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To learn Forex Trading in the correct way we need to understand in which environment we operate!
Professional traders vs. Retail traders
1. Professional traders:
They are creating the environment in which we operate. It’s called the market! They are moving the prices to levels at which the retail traders react. So they already know the future. The pro trader approach is 80% fundamental and 20% technical. Do not confuse the professional trader with a profitable retail trader, because they are the complete opposite. When we talk about professional traders, we talk about investment banks, hedge funds, and prop desks. Do you think they go to their trading desks to start drawing lines on the charts? Or do they go long when the price is bouncing on the trendline? It makes me laugh 🙂 . Of course, you can extract money from the markets by drawing lines, but with the correct approach, by playing the probabilities.
2. Retail traders:
They are trying to predict the non-existing future when, in fact, they are the predicted future of professional traders. And that’s because the typical retail trader reacts at levels used by professionals to exit their positions. In other words, 90% of retail traders are used to providing liquidity. The other 10% of retail traders understand that the market cannot be predicted, and they develop a system to constantly extract money from the market by playing probabilities.
The typical trader is trying to learn Technical Analysis (TA) as much as he can. He thinks that this is the obstacle to not being able to win all of his trades. It means that he can’t accept his losses, when in fact losses are part of the game, they are not failures. Uncontrolled losses are failures. In trading, you have to lose 1 in order to win 2. So, his ego is playing a big role here. He doesn’t accept that all he is doing is totally wrong. He can’t see more than 2 or 3 trades before and 2 or 3 trades ahead because he doesn’t use a trading journal.
The typical trader thinks that one day he can be so good by learning TA that he can win all of the trades that he is losing now. His perception is wrong, he is trading (taking decisions) based on emotions and fueled by the feelings of the last big position he won. He forgot about all the losses, he forgot about risk management, trading plan, and everything else that matters to be successful/profitable.
He doesn’t know he has been trained to fail right from the beginning!
THAT IS WRONG PERSPECTIVE AND WRONG TRADING APPROACH!
Learn Forex Trading the correct way
What is the best trading approach in current environment conditions?
As a retail trader, you have two options: Mechanical Trading or Intuitive Trading.
(A) Mechanical Strategy
You find a pattern that gives you an edge. You create rules for when to enter the market and when to exit. For example, every time conditions A and B happen, I am going long/short from here to here. To be profitable, you need to find a pattern that wins 4 times of 10. The trade must have a Risk to Reward Ratio (RRR) of 1:2. It means that when losing, you lose $1 and when winning, you win $2.
What is the best approach?
Every time you see the pattern and the entry conditions have been met, you just execute the trade. You don’t know if it will win or it will lose. All you know is that 4 of 10 wins. The wins and losses are randomly distributed in this series of 100 trades. You can’t trade with emotions as long as you understand that the outcome of any single trade is random. You can’t know in advance the result of your next 2 or 3 trades. Only the risk is known in advance or how much you can lose.
You can win 2 or you can lose 1.
(B) Intuitive trading:
You execute all the situations you know that give you an edge.
This kind of trading style is developed in time by a trader. You need experience, and you need at least one mechanical strategy in your background. Now, all you have to do is to wait patiently until a pattern that gives you an edge appears. Then you execute it based on your experience. Of course, without emotions because know you learned that the outcome of any single trade is random.
In my opinion, any trader should start his trading journey using a mechanical strategy, so it can go thru the back-testing process. Back-testing a strategy gives you a lot of advantages. It teaches you what live trading can’t. You can go thru e period of 1 year in a couple of days. You will be more confident to execute that kind of setup when trading live. Besides the execution part, you will start to think in a probabilistic way, you start counting the numbers. You’ll see how the account is growing little by little. You will start to see the benefits of a good risk management plan at the end of back-testing. You will eliminate the emotional trading errors as long as you understand that you are playing probabilities. The fear is eliminated now. Discipline can be adopted naturally now. Errors can’t appear when you are doing it right.
Have realistic expectations when trading
The mentality of earning tens of thousands per day will disappear when you will understand that you are playing a probability game and that you need a trading system that offers you an edge so that you can constantly extract money from the market. Yes, you can have profits of 10k per day, BUT IN TIME! When 1% of your account represents 10k, then yes, you can close a 20k trade per day. I think the vast majority of retail traders are blinded by the big numbers that are going thru their heads because they don’t have REALISTIC EXPECTATIONS. Unrealistic expectations are bad because they cannot be fulfilled. Be cautious to not be caught in this wrong perception.
Trading success is defined by consistency
Yes, of course, we are here for the money, but money is made thru a process, and we have to love the process of trading. Extracting money constantly from the market means trading constantly. To trade constantly you have to remain in the game, which means capital preservation, which means controlling the risk. We have to trust the process when going thru a losing streak which means we need confidence. Confidence is built in time, so give time to yourself to truly adopt the correct way of trading. It must be adopted at a subconscious level so that when you trade, you do it in a natural way and not difficult at all. Like when you’re driving a car. It was hard at first, but now it’s become automatic. Now discipline comes in a natural way!
Building your trading plan is an important part of your trading success
You should be a risk manager first, and a trader second! A systematic approach to extracting money includes the following.
1. Risk Management
(a) Set the risk per trade at 0.5% to 3% of your total account. It’s not a free choice. You will use the appropriate risk that fits your results when back-testing. It depends on your win-rate ratio over a series of 100 trades. Drawdown should be taken into consideration. As an example, to prevent blowing up the account you shouldn’t risk more than 0.5% / trade. If you lose 20 consecutive trades you are protected now.
(b) Use a position size calculator to maintain a fixed risk on every position you open. My recommendation is the Risk Calculator for MT4 (click here). It automatically calculates your position size and also sets the Take Profit accordingly to your defined RR ratio. Give it a try! You’ll thanks me later. If you want to manually calculate the position size, then search for “forex positions size calculator”.
(a) Find a pattern that gives you an edge
(b) Define a set of rules that improves the odds of winning
(c) Have a trading plan that includes rules for entry, take profit or cut-loss.
Execution is always the hardest. It involves the TA and the emotional part. You have to think objectively every-time you enter the market. The execution is when you expose a part of your capital at risk. Execution includes all the plans that have been prepared to be applied to live trading conditions. You should include all the commissions and taxes in the pre-defined risk. You are not allowed to lose one dollar more than your pre-defined risk. Otherwise, you are a loser before you have started.
4. Trading Journal
You have to keep a journal of all of your trades. If you can measure it, you can improve it. Know where you are going and if you are doing it right. Trading is a business and incurs expenses, losses, fees, uncertainty, stress, and risk. As a trader, you have to treat it like a business. You must research and strategize to maximize your business’s potential.
In your trading journal, you find what works and what doesn’t. Don’t trade without keeping a record of what you are doing. That’s the biggest mistake that any new trader is making.
Trading success is the result of developing proper trading habits
Now all you have to do is to understand how the market is moving and find some situations to trade. Don’t use fancy indicators. Use naked charts and find some indicators to be used as confirmations if it helps.
Your job is to fill the gap between the plan and execution.
Having the correct foundation of trading you can try different methodologies of trading. There are a lot of ways to extract money from the market. Use the one that fits you. Some are looking to trade range, others to trade continuation patterns. Others are using supply and demand, or trend following systems, or breakouts. It’s up to you to choose the situations that give you confidence. That’s the one that perfectly fits your personality. Some traders love day-trading, others swing trading…and so on.
I hope that everything I wrote here helps you to evolve when you learn forex trading. These are the most important aspects you have to learn before going to use your real money in trading. This is my general view on trading and it is not financial advice. Please do your own research before risking any money.
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