A trading strategy is a systematic, step-by-step, approach to trading. Using a forex trading system to trade is of utmost importance to the long-term success of a forex trader. A forex trading system or strategy will equip a new trader with a set of steps to follow; a set of steps that will build discipline and self confidence in the trader. There are many traders in the forex market that don't have a set of strategies and simply go by "gut feel". This can be dangerous because the trader will eventually fall prey to one of his greatest enemies — his emotions.
A well-defined strategy is essential in day trading. Without a specific system, traders are like soldiers without a mission. The strategy has to specify when to get in and when to get out of a position. Every step that a trader must take has to be spelled out because generalities in day trading are a disaster waiting to happen (pardon the cliché).
Many of novice trader are surprised when they hear statistics that claim that 80% to 90% of day traders lose money. They incorrectly conclude that day trading is a game. Day trading is a BUSINESS — not a game. It is no different than the many small businesses that are formed every year. Statistics say that about 80% of new businesses go bankrupt in their first two years of existence.
Why is this? Because most new entrepreneurs are not properly equipped to run the operations they start. Whether it is due to a lack of enough practical experience or a lack of understanding of the risks and inner workings of the business, many are not prepared to succeed. They start a business out of impulse, thinking only about the great potential rewards that lie ahead.
Since day trading is a business too, most people that start doing it also fail to prepare themselves properly before beginning. Without learning and practicing the proper techniques and methodologies required to succeed as a day trader, most day traders simply become another small business statistic.
So what kind of strategy do I need to learn to day trade, you ask?
There are many out there.
You are constantly being bombarded by internet, TV, and print advertising from gurus that want to sell you their "secret" trading system. Since most people are looking for shortcuts ("secrets") all the time, they wind up buying these magical systems or courses, sometimes spending thousands of dollars in the process. Eventually, they find out the hard way that these secret methods don't work and give up day trading altogether.
The reality is that there are many different strategies that day traders can use that might work.
What is important is that the strategy is well defined and is as objective as possible, in other words — "If this specific condition happens, then take this specific action (OBJECTIVE)", rather than, "Analyze the market and get a feel for it before placing your order (SUBJECTIVE)" or "Based on your interpretation of what Greenspan (or some other important person) says about the economy, place your order (SUBJECTIVE)". The great majority of people that use a subjective strategy, wind up making the wrong decision or staying in a trade too long because they reach a "logical" conclusion, but the market acts "illogical". Many of these "logical" strategy traders try to determine where the market is going, instead of reacting to what the market is doing.
What has to be defined in order to have a complete trading strategy?
- Entry and Exit Signal
- Stop Loss Placement
- Money Management
- Managed Psychology
Remember that these four sections of a strategy have to be as specific as possible and they have to make sense. A day trader cannot be thinking in the middle of a trade, "Where will I place my stops this time?" or "I wonder if I should be buying or selling now?" This has to be clearly defined by the system being used so that the day trader is simply following a set of conditions in any given market situation. When this is accomplished, every new position that the trader enters or exits builds the discipline he needs to succeed.
Mastery of the day trading strategy will come over time, as the trader learns to apply it with precision and consistency. That is why it is also important that the strategy be simple enough to apply without having a Ph.D. from MIT.
When the strategy has too many indicators and conditions, the day trader can be easily confused, and a confused trader has almost no chance of executing successful trades.
There are not many Forex tips that are more important than that of training and knowledge. While there are many professionals who will be willing to help you on your way, it is important that the final say on the matters will be yours. Hence, when you do invest, know the ins and outs of the market, and take the power into your own hands. Another of tips of Forex is that you invest wisely and take advantage of the technology available to you in the market, since most trades are made online.
The Forex market is among the most advantageous and profitable in the world, and is worth more than a trillion dollars a day! With all that money going around, it makes sense to get in on the action. There are a few things that you should remember, however, before you invest large sums of money in the enterprise.
The truth is that trading is not easy but it can be learned and achieved if you have the right information. You must be willing to learn how to trade as you would if you were changing professions. After all that's what trading is... a profession.
I know your time is valuable so I will be very brief...
I am a trader and not a full-time professional marketer so I am not going to write one of those slick 30 page sales letters using every trick in the book to try and convince you to buy my program. As a matter of fact, if you are looking to "Get Rich Quick" or looking to turn $1000 into $100,000 in 3 months then this program is not for you.
If you are still with me, then lets get you started on the road to becoming a more profitable trader. ;)
This is a short story what I want share with you...
What Was My Friend Doing Wrong
Recently, a close friend of mine who knows me for years admitted to me that he lost over $21,000 trading Forex market in less than three months time. Well, there would be nothing strange about it if there wasn't one very important fact. He is my friend. And he knows that I'm a forex trader and he also knows that I'm a very successful forex trader. So I asked him why didn't he consult me when he was starting, actually I was very disappointed that he even hid from me the fact that he was involved in forex. He told me that every time when he heard me talking about forex I was always using words such as "hard", "stressful", "dangerous"... He said that he didn't like to hear those words.
So one evening he was surfing the web and he stumbled upon one site that he says "stood out". Everything that he read on that site was completely opposite of anything that he heard me saying. "Forex trading is easy...", "Anyone can do it with just a little bit of effort...", "You can quit your day job...". And he was hooked. He bought their system and opened demo account. His demo account was set at $50,000, few lucky trades over the next four weeks and his demo account grew to $78,000. Wow! Twenty eight thousand dollars in four weeks. As any other beginner he was thrilled. He withdrew $10,000 from his hard earned savings account and he was all set to accomplish his dreams.
However, very soon he realized that trading for real money and trading demo account have nothing in common. When real money got at stake, he became different person. Nervous, scared, he took his profits way too early and stayed in losing trades far more than he was supposed to. His money was melting before his eyes! He added another $5,000. Then he borrowed another ten thousand from his line of credit. He came to me when he was down to the last three thousand and nine hundred dollars.
What was the first advice that I gave to my friend
After spending a few hours talking to him, reviewing his system and listening to his trading experiences I came to the following conclusions.
There were THREE MAJOR problems with his trading method:
1. His Trading "System"
- His system was producing way too many entry signals
The efficiency (profitability) of the system is not based on the QUANTITY of signals that it produces. It is based on the QUALITY of entry signals that it produces. The entry signal needs to put probability of a trade moving into your desired direction on YOUR side. His signals were working AGAINST him.
- His system was relying on lagging indicators
Most of the indicators that his system was using were so called lagging indicators. Basically, it means that he was always the last one to enter a profitable trade and the last one to get out of a losing trade.
- His system was not clearly defined
The system needs to have a clear set of entry and exit rules. It can not be left up to the trader's discretion to decide when to enter the trade and when to get out. In the real, professional system, you MUST enter the trade when the signal occurs, because that is where your winning edge is in the long run.
2. His Mind Set
- He was always stressed out when his real money was inside the trade
You can not and should not trade with "scared" money. You can only trade with the money that you can afford to lose. That will make you calm and therefore less likely to make a bad judgment.
- He was getting out of winning trades too early
Even when his entry signals were good he was not able to extract maximum profit from them. The MANTRA is "let your profits run". It is not "cut your profits short". You need to extract MAXIMUM profit from EVERY single trade in order to be profitable in the long run.
3. He did not pay attention to SENTIMENT
The Forex market sentiment is the "collective" and intuitive opinion or better to say "gut feeling" that is formed inside the forex trading community regarding the future direction of a given currency pair (EUR/USD, USD/CAD, GBP/USD, etc..). I'm sure that all of you who are already involved in the Forex market have noticed that sometimes, when market sentiment is negative for the particular currency, even the best news can do nothing more than temporarily stop the negative direction of that currency. For example, let's say that current opinion is that Central Bank will rise interest rates by .25 points on the next meeting. And they actually raise it by .50 points. If the sentiment for that particular currency was bullish or even neutral, it would definitely trigger that particular currency to go higher. However, if the sentiment was negative, all that would happen is that sell off of that currency would stop for short period of time and then it would resume.
So, why is the sentiment important?
Sentiment is by far the most important tool at the hands of forex trader. Why is it so? Because it gives to the forex trader a clue when NOT to take particular trading signal. The power of successful forex trader is to know when NOT to participate in the trade.
How this applies to you?
Let's say that you own a trading strategy that generates either bullish or bearish signals for the particular currency pair. Sentiment will help you determine whether to take the signal or to stay on the sidelines. If the signal is bearish but current sentiment is bullish, you DO NOT take the signal. If the signal is bullish but current sentiment is bearish, you DO NOT take the signal. You only take the signal if it is confirmed by current sentiment.
I hope that you have learned something from my friend's mistakes.
When you're starting out, one of things you discover is that only a few forex traders actually scoop profits out of the market consistently. Just a tiny minority. Everyone else is losing, or just breaking even.
So what's their secret? Do winning forex traders have some special talent? Have they found some inside knowledge and locked the rest of us out? Do they have a knack of thinking "positive" or thinking "winning"? Are their computer more powerful and their trading software more sophisticated?
What is it?
Well... It's none of the above!
Let's have a look at the figure below.
The typical beginner trader moves with the "herd". He sees a rally, doesn't want to be left out, and enters the market at point A. However, by then, winning traders, who were in earlier, start to cash in on their profits and the rally loses steam. So the beginner's position falls. His money is dissolving before his eyes! Either he panics and gets out at point B, when he can't bear the pain any more. Or, if he somehow manages to stay in long enough to see the next rally, he leaves at point C, relieved to recover at least some of his losses. This is exactly the kind of "herd" trader that successful traders prey upon.
But actually the beginner also lost at point C. Because during that exact same move the winning traders had leveraged their trading capital, entered and exited at the optimum times, and stuffed their accounts with profits!
If you want to learn how to enter and leave like the winners do, you should keep reading.
