Tag: Trading Plan

Categories
Forex Trading Strategies

Ways to Completely Sabotage Your Trading Strategy: Part 4

We’ve covered money management, trade management, and trading psychology’s biggest strategy sabotaging tactics in the first three articles of this series, and now, we are down for our last eye-opening conversation on this topic. There are some questions we don’t ask because no one told us that other options exist. While this is definitely not […]

We’ve covered money management, trade management, and trading psychology’s biggest strategy sabotaging tactics in the first three articles of this series, and now, we are down for our last eye-opening conversation on this topic. There are some questions we don’t ask because no one told us that other options exist. While this is definitely not […]

We’ve covered money management, trade management, and trading psychology’s biggest strategy sabotaging tactics in the first three articles of this series, and now, we are down for our last eye-opening conversation on this topic.

There are some questions we don’t ask because no one told us that other options exist. While this is definitely not the only way of looking at things, we certainly believe that this dialogue is very much needed in the trading community.

You know the saying…When the student is ready the teacher will appear (Tao Te Ching). Maybe this rhetoric gives you the insight you’ve been looking for.

  • Part 4: Don’t Look Beyond

When traders first start learning about their market of choice, they are a tabula rasa, a new notebook waiting to be filled with knowledge and wisdom. At this critical stage, like children who gradually learn to be less honest because it is socially unacceptable to utter certain truths, traders are also conditioned to look at things in a certain way. Still, as human beings, we are blessed with analytical skills we need to rely on to create our own path, our own success story.

That’s why, when we first get to read about different trading markets, we need to understand the essential differences between them, such as the intricate nuances that separate the forex market from the stocks market.

A lot of resources suggest that money is made when you buy low and sell high, but we’d like to throw in a little twist here to possibly give you a perspective of where this narrative is coming from.

If we are speaking about the forex market, many experts ask how we can discuss if something is overbought and oversold when currencies essentially have no value of their own. The days of the gold standard are long gone, so what we have nowadays is fiat currencies that, unlike equities, have no intrinsic value.

When we look at a specific stock, there are many things we can rely on to determine its price. With currencies, however, we don’t think of balance sheets or products; we only depend on major banks to drop the news concerning prices.

This is one among many subtle (or not so subtle) distinctions that might seem very insignificant. Nevertheless, it’s like with changing companies – you need to understand the company culture to see if you’d fit in even though the position is the same. Here too, we are traders in either case, but some rules of the game differ.

So, what do you think happens when the money floods into the market? With stocks, it is clear – the money comes in, the price follows accordingly. Forex, like some experts, like to explain, does the opposite. When the money comes in, the prices run in the opposite direction.

Why do you think so many traders fail at trading currencies? They swarm in like bees, making massive concentration in one area of the chart, and guess what happens next…the big banks step in and pull the rug from under their feet.

The big banks use all the technology they can to see where the money is going to go next. If something is headed long, they will change it to short. This is how the big banks take the cream off in this market, which does not happen with stocks. So, how the price goes up and down is entirely different in these markets.

Now here is another topic to contemplate – reversal trading. This is one of the favorite topics on trading blogs as well as one we should definitely ponder on more deeply. Reversal traders seem to be the key players in this game of price change. Why? Big banks don’t need trend traders, professionals claim. They need reversal traders for the show to go on. 

While some traders are trying to call a reversal, big banks are “secretly” waiting for the right moment to wreak havoc. That’s why this scenario has been repeating on and on all this time. Most traders get into this collective loop of waiting for a currency to reverse itself for a long time. Do you know when a reversal really happens? ….only when the majority of reversal traders give up on waiting. 

You can always find proof of this if you look up client sentiment online or even observe the charts. You will see how the big banks keep traders immersed in this fixation by calling a reversal with sporadic crumbs of small wins. But, in the end, the majority losses because the majority does not possess this information. They did not read or learn what we talked about in the previous articles of this series and they do not understand what makes them obsess about something that keeps making them lose.  

The most important thing is to try and look and not just disregard and toss everything that doesn’t resemble mainstream thinking. Whatever is prevalent temporarily may not carry the information you need in the long term. Also, whatever is present online is not necessarily true or good for us, which is something we can see in other areas of our lives as well. Why would you let your ignorance be the reason why others become rich? 

Another important topic that is closely related to what we discussed above is your toolbox. What do you have on you to tackle current challenges? Many traders use indicators that are not only designed for other markets but that is also so old and thus useless at present. Forex traders in particular are known for using tools that were specifically made for trading stocks even to this day after so many indicators have been made only for trading currencies. Why this happens lies in the fact that many people are unwilling to search and test, but this is the only viable way for anyone to become professionally and financially satisfied doing what they do.

What we really want to stress here is that you need to think for yourself and think outside the box. We cannot let popular or widespread ideas dictate what we should do. The number of traders who fail is absolutely unbelievable. Don’t make yourself be just another statistic. You can do much more with just a little more effort on your behalf. 

And…this is the end of this journey. Remember to look beyond and test everything because you deserve better – better trading, better results, and a better life. Good luck!

Categories
Forex Trading Strategies

Ways to Completely Sabotage Your Trading Strategy: Part 3

We are on a mission here! We’ve dismantled some major fallacies and we are finally ready to come undone, free of misconceptions and wishful thinking. We’ve understood how exactly to approach our trading plans in article one and how our emotions can serve us in article two of this series. If you are too ready […]

We are on a mission here! We’ve dismantled some major fallacies and we are finally ready to come undone, free of misconceptions and wishful thinking. We’ve understood how exactly to approach our trading plans in article one and how our emotions can serve us in article two of this series. If you are too ready […]

We are on a mission here! We’ve dismantled some major fallacies and we are finally ready to come undone, free of misconceptions and wishful thinking. We’ve understood how exactly to approach our trading plans in article one and how our emotions can serve us in article two of this series. If you are too ready for some real truth once again, keep on reading. We are bringing in some more clarity today.

  • Part 3: Don’t Listen to Experts

This is another one of our favorites here. Don’t listen to experts. Why would you listen when you know better? This is a special treat for anyone in love with sabotage. You may be surprised how deep this belief goes and how far it reaches. No, it’s not only about everything you read before. Just, read the whole article and then form a judgment.  

So, let’s get right to it.

This is a story about Bob, which we heard from one of the most prominent traders we know. Bob started trading when he read a blog post on how he can make a lot of money trading. His eyes popped when he saw the monthly return. He finished reading in the blink of an eye and discovered his new calling. He will be a successful trader!

Bob started his demo account with 20 thousand USD. With a risk ratio of 1:50, he managed to raise his account to almost 100 thousand USD in just a few months. Interestingly enough, Bob only used stop losses upon entry when trades would unfold to his benefit. He thought that he had enough in his account to bear the consequences of a trade going against him, so he would just wait for the scenario to change back to positive. 

What do you think Bob’s approach lacked the most?

If you don’t know, we’ll help you with some additional questions:

No. 1: Could Bob differentiate between the money in his account and money management?

No. 2: Do you believe that Bob ever enquired about proper money management skills?

No. 3: Was Bob ready to settle for less?

You’ve got three big NOs here. Bob served us well to learn an important lesson.

Warren Buffett is no lunatic. Why would he not secure a greater yearly return? Do you think a man who achieved that much would ever not use ways to protect his trades? Imagine how unusual it may sound for someone who has just started to trade that 10—15% return is amazing when they managed much more on a monthly level. Why would anyone on earth be using stop losses when there is another way, these novice traders may think. 

We wish to discover a trader who has managed to maintain a steady-growing account year after year this way, but most professionals would agree that this approach is simply unsustainable. If you wait for a trade to go your way, you can – and probably will – deplete your account of every last dime you’ve got. The only way to make this big of a change in your account is to use reckless money management.

When you are so eager to increase your income no matter the consequences, what you get is the opportunity to kill two birds with one stone – see your account skyrocket and then be completely shattered. These results are just like Newton’s laws of physics – inevitable. 

Now, let’s quickly go back to our previous article on sabotaging strategies. What emotions do you think Bob felt throughout his experience? Was he calm and composed or half-crazed with euphoria and excitement? We believe it was the latter. We think that the best advice for Bob, the main protagonist of our story today, would be to go and cash out everything before he manages to waste it all. Would you agree?

Now if you are wondering if you could go above the standard 2% risk and maybe use stop losses in a different, more lenient way, the answer is yes. The only questions left are what kind of results you are getting with this approach and whether you are doing your account a disservice.

Now, make sure to write this down in your notes and underline it as many times as it takes for the message to get engraved in your memory:

❝Reckless money management is a sure way to sabotage my strategy.❞

If you are still wondering why, the answer is simple – it won’t render lasting results. So again we go back to the previous article and ask you – what is your aim? Are you in for the long haul or you want quick results? What is your standpoint in trading?

Don’t forget that the internet is a safe haven for tricksters and some more serious frauds who will promise anything for you to believe that your dreams can come true. Now more than ever, there is enough room for every form of deviant behavior to be wrapped up nicely for all manipulative intents and purposes. We see this with trading robots (EAs) where the results you think you see on their web pages are not the actual results you need to see and have after you make a purchase. As we explained before in this series of articles on sabotage, do not believe everything you read. Ask for clarifications and use the power of your analytical mind.

Speaking about analysis…Bob explained that he had enough margin to wait out for as long as it was needed until the trade started to move in his favor again. The problem is that, in reality, dropping from a 50 thousand USD account down to 40 thousand USD is already very, very hard to recover from. Realistically speaking, you would need to make a 25% return, a return better than Warren Buffet’s yearly average, just to make up for what you lost. On the other hand, with a standard 2% risk profile, you would need to take 11 consecutive losses to manage to get this low, and that would be without any exit plan except by a stop loss at 2% risk per trade. 

The point of everything you do in terms of money management and trade management is to make everything happen to your benefit. As we explained in the previous articles, you are a good trader if you manage to not just win but protect your account from losses as well.

Even professionals traders will admit that, at times, they deviated from the system they advise others to follow. Still, this happened under exceptionally favorable market conditions and after many, many years of trading experience. We need to create a steady foundation if we want to build a palace. 

What do you think happened to Bob?

In the end, Bob realized that he was losing more and more, so he visited this one website where he was told to watch and read further. 

  • More reading, more learning, he shouted.
  • Bob said his goodbyes and closed off his account. 
  • Like the famous meme says… Don’t be like Bob. 
  • Don’t sabotage your trading. Be a smart trader.
  • Choose quality, not quantity.
  • Choose sustainability, not instant cash.
  • Choose everlasting content, not passing news.
  • Choose to grow, not to be praised.

It is, especially at the very beginning, important not to think that you are above it all. With some humility and eagerness to learn, you will not fall for the trap that Bob did. Pick wisely the content you will let get to you and learn from other people’s experiences. You don’t have to suffer as much.

See you next time with the very last article on how to sabotage your strategy. Until then, think of the ways in which you possibly ignored expert opinion to your detriment and then try to add on the results of the trading psychology test we talked about in the previous article to get to the why’s.

Categories
Forex Trading Strategies

Ways to Completely Sabotage Your Trading Strategy: Part 2

If you don’t know what the problems with your strategies are, you probably didn’t read the first article of this series. The short answers to your questions will be included in this article too, but, before you proceed, you should definitely read the first part where we talked about how trading plan issues can be […]

If you don’t know what the problems with your strategies are, you probably didn’t read the first article of this series. The short answers to your questions will be included in this article too, but, before you proceed, you should definitely read the first part where we talked about how trading plan issues can be […]

If you don’t know what the problems with your strategies are, you probably didn’t read the first article of this series. The short answers to your questions will be included in this article too, but, before you proceed, you should definitely read the first part where we talked about how trading plan issues can be the worst sabotage to your strategy and success. 

If you think that making a trading plan will suffice, you are badly mistaken. That’s why today, as promised, we are moving on to another key area that will help you avoid the biggest traps in the world of trading.

  • Part 2: Don’t Give a Darn about Trading Psychology

They say money is energy. Therefore, since energy goes where attention does, what you pay most attention to in trading will inevitably dictate the amount of money you earn.  Interestingly enough, most traders who have the least success trading take very little notice of how their personality and habits impact their trading. And, many of you who assume you have everything going for you are also far from impervious to this hurdle.

What we want to achieve is the ability to control:

  • Our emotions while trading
  • Our reactions to losses
  • Our compulsive need to correct things

You may notice that we did not say eliminate, and there is a crucial difference here. If you think about people who suffer from any addiction, you may remember that the first step towards recovery is acknowledgment and acceptance of the problem.

We cannot fix the problem if we don’t know that we have one or if we keep turning a blind eye to it constantly.

We always write our New Year resolutions, but we don’t stick to them. Do you know why? We rarely try to understand what lies behind our lack of motivation to lose weight or exercise for example.

That is why if you don’t recognize that, as a human being, you are prone to feeling different emotions before, during, and after trading, you are by default sabotaging your strategy. We will call this our step 1.

Emotions are in our DNA and there is no reason for you or anyone else to feel ashamed. While many people try to ignore this side of their personality, any attempt to disregard our affective responses leads to making wrong trading choices.

For trading to go well, you essentially need to meet two basic requirements:

  • Trade your system
  • Do not interfere

And, this always goes fine until emotions come into play.

Anxiety, fear, desire, need, tiredness, failure, continuous losses all leave a mark – a sensation followed by physiological changes in the body. 

Even winning affects our brain. The moment traders’ percentage return goes way up from where it used to be, people start thinking of leaving their jobs. This is one of the major misconceptions about trading and a sure way to sabotage your trading. Trading alone, for the greatest number of everyday people, cannot suffice right away. The way trading is conceptualized will not allow this immediately as you may have initially expected, so don’t give in to these thoughts and feelings.

We cannot eradicate our emotions, but after we grasp their existence, we can choose what to do with them. This is step 2.

Losing will always be a part of this game and every trader, professional or not, goes through this experience sooner or later. The moment things start going really well for you, losses may become even more painful. You cannot lose your motivation and focus here. Like consolidation periods are a natural part of the market, so are the losses. 

Therefore, it is not losses that should worry you, but your reactions to them.

Some traders find the 2% risk rule to be ridiculous because they want more and they want it now. Greediness can bring some amazing results but only in the short term. This has happened so many times to so many traders.

Some of the most successful forex traders earn a 20% yearly return. When you manage to ensure a consistent return year after year, you learn to appreciate the effort behind and stop believing everything you read.

Another massive sabotage traders are prone to struggling with is guilt. Guilt is such a dangerous trigger for a variety of harmful actions that you really need to change your perspective immediately. Any loss you took was meant to happen because you needed it to grow. Don’t cry over spilled milk and quickly return your focus to where it can actually serve you. This is step 3.

Instead of drowning yourself in regret and self-pity, do something useful – analyze what went wrong without any should-haves. Did you follow the guidelines for risk? Did you overleverage? Were you overtrading or did you cross any other boundary?

Especially as a beginner, you may regret not following your plan through and thus losing some pips. However, we need to learn to celebrate our small wins as well. You may not have earned as much as you intended at first, but you still managed to go through with the trade and ensure a positive return. Celebrate your success regardless of how big or small it is. Note this down as your step 4.

Now take your pen and write these words in this order:

❝I will never trade by feel or chase losses.❞

Do not allow your trading to be conditioned by something as transient as emotions. You are there for the long run. You want consistent results and sustainable trading.

So, we will always support recognizing emotions but you need to learn what to with them.

What will it take for you to stop letting your feelings drag you down? Is it more demo trading? Is it more testing? 

The thing is…trading will never be perfect, like anything else in life. The more we seek perfection, the more we miss the bigger picture. Here are some of the famous quotes we should all strive to live and trade by:

  • If you don’t make mistakes, you don’t make anything. (Joseph Conrad)
  • Take chances, make mistakes. That’s how you grow. (Mary Tyler Moore)
  • Mistakes are a fact of life. It is the response to error that counts. (Nikki Giovanni)
  • He who is not contented with what he has would not be contented with what he would like to have. (Socrates)
  • Skepticism is the first step towards truth. (Denis Diderot)
  • Millions saw the apple fall, but Newton asked why. (Bernard Baruch)
  • He who spends time regretting the past loses the present and risks the future. (Quevedo)

Your last step, step 5, concerns trading psychology tests. You do not have to wait for the big crash. Meet yourself now. Discover what situations could trigger your shadow sides and explore ways to bypass these issues in advance.

Be brave and smart now so you don’t have to pick up the pieces later. And, this is a perfect introduction to what we will be talking about next. Until then, start getting to know yourself better.

P.S. All answers in today’s test should be NO.

Categories
Forex Basic Strategies

How To Construct and Write Up Forex Trading Plans

A good winning Forex trading plan should become the start for any path to becoming a consistently profitable trader. Unfortunately, some traders don’t write one until they’ve shredded some trading accounts. Even the task of writing a trading plan often falls into the category of, “I will do it when I have more time!” So […]

A good winning Forex trading plan should become the start for any path to becoming a consistently profitable trader. Unfortunately, some traders don’t write one until they’ve shredded some trading accounts. Even the task of writing a trading plan often falls into the category of, “I will do it when I have more time!” So […]

A good winning Forex trading plan should become the start for any path to becoming a consistently profitable trader. Unfortunately, some traders don’t write one until they’ve shredded some trading accounts. Even the task of writing a trading plan often falls into the category of, “I will do it when I have more time!”

So why don’t a lot of merchants spend some time making one if we’re talking about something so important? The answer is very simple: we don’t like the rules. And this doesn’t just apply to traders. We use the term “us” to refer to the entire human race.

When entering forex, we find an environment without many rules. Except for the ones our broker can put on, we’re free to do whatever we want. This is a somewhat frightening proposition for someone who’s been bound by rules all his life. We attribute to this fact the phenomenon that so many traders fail; they cannot handle the fact that they have no rules to follow. Or rather, they do not set their own rules.

In this article, we intend to check what a trading plan is all about, why it is so important and some points we think you should consider including in your own trading plan.

What Is A Forex Trading Plan?

A trading plan is like the original plan of everything you do as a trader, grouped as concisely as possible, but also descriptively. Your negotiation plan should consist of how and when you operate, as well as what you do before and after each operation.

Anyway, writing your trading plan isn’t the hard part. The hard part is to do it in as much detail as possible while keeping it as concise as possible, preferably just one page. After all, an 8-page trading plan that takes 15 minutes to read is not likely to be consulted often, which you should be doing.

Finally, your plan needs to be reviewed as your trading skills improve. Do not mistakenly think that your business plan is immovable and that just have to make it work.

Why Is A Trading Plan Important? 

Simply put, a forex trading plan helps you stay disciplined. Commerce is a business and has to be treated as such. Like a business has a standardized operating procedure to keep things running properly, you must have a trading plan to keep yourself disciplined. As mentioned above, the forex market is a boundless environment and rules, so you need your trading plan to serve as a rule book to help you stay out of trouble.

Building Your Forex Trading Plan

Now is the time to work to put the pieces together. Below we have outlined what we believe are the most important topics to include in your trading plan. This is not a complete list, so you are free to add topics that you think should be included in your trading plan.

Every winning trading plan begins with a well-defined strategy or set of strategies. For us, these strategies could be the indecision candle, reversion pinbar, internal bar breaks, power candle, etc. It is important to define each strategy you will use and also to define the market conditions necessary to validate a setup. Does the market have to be biased or can it be of rank? Should the pinbar occur at a support and resistance level or will you also consider operating continuation pinbars?

Defining Time Frames

This theme is very simple, but it is also crucially important. You have to define the time frames in which you will operate. The omission of this simple rule has caused a lot of headaches for many traders. For example, we know a trader who when he first started in this world of forex, was constantly changed from the time frame. One week he used H1, then he got bored and moved on to M5 the next week.

Not only that, but he was in the habit of entering the market by looking at the H1 graph and then switching to H4, D1, M15, and even M5, just to see if things looked “right”. This person had no idea what he was looking for but was determined to make sure that every time frame looked favorable.

Choose only 1 or 2 time frames with which you feel more comfortable and stick to them. Look for setups in these time frames, operate in these time frames, and exit the operations in these time frames. This is the only way to break with “the dance of time frames,” which I think we’ve all experienced before.

Defining Your Watch List

As part of your trading plan, you will want to define the currency pairs you will operate. As with your overall trading plan, your watch list will change over time. Normally we recommend starting with 10 pairs of coins to observe at any time. This will give you several setups every week even in the highest time frames. As time goes on your business skills will tend to improve and your confidence increases, you can extend the list to include other pairs and even some commodities.

Mental Preparation

No, you should not meditate. Mental preparation is undoubtedly the most neglected topic in a trading plan. Maybe it’s because traders are too busy defining their strategy. Or perhaps simply because people don’t like to talk about their feelings. Whatever the case, this point is a must!

How do you feel today? Did you have a good night’s rest? Do you feel energetic, tired, or something in between? These are virtually all the questions that need to be asked as part of your business plan. We’ve all had those mornings. Whether we’ve been up late with friends, the stress of life that won’t let you sleep, or maybe you got up on your left foot. These things happen to the best too and will continue to happen. It’s your job to assess the situation and find out if you’re mentally prepared to face the markets. If not, maybe it’s best to sit back and do nothing until tomorrow.

The financial markets will always be there and believe us when we tell you that it will be much better to wait to operate until you are mentally prepared than to lose money for a mistake you would not otherwise have made. Just remember, being “flat” (not having open positions) is one position and the safest you can have.

Lay Down Your Risk

As some will know, we do not recommend setting the risk in percentage terms. A much more precise approach is to define your risk level as a monetary value. But on the other hand, setting a percentage also gives some value, so we think it advisable to use both methods combined.

Here we can give an example of how you could define your risk within your trading plan. First, you must determine what your risk threshold is in terms of percentage. We recommend something between 1% and 5%. Let’s assume that you want to risk 2% per operation. The next step would be to define your risk threshold in terms of monetary value. Suppose you have a $10,000 account and are comfortable with risking 2%. Using the percentage rule only, your risk will be $200 on any transaction. But the question is, what kind of risky dollars do you start feeling a little anxious about?

Put another way, how much capital are you willing to lose an operation? The reason you have to ask yourself this is that it will not always fit perfectly with the percentage you have defined above. Let’s say your monetary threshold is $100. Any value above that and your emotions will start to bring out the worst in you. But in the $100 example is half of what your 2% rule tells you that you should risk…

For this reason, it is important to define risk in both terms: percentage and monetary value, and that you risk the least between them. Clearly, these numbers will change as your trading account grows, just be sure to redefine both whenever necessary.

Define Your Multiple of R

Your multiple of R is simply your profit-risk ratio expressed in a single number. For example, if you risk $50 on an operation and your potential gain is $100 (based on your goal), then your risk-benefit ratio is 1:2. In other words, the risk is half of the potential benefit. In terms of multiple of R, this would be a “2R”.

Another example would be to risk $70 to get a potential of $170. By dividing 170 between 70 we get a 2.4R. It is important to define a minimum ratio as part of your trading plan. We recommend 2R, but of course, we each apply the value that best suits you. The higher the value R is the better.

Defining Entry Rules

How are you going to enter into the trading strategies you previously defined in your plan? Let’s take an example, if any of your strategies are pinbar, what kind of input method will you use? Will you enter a “nose” break of the pinbar or perhaps prefer to enter in the middle of it?

If you are open to both methodologies, you should also define when to use each of them. What market conditions justify using the method of entering the middle of the pinbar? What market conditions must be present to justify entering a pinbar nose break?

Defining Output Rules

This is one of the most misunderstood rules when we talk about drawing up a trading plan. Why? Because too many people are so obsessed with developing a setup to operate that they completely forget to look for outlets before entering the market. Although most traders are excellent at finding a possible way out, everyone likes to see how much money they have a chance of making on each operation. But not defining an exit point will prevent you from defining your R-value based on your potential loss.

In this heading of your business plan, you will want to define where the stop loss will be located as well as how to define your objectives. Speaking of objectives, you’ll also want to define in detail how you plan to get out of a winning operation. Will you go out of position completely to the first target achieved, or will you close only half of the position and keep the other half in play? These are questions that need an answer.

Risk Management

Setting rules to manage your risk is an essential part of a good trading plan. Even though you have already established where you will place your initial stop, you will also want to define how you plan to modify it as the operation develops, if you wish to do so. For example, you could use the highs and lows of the previous days to move your stops to safe places and insure profits.

The issue of risk management is what makes a trader. As we said before, it’s not your percentage of winning operations that makes you consistently profitable, but the amount of money you make with a favorable operation vs. the amount you lose with an unfavorable operation averaged over a long series of operations. And the only way to put the scales in your favor is with a solid plan for your risk management as well as a disciplined approach to implementing your plan.

What you do after each operation is as important as the way you mentally prepare before the operation. One of the most important rules is how long you will take away from your trading place before entering the next transaction. This is very important! After losing an operation, you may be tempted to take revenge and take back what you’ve lost. This is usually called revenge trade and is one of the reasons why so many traders fail.

The urge to jump immediately to the market after a winning operation is also very strong. This impulse is caused by 2 thoughts:

You feel invincible. That feeling that everything is going as you expect, so why not take another operation and earn even more money?

Building trust is one thing, but not being able to recognize overconfidence in key situations is called arrogance. And this one has no place in the forex market.

You feel like you have extra money to spend. The profits made in the last operation give a feeling of “I found money”, then no problem if I return some to the market. We call this “casino mentality”. It’s the same feeling that casino players get after winning $500. Instead of leaving with that money won, they immediately bet the $500 just to lose everything and a little more. You must use this part of your operations plan to redefine how to mentally prepare for the next operation.

Summary

The hardest part of writing your own forex trading plan is not defining your rules. The most difficult part is to include enough details to make it effective and yet be concise enough for you to use in practice. Remember that the idea behind putting together a trading plan is so you can go over it daily. This means that it must occupy 1 page (or 2 at most) and must be somewhere that is visible to you. It is our wish that this article has given you some practical tips on how to write a forex trading plan.

Categories
Forex Daily Topic Forex System Design

Building a Trading System: Why do you need a trading plan?

The necessity of a trading system has been discussed many times. Still,  new traders don’t consider it important when, in fact, it is a crucial element.  Could you conceive building a bridge without a project, playing tennis, or chess, with no strategy?

The necessity of a trading system has been discussed many times. Still,  new traders don’t consider it important when, in fact, it is a crucial element.  Could you conceive building a bridge without a project, playing tennis, or chess, with no strategy?

The necessity of a trading system has been discussed many times. Still,  new traders don’t consider it important when, in fact, it is a crucial element.  Could you conceive building a bridge without a project, playing tennis, or chess, with no strategy?

 

 

 

 

 

The trading profession is alike. If you take this business seriously, you’ll need to have a plan. Else, you’ll be in the loser team, in which are 90 percent of traders.

Reasons for a trading plan

1.- The financial markets are not deterministic

A market is a strange place where you cannot predict an outcome. An engineer can design a bridge, knowing that he can predict the bridge’s strength and behavior under heavy loads with proper calculations.  In the financial markets, you don’t have the benefit of an analytical formula to success. All you can expect is a small edge. Not following your plan is comparable to random trading; thus, losing the edge.

2.- Not following a plan weakens you psychologically

When you buy a lottery ticket or play roulette, you’re entering a bounded game. You know the cost of your ticket, the reward associated with a successful bet, and you don’t need to make any other decision. All parameters of the play, including the exit time, are fixed.

The financial markets are different. Everything there is unrestricted. The trader decides when, how much, exit time, stops, and target levels.  With so many parameters, a trader needs to define his rules and stick to them. Otherwise, he will be shattered by his emotions and lose money.

3.- The need to measure

Traders need to record and analyze their trades for many reasons.  The first is the need to analyze their performance and see if it has improved or not. Also, if the system performs as expected or lags its past performance. The most important reason is that traders need to know the strategy’s main parameters: percentage of winners, reward/risk ratio, the average profit and its standard deviation.

A trading plan that fits you

New traders don’t know much about statistics, and trading is about odds and their properties. One of them is streaks. There are winning streaks and losing streaks. The point is, streaks are mathematically linked to the ods of the system.

Let’s think of a system as a loaded coin, in which the odds of a winner can be different from 50 percent. Let’s say the odds of a system is 60 percent instead.  That means there is a 60 percent chance the next trade is a winner, and, consequently, a 40 percent chance it is a loser.

But what are the odds of a loser after a previous losing trade (a two-losing streak)? For the second trade to be a loser, the first one should also be a loser.  So the odds of two consecutive losing trades in a row is 0.4 x 0.4 = 16%. The odds of three successive losers would be 0.4×0.4×0.4 =6.4%, and so on.

The general formula for the probability of a losing streak is

n-losing-Streak = prob_lossn

which is the probability of one loss to the power of n, the size of the losing streak.

What we have shown here is that streaks are inherent to trading. In fact, inherent to any event with uncertainty. Golf pros, football players, and spot teams are subject to streaks, which are entirely expected. Trading systems are no different.

So, what’s the problem?

There are a variety of trading systems. Some, such as the well-established Turtles Trading System, which is trend-following, have less than 38 percent winners, although with average reward/risk ratios over 5. Other systems show over 70 percent success but reward/risk ratios of less than 1.

The odds of a 10-losing streak on the Turtles system, assuming 38% winners or 62% losers, is about 0.84%. That means we can expect ten losers in a row every 120 trades.

On a 70% winner system, the odds for ten losers in a row are one every 200 thousand trades.

The rationale behind the turtle is to lose small and profit big. When a Turtle trader sees they are right, they add to their position, and on and on, following the trend.

People who use the later system are scalpers that jump for the small profit and get our fast before the movement fades.

Nobody is wrong. They trade what best fits their psychology. You need to know your limits, as well. Many wannabe traders move from system to system after only a five-losing streak, discarding a sound strategy when its first perfectly normal streak occurs. Also, most traders use sizes inconsistent with the expected streaks and lose their entire account.

By now, you should have learned the importance of having a plan that fits your psychology and trading tastes.

In the coming article, we will discuss the components of a trading strategy or system. Stay tuned!

Categories
Forex Basics

Calculating Your Trading Plan Expectancy

One of the biggest steps to successful trading is accomplished once you develop your trading plan. Your plan serves as a roadmap that covers everything having to do with the reasons why and how you’ll trade. This includes the evidence you’ll look for before entering a trade when you’ll exit trades, risk-management precautions you’ll take such as how much money you’re willing to risk on each trade, and so on. Many professionals will tell you that you should create this plan and stick with it if you want to remain profitable, rather than going rogue30 and doing something else.

One of the biggest steps to successful trading is accomplished once you develop your trading plan. Your plan serves as a roadmap that covers everything having to do with the reasons why and how you’ll trade. This includes the evidence you’ll look for before entering a trade when you’ll exit trades, risk-management precautions you’ll take such as how much money you’re willing to risk on each trade, and so on. Many professionals will tell you that you should create this plan and stick with it if you want to remain profitable, rather than going rogue30 and doing something else.

One of the biggest steps to successful trading is accomplished once you develop your trading plan. Your plan serves as a roadmap that covers everything having to do with the reasons why and how you’ll trade. This includes the evidence you’ll look for before entering a trade when you’ll exit trades, risk-management precautions you’ll take, such as how much money you’re willing to risk on each trade, and so on. Many professionals will tell you that you should create this plan and stick with it if you want to remain profitable, rather than going rogue30 and doing something else.

Of course, there may be times when a trader creates a plan that just doesn’t work. Many traders test their plans on a demo account beforehand, but some skip this step or don’t spend long enough in testing because they think their plan will work well on a live account. Others might develop a plan that works for them in the beginning, only to realize that they’ve outgrown their original plan over time. Regardless, there are times when you’ll have a solid trading plan that you need to live by because it works so well, and there are times when you’ll need to scrap your plan and start over because it just isn’t working for you. So how do you tell the difference?

If you are trying to figure out how successful your plan is, you should calculate your trading expectancy. This involves taking a look at your trading journal in order to measure all your winning trades versus losing trades, and then determining how much your winning trades won versus how much your losing trades lost. Obviously, you might have a higher number of losing trades, but this doesn’t mean that you weren’t profitable, as your winning trades still could have made more than you lost altogether. 

This is the formula used to calculate expectancy for your trading plan:

 ​Expectancy = [1+(W/L​)] ×P−1

W = Average winning trade

L = Average losing trade

P = Percentage win ratio

After using the calculation, you should come out with a percentage that tells you how much you’re winning or losing while using your trading plan. From there, you can decide whether the plan is working well, or if you need to throw it out and try again. Remember that this formula can be helpful if you’re unsure how much you’re winning or losing, or if you’d like to put your plan’s success rate into a simple percentage rather than explaining how many trades you’ve won or lost. 

Categories
Forex Psychology

The Road to Become a Pro: Preparation

I see a lot of people approaching the financial markets as a way to get a second income or even be financially independent. The major part of them wants to invest in the financial markets but don’t have the time or interest in mastering the needed skills to really succeed. 

I see a lot of people approaching the financial markets as a way to get a second income or even be financially independent. The major part of them wants to invest in the financial markets but don’t have the time or interest in mastering the needed skills to really succeed. 

I see a lot of people approaching the financial markets as a way to get a second income or even be financially independent. The major part of them wants to invest in the financial markets but don’t have the time or interest in mastering the needed skills to really succeed. 

A minority of them are involved in acquiring those skills but think that to be successful, only the knowledge to forecast the markets is needed, most of them focused on learning one or several technical analysis methods that would allow them to do it.

The cruel reality is that the randomness of the markets is high, and forecasting is not deterministic. Thus, operating in leveraged markets makes the task much more difficult if traders are not aware of the statistical parameters and size limitations of the system in question. Thus, psychology comes into play as traders get confused and unable to act as losses accumulate, greed, and fear driving the decision process instead of the rational mind.

The preparation tasks

Dr. Van K. Tharp states in his Peak Performance Course series that top traders need to master 15 different tasks or processes, twelve related to trading, two preparation tasks, plus “being out of the market” task. The two tasks related to preparation are: 

  • Developing Self-awareness and 
  • Developing a low-risk game plan

Self-Awareness

This task aims to recognize our strengths and flaws, so we can profit from the first ones and overcome the second ones. For instance, if you are good at recognizing breakouts, you could focus on that kind of pattern to create your trading strategy. Another trader might have difficulty with decision making but is good at programming. Thus he could use his skills to develop a mechanical system that makes decisions for him.

Goal Settings to solve the conflict

Dr. Tharp rightfully states that most traders are nor aware of what they want to accomplish. Of course, they want to get the max out of the markets, but that statement says nothing about the right way they should go. Most of the time they have conflictive goals, they want profits but also avoid losses, be safe at the same time they risk capital. Most of the time, unresolved conflict of both primary desires spells catastrophe. The right way to solve personal issues is through goal setting. In the case of profit/risk conflict, traders must set goals for the monthly profits and verify these are congruent with the expected risks (drawdowns), and match both to fit him. Goal setting is part of developing a system that suits you, but to know what suits you, you need to know yourself. It is important to list all your desires and expectations about you and the markets.

Are you a risk-taker or avoid risk? Do you want to work 100 percent of the time looking at monitor screens or just to enter a trade? Do you like to plan in advance, or are you an intuitive trader acting the moment you feel a move?  

Development of a Low-risk Plan

The key to succeeding in the financial markets is not good forecasting, but profiting from low-risk ideas. A lot of traders only focus their attention on entries and forget that the exit is when the profits are realized. Also, since most traders want to avoid losses, they think that a high percentage of winners is the critical element of a sound trading system. Thus these traders end up scalping small profits and holding their substantial losses. Instead, the key to success is the opposite. Traders must create a written plan with a primary element: low-risk trades.

A low-risk idea is one in which the reward is higher than its risk. The property of high reward-to-risk ratios is better shown with an example. Let’s call the risk R and the reward a multiple n of R. It is evident that in a series of n trades, just one needs to be profitable to break-even. Thus, if continually trading using 5:1 RR ideas, only one profitable trade, every five trades is enough to keep us afloat. Therefore, it is in the trader’s interest to chose low-risk trades as protection for a drop in the percentage of winning trades.

Consistency by following your rules

A written plan consisting of a set of rules is essential. You need written rules so you can, later, analyze results and make changes to the rule that needs to be improved. If there are no rules, it is impossible to improve them. 

For instance, let’s suppose there is a stop-loss rule that cut losses at 1.5 ATR(10). Maybe, after some time, you see that there is a substantial portion of trades that reverse after your stop is hit. If your system has such a rule, and you keep a record of your past trades, you could do an analysis and conclude that your system could be optimized by changing the 1.5ATR to 1.8ATR, but that 1.9ART or more harms you in the risk side with no substantial improvement in the number of winning trades. That kind of analysis, obviously, is impossible if your stop-loss strategy is decided on each trade depending on your subjective feelings

Making money demands consistency and discipline. Trading rules are essential to both. To respect the rules is the factor to consistency, and a disciplined mind is required to adhere to the rules. With no rules, trading is a set or random entries and exits with no possible statistical value for future analysis and improvement. In this context, a mistake means not a losing trade, but not following the rules.

Further reading: Peak Performance Course Book 1 – How to use Risk, Van K. Tharp chapter V

Categories
Forex Course

12. The First Step In Your Trading Journey

Introduction
Trading the forex market involves high risk. As per statistics, 95% of the traders fail in this domain. Hence, having expertise and experience in trading is very necessary for

Introduction
Trading the forex market involves high risk. As per statistics, 95% of the traders fail in this domain. Hence, having expertise and experience in trading is very necessary for

Introduction

Trading the forex market involves high risk. As per statistics, 95% of the traders fail in this domain. Hence, having expertise and experience in trading is very necessary for staying away from the 95%. And in this course, we’re here to guide you on how to be a successful trader. So let’s discuss what your first step should be in your trading journey.

Demo Trading

As mentioned, forex is a very risky business. One must never enter the live market during their initially early stages. So, brokers help the novice traders by providing a facility to demo trade. With a demo trading account, one can place live trades in the market just like a real trading account. In this account, you get virtual cash to place trades on the live charts. Moreover, in this platform, you get all the features and tools that are available on a real trading platform. And the best part is that this platform is provided by brokers for free of cost.

Advantage of Demo Trading

Helps test your strategies and techniques

There is no strategy that will work with 100% certainty. So, testing a new strategy on the real account can cause damage to your account balance. But, with a demo account, you can test your strategies without any risk.

Gives you a hands-on experience on placing orders

In forex, there are different types of orders. With a demo account, one can test the working of all these orders without the fear of losing money.

Helps concentrate on analysis rather than emotions

Emotions play a major role when it comes to trading. Emotions in trading can lead to huge losses as it takes over the actual analysis. One can reduce emotions entering into them while trading, only when they start gaining experience. Hence, trading in a demo account can help you focus on your analysis rather than emotions taking over.

How to create a trading plan

Well, having experience in demo trading is insufficient to start trading the live markets. A systematic plan for trading plays a vital role, as well. Below is an example of how you can create a perfect plan for yourself.

Choose your time zone: Though the forex market is a 24 hours market, it is not ideal to trade anytime in the day. Hence, you must choose those zones which bring in great liquidity and volatility in the market.

Fix your timeframe: You must be firm on one set of timeframes because switching over timeframes is a clumsy way of trading.

Choose the right currency pairs: There are about 28 majorly traded currencies. Keeping track of all these is a challenging task. So, you must select only a few currencies and analyze them deeply.

Have one fixed strategy: Novice traders look for new strategies every trading day. But, this is completely the wrong way to trade as it becomes more like gambling than real trading. So, you must have one standard strategy in which you can keep optimizing with experience.

Maintain a trading journal: This can be the most vital plan in your trading plan. However, many take this for granted. With a journal, one can keep track of their past transactions and get a statement on the number of loss & win trades. It will give you a clear picture of your consistency. This can help you improve your trading by learning from past mistakes.

By following these steps, you can be sure that you are up to a great start on your trading journey. Take the below quiz to check your learnings.

[wp_quiz id=”45923″]
Categories
Forex Educational Library

Making a Trading Plan using Fibonacci Tools

The Trading Plan

In the previous article, we’ve exposed a brief introduction to the Fibonacci Sequence, retracements, and projection concepts. In this article, we will show how to make a trading plan using Fibonacci Tools, specifically, the retracement and expansion, although we will not explain Risk or Money Management rules and methods.

In practically all industries, with every task, there are procedures to define what to do in each process stage. Professional traders too, have operating methods. In this sense, retail traders have a significant procedural disadvantage compared with professional traders. A way to reduce this gap is to make a working plan. A Trading Plan is a route map, not a treatise, where we will answer the following questions*:

  1. What market to trade? I.e., Forex, Indices, Commodities, EUR-USD, DAX, Gold.
  2. What timeframe should we choose?
  3. What are the market conditions, the arguments for the entry setup?
  4. Where is our stop-loss level; this is the invalidation level of the scenario.
  5. Where to set a profit target or the objective zone of the trade setup.
  6. Finally, a chart including market conditions and its analysis

* Note that this is not an exhaustive list; the reader could incorporate or eliminate decision criteria.

Practical Example

Once we have a good trading plan, let’s consider a specific market and propose a scenario for a trading opportunity. In figure 1, the cross EUR-AUD <EURAUD> in the hourly chart has lost the latest minimum (1.55681) on the 5th December, then it moved on a retracement segment from F(50) to F(76.4). That area could be a potential entry zone for a short-selling setup on a bearish continuation movement.

Fig 1: Potential Reversal Zone. (source: Personal Collection)

In figure 2, we define Profit Target zones; these levels are FE(100) 1.54099, FE(1.618) 1.52333 and FE(200) 1.51424. The invalidation point is 1.57705; this is the maximum reached on the 1st of December.

Fig 2: Potential Profit Taking zone (source: Personal Collection)

 

Some entry possibilities are:

  • Sell Market, i.e. spot price 1.56555.
  • Sell Limit, i. e., F(76.4) = 1.57026.
  • Sell Stop, i.e., F(50) = 1.56267.
  • Sell if price closes below the last low 1.56016.

A summary of the arguments exposed in the Trading Plan example are:

TRADING PLAN
Instrument EURAUD
Timeframe H1
Date Dec-11-2017.
Order Sell
Entry Level 1.56276
Stop Loss 1.57705
Take Profit FE(1.618) = 1.52333
Arguments The price has broken down through a relevant minimum, and currently, it has made a retracement to the F(50) – F(76.4), this is a potential zone for a bearish continuation…
Chart
Trade Result (**)

 

(**) Trade Result: This is not a section for self-flagellation nor a best-trader-in-the-world award as if we were to record +100 pips at the end of a trade. This part is about the “learned lessons” of a finished trade, independently of its result, bringing a higher objectivity to the performance. In summary, the Trade Result is the way to learn about the trades, it is where we have the opportunity to visualise and avoid future mistakes in the execution or to improve the analysis criteria on market entries and exits.

 

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