low. It is important to remember these feelings, however, the reason why we are remembering them is not so that we can try and recreate them, it is to show us that we need to try and get them out of our trading. The nerves that you get at the start should go with time, but if you allow them to remain it can become increasingly hard to actually place trades, the same with the highs and lows, they can become addicting or even bring on other emotions that can affect our trading like greed or overconfidence. So remember those feelings, if you then, later on, feel them becoming quite strong, that is a good time to take a break and clear your mind.
If we did our analysis properly, we will most likely have a few things to think about, did you follow your strategy? Did you place a good trade or a bad trade? These are things to think about. If things were not entirely perfect which they probably weren’t, then we can start to think about things that we need to change. When starting out there will most likely be a lot of different things that we need to change on our first, second, third, and more trades. They may be very few things, but each change that we make is an improvement that will ultimately improve our overall trading in the long run. Remember, these changes do not need to be big, any changes are also helpful, no matter how small they are.
So we placed our first trade, after looking at that trade, analysing it, working out what we need to change, we can then think about placing our second trade. We need to take into account anything that we previously looked at, so if we needed to make a change, this is where we can implement it, of course, if it is a huge change, then it will be good to test it on a demo account, but for very small changes it will be ok in our live account. It should be slightly easier and quicker to place this second trade as we have done one before and the majority will be exactly the same. Place the trade and then do exactly the same again, write down what you do, the same information as before, so you can then analyse the second trade to ensure you are still in line and that any changes that were made are working well. Then do the same for the third, fourth, and any other subsequent trades that you make.