Gerbangingdonesia.com The best traders hone their skills through practice and discipline. They also perform self-analyzes to see what drives their trades and learn how to keep fear and greed out of the equation. These are the skills every forex trader should practice.
Define Goals and Trading Style
Before embarking on any journey, it is essential to have an idea of your destination and how to get there. Consequently, it is vital to have clear goals in mind and then make sure your trading method is capable of achieving these goals. Each trading style has a different risk profile, which requires a certain attitude and focus to trade successfully.
For example, if you can’t fall asleep with an open position in the market, then you might want to consider day trading. On the other hand, if you have funds that you believe will benefit from the appreciation of a trade over a period of a few months, you may be more of a position trader. Just make sure your personality fits the trading style you undertake. A personality discrepancy will cause stress and some losses.
The Broker and Trading Platform
Choosing a reputable broker is of the utmost importance and taking the time to research the differences between brokers will be very beneficial. You should know each broker’s policies and how they create a market. For example, trading on the over-the-counter market or the spot market is different from trading on foreign exchange-based markets.
Also, make sure your broker’s trading platform is suitable for the analysis you want to perform. For example, if you want to trade Fibonacci numbers, make 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.
A Consistent Methodology
Before entering any market as a trader, you need to know how you will make the decisions to execute your trades. You need to understand what information you will need to make the right decision about entering or exiting an operation. Some traders choose to monitor the underlying charts and fundamentals of the economy to determine the best time to trade. Others only use technical analysis.
Whichever methodology you choose, be consistent and make sure your methodology fits. Your system must keep up with the changing dynamics of a market.
Determine Entry and Exit Points
Many traders are confused by the conflicting information that occurs when looking at charts over different time frames. What appears as a buy opportunity on a weekly chart may appear as a sell signal on an intraday chart.
So, if you are taking your basic trading direction from a weekly chart and are using a daily chart for time entry, be sure to sync the two. In other words, if the weekly chart gives you a buy signal, wait for the daily chart to confirm a buy signal as well. Keep your time in sync.
Calculate Your Expectancy
Expectation is the formula you use to determine the reliability of your system. You need to go back in time and measure all trades that were winning versus losing, then determine how profitable your winning trades were versus how much your losing trades lost.
Take a look at your last ten trades. If you haven’t done real trades yet, go back to the chart at the point where your system told you to enter and exit a trade. Determine whether you would have made a profit or a loss. Write these results.
While there are a few ways to calculate the percentage of profit earned to measure a successful trading plan, there is no guarantee that you will earn that amount every day you trade, as market conditions may change. However, here is an example of how to calculate expectation:
Formula for Expectancy
Expectancy = (% Won * Average Win) – (% Loss * Average Loss)
Example of Expectancy
If you made ten trades, six of which were winning trades and four of which were losing trades, your percentage win ratio would be 6/10 or 60%.
- If your six trades made $2,400, then your average win would be $400 ($2,400/6).
- If your losses were $1,200, then your average loss would be $300 ($1,200/4).
Expectancy = (% Won * Average Win) – (% Loss * Average Loss)
- Expectancy: (.60 * $400) – (.40 * $300) = $120
In other words, on average, a trader could expect to earn $120 per trade.
Before trading, it is important to determine the level of risk you are comfortable taking on each trade and how much you can realistically earn. A risk-reward ratio helps traders identify if they have a long-term profit opportunity.
For example, if the potential loss per trade is $200 and the potential profit per trade equals $600, the risk-reward ratio would equal 1:2.
- If ten trades were placed and a profit was earned on just four of the ten trades, the total profit would equal $2,400 ($600*4).
- As a result, six of the ten trades would’ve lost money at $200 each, which equals $1,200 in total losses ($200*6).
- In other words, a trader would earn a profit on the ten trades, despite being correct only 40% of the time.
The risk can be mitigated by stop loss orders, which exit the position at a certain exchange rate. Stop loss orders are an essential forex risk management tool as they can help traders limit risk per trade while avoiding significant losses.
Using the example above, imagine that the trader had a very large stop-loss order for each trade, which means he was willing to risk losing $ 1,200 per trade but still earning $ 600 per winning trade. A loss could result in two winning trades. If the trader has suffered a series of shutdown losses due to adverse market movements, a much higher and unrealistic profit percentage would be needed to make up for the losses.
While it is important to have a trading strategy based on payout percentages, managing risk and potential losses is also key to not destroying your brokerage account.
Focus and Small Losses
Once you have funded your account, the most important thing to remember is that your money is at risk. Therefore, your money shouldn’t be needed for normal living expenses. Think of your business money as vacation money. Once the vacation is over, your money is spent. Having the same attitude towards trading. This will psychologically prepare you to accept small losses, which is the key to managing your risk. By focusing on your trades and accepting small losses instead of constantly counting your capital, you will be much more successful.
Positive Feedback Loops
A positive feedback loop is created as a result of a well-executed operation according to his plan. When you plan an operation and execute it well, you create a positive feedback model. Success breeds success, which in turn breeds trust, especially if the trade is profitable. Even if you suffer a small loss but do so on a planned exchange, you are building a positive feedback loop.
Perform Weekend Analysis
A positive feedback loop is created as a result of a well-executed operation according to his plan. When you plan a trade and execute it well, you create a positive feedback pattern. Success breeds success, which in turn breeds trust, especially if the trade is profitable. Even if you suffer a small loss but do it in a planned exchange, you are creating a positive feedback loop.
Keep a Printed Record
A printed log is a great learning tool. Print a chart and list all the reasons for the trade, including the fundamentals that influence your decisions. Label the graph with its entry and exit points. Enter all relevant comments in the box, including emotional reasons for taking action. Did you panic? Were you too greedy? Were you full of anxiety? Only when you can objectify your trading will you develop the mind control and discipline to execute according to your system rather than your habits or emotions.
The Bottom Line
The above steps will take you into a structured approach to trading and should help you become a more refined trader. Trading is an art and the only way to become increasingly proficient is through consistent and disciplined practice.