The Trading Strategy
For forex trading, discipline is considered important, and one way of having trading discipline is by having a trading strategy. With lack of a proper strategy your chances of suffering a loss are high. Your trading strategy should inform you about the optimum time to place your stop loss; if it does not then you should consider another strategy. A trading strategy is considered good when its rate of success is high.
Strategies may differ based on various indicators for example, Moving Average, RSI, or a blend of the indicators. Choosing a strategy is dependent on your personality, and trying out various strategies prior to deciding which you prefer is advisable.
The strategies may be long term or short term. Below are the most common strategies:
Swing trading. Here the positions are held for a couple of days, with the trader having to look hourly at the bars. With short term patterns, the trader aims at making the most profit.
Positional trading. It is a long term strategy where the trader monitors the trade charts at the end of the day. The trader aims to maximize profits from major changes in prices.
Scalping. A short term strategy that stays for a couple of minutes. The trader uses mostly tick charts, and seeks to win the bid and skim just before closing.
Day trading. They are not affected by overnight large moves since as the name suggests they trade before the end of the day. Their trades last a few hours.
Once you have identified a suitable strategy, look further into it. What is its rate of success? That the same rate you got during your trade using it?
For example; your strategy is said to have a 75% success rate, but in your trading the success rate was 35%. Chances could be the strategy’s rate of success was exaggerated or the problem could be in your trading. Below are the other two fundamentals for a successful trade.
Forex trading is not fully dependent on the strategy or system you use as most of us think, your mindset is the key to successful trading. What you think and how you react to the market is what matters most. The trick is being able to manage your trades as well as your emotions.
Why most traders lose money.
Most traders lose money from emotional trading. It is not unusual for a person to quit his or her job and venture into trading hoping to make a lot of cash from it. They are under pressure and have a high need for the money, and they end up trading based on their emotions and pressure exerted on them by the urge to make a lot of money fast.
Emotions you should be cautious about
Greed- most, if not all traders have been victimized by greed. It is not unusual to rush into a trade with the mentality that the opportunity is going to be ceased. This results to the trader losing focus and place trades under pressure.
To overcome hasty decisions that result from greed, have an approach that is disciplined that will help do away with impulse trading. Have a trading strategy and remain loyal to it.
Fear- it comes as a result of doubt and uncertainty in achieving success. New traders are also trapped in this. Fear has an opposite effect from greed, instead of rushing to trade; it pushes you away from trading with the panic of suffering losses. It makes one believe that no matter how disciplined you may be the chances of gaining profits are limited. In response to fear, most traders end up giving up and deactivating their accounts.
Do not mistake fear for conservatism. A conservative trader is cautious, pays attention to what he hears but his willingness to trade still exists when he spots a profitable risk. A fearful trader is incapable of making a decision and is shaken by what he hears or what he is told; he is unwilling to risk and cannot trust his judgment.
To avoid fear, you should have a plan and be confident in your decisions. It is important to understand success does not just happen randomly.
Euphoria- It attacks mostly those new to the traders who have had constant profits, and tend to be over confident in their decisions. It turns your mentality to only imagine large amounts of profits.
To overcome it you should be aware that the success of the next trade is in no way connected to the previous trade. Your success is dependent on your patience, analytical skills and hard work.
Panic- It is the exact opposite of euphoria. The trader in this case is paranoid and all he or she sees is losses. It is driven by the thought that you may lose your cash to someone else who will have obtained a profit. Panic is heightened by market instability that in turn makes it hard to predict the market. In turn confidence is lost and panic sets in, with the trader making most if not all wrong decisions.
Revenge- After suffering a loss on a trade they thought was a sure profit, most traders will want to revenge that loss and thus end up losing more money
Minimizing emotional trading is the only way to curb trading psychology. Having a logical approach towards trading is the key. You should be aware that luck does not play a role in success or loss, our decisions do.
To make money, you need to risk. Risk trading without money management strategies is g=simply gambling. Basically money management describes risk management and reward per each trade you engage in. Risk management is what determines how long you survive as a trader. Without proper knowledge on money management, your chances of success in the market are slim. The major aspects are
The foundation to becoming a successful trader is maximizing the rewards and minimizing the risk. Patience, which most of us lack, is the key to making the most of the risk reward ratio.
This is adjusting the lots you are trading with to meet your stop loss distance and pre calculated risk amount. It is calculated by first determining the amount of cash you are willing to lose, find the best rational place to set your stop loss, you can then enter the number of lots that will in turn give you the risk you desire.
For Example: You are ready to lose 8 trades successively, and you are willing to risk 4% in your account balance in each trade you engage in.
Opening account balance; 4000
4% risk on each trade: 160 risk on each trade.
8 losses x 4% = 32% loss.
Remaining account balance: 2,720
Let us now see the difference if we opted to trade with 1% risk
Opening account balance: 4000
1% risk on each trade: 40 risk on each trade
8losses x 1% = 8% loss.
Remaining account balance: 3,680
In the second example, we lost less than 10% of our account balance, while in the previous example we lost less than half of the balance.
Risk trading is all about preserving your capital, and considering profit only after considering money management.
For risk trading, you should first be aware of the trading odds, and how to manage the risk and control the loss.