How to become a successful forex trader
How to become a successful forex trader
For all of its numbers, charts and ratios, trading is more
art than science. Just as in artistic endeavors, there is talent involved, but
talent will only take you so far. The best traders hone their skills through
practice and discipline. They perform self analysis to see what drives their
trades and learn how to keep fear and greed out of the equation. In this
article we'll look at nine steps a novice trader can use to perfect his or her
craft; for the experts out there, you might just find some tips that will help
you make smarter, more profitable trades, too.
TUTORIAL: Beginner's Guide To MetaTrader 4
Step 1. Define your goals and then choose a style of trading
that is compatible with those goals. Be sure your personality is a match for
the style of trading you choose.
Before you set out on any journey, it is imperative that you
have some idea of where your destination is and how you will get there.
Consequently, it is imperative that you have clear goals in mind as to what you
would like to achieve; you then have to be sure that your trading method is
capable of achieving these goals. Each type of trading style requires a
different approach and each style has a different risk profile, which requires
a different attitude and approach to trade successfully. For example, if you
cannot stomach going to sleep with an open position in the market then you
might consider day trading. On the other hand, if you have funds that you think
will benefit from the appreciation of a trade over a period of some months,
then a position trader is what you want to consider becoming. But no matter
what style of trading you choose, be sure that your personality fits the style
of trading you undertake. A personality mismatch will lead to stress and
certain losses. (For more, see Invest With A Thesis.)
Step 2. Choose a broker with whom you feel comfortable but
also one who offers a trading platform that is appropriate for your style of
trading.
It is important to choose a broker who offers a trading
platform that will allow you to do the analysis you require. Choosing a
reputable broker is of paramount importance and spending time researching the
differences between brokers will be very helpful. You must know each broker's
policies and how he or she goes about making a market. For example, trading in
the over-the-counter market or spot market is different from trading the
exchange-driven markets. In choosing a broker, it is important to read the
broker documentation. Know your broker's policies. Also make sure that your
broker's trading platform is suitable for the analysis you want to do. For
example, if you like to trade off of Fibonacci numbers, be sure the broker's
platform can draw Fibonacci lines. A good broker with a poor platform, or a
good platform with a poor broker, can be a problem. Make sure you get the best
of both. (For related reading, see How To Pay Your Forex Broker.)
Step 3. Choose a methodology and then be consistent in its
application.
Before you enter any market as a trader, you need to have
some idea of how you will make decisions to execute your trades. You must know
what information you will need in order to make the appropriate decision about
whether to enter or exit a trade. Some people choose to look at the underlying
fundamentals of the company or economy, and then use a chart to determine the
best time to execute the trade. Others use technical analysis; as a result they
will only use charts to time a trade. Remember that fundamentals drive the
trend in the long term, whereas chart patterns may offer trading opportunities
in the short term. Whichever methodology you choose, remember to be consistent.
And be sure your methodology is adaptive. Your system should keep up with the changing
dynamics of a market. (For related reading, see What is the difference between
fundamental and technical analysis and Blending Technical And Fundamental
Analysis.)
Step 4. Choose a longer time frame for direction analysis
and a shorter time frame to time entry or exit.
Many traders get confused because of conflicting information
that occurs when looking at charts in different time frames. What shows up as a
buying opportunity on a weekly chart could, in fact, show up as a sell signal
on an intraday chart. Therefore, if you are taking your basic trading direction
from a weekly chart and using a daily chart to time entry, be sure to
synchronize the two. In other words, if the weekly chart is giving you a buy
signal, wait until the daily chart also confirms a buy signal. Keep your timing
in sync.
Step 5. Calculate your expectancy.
Expectancy is the formula you use to determine how reliable
your system is. You should go back in time and measure all your trades that
were winners versus all your trades that were losers. Then determine how
profitable your winning trades were versus how much your losing trades lost.
Take a look at your last 10 trades. If you haven't made
actual trades yet, go back on your chart to where your system would have
indicated that you should enter and exit a trade. Determine if you would have
made a profit or a loss. Write these results down. Total all your winning
trades and divide the answer by the number of winning trades you made.
Step 6. Focus on your trades and learn to love small losses.
Once you have funded your account, the most important thing
to remember is that your money is at risk. Therefore, your money should not be
needed for living or to pay bills etc. Consider your trading money as if it
were vacation money. Once the vacation is over your money is spent. Have the
same attitude toward trading. This will psychologically prepare you to accept
small losses, which is key to managing your risk. By focusing on your trades
and accepting small losses rather than constantly counting your equity, you
will be much more successful.
Secondly, only leverage your trades to a maximum risk of 2%
of your total funds. In other words, if you have $10,000 in your trading
account, never let any trade lose more than 2% of the account value, or $200.
If your stops are farther away than 2% of your account, trade shorter time
frames or decrease the leverage. (For further reading, see Leverage's
Double-Edged Sword Need Not Cut Deep.)
Step 7. Build positive feedback loops.
A positive feedback loop is created as a result of a
well-executed trade in accordance with your plan. When you plan a trade and
then execute it well, you form a positive feedback pattern. Success breeds
success, which in turn breeds confidence - especially if the trade is
profitable. Even if you take a small loss but do so in accordance with a
planned trade, then you will be building a positive feedback loop.
Step 8. Perform weekend analysis.
It is always good to prepare in advance. On the weekend,
when the markets are closed, study weekly charts to look for patterns or news
that could affect your trade. Perhaps a pattern is making a double top and the
pundits and the news are suggesting a market reversal. This is a kind of
reflexivity where the pattern could be prompting the pundits while the pundits
are reinforcing the pattern. Or the pundits may be telling you that the market
is about to explode. Perhaps these are pundits hoping to lure you into the
market so that they can sell their positions on increased liquidity. These are
the kinds of actions to look for to help you formulate your upcoming trading
week. In the cool light of objectivity, you will make your best plans. Wait for
your setups and learn to be patient. (For information on determining what the
market's telling you, read Listen To The Market, Not Its Pundits.)
If the market does not reach your point of entry, learn to
sit on your hands. You might have to wait for the opportunity longer than you
anticipated. If you miss a trade, remember that there will always be another.
If you have patience and discipline you can become a good trader. (To learn
more, see Patience Is A Trader's Virtue.)
Step 9. Keep a printed record.
Keeping a printed record is one of the best learning tools a
trader can have. Print out a chart and list all the reasons for the trade,
including the fundamentals that sway your decisions. Mark the chart with your
entry and your exit points. Make any relevant comments on the chart. File this
record so you can refer to it over and over again. Note the emotional reasons
for taking action. Did you panic? Were you too greedy? Were you full of
anxiety? Note all these feelings on your record. It is only when you can
objectify your trades that you will develop the mental control and discipline
to execute according to your system instead of your habits.