In this article we shall discuss eternal, unavoidable principles essential for a successful forex trading career (or in any other financial market, for that matter). It may seem trite, but many less experienced players in the financial markets pay lip-service to these principles to their peril – if they are even aware of them. We shall attempt to discuss them in detail.
Number One is Money Management. You cannot breach this law – you need to have some way of strictly controlling the amount you risk on each trade. The market is an arena of chance; a good trading system just enables you tip the odds in your favor so you can win more often than lose, and hopefully (depending on your Risk: Reward ratio) have larger wins and smaller losses so your equity increases over time. Anyone who is still disillusioned that he/she can discover a perfect, non-losing system has probably not been trading long enough, and is still looking for a quick way to part with his/her hard-earned money. You need to know how to manage your equity through the mediocre and bad trades, so that when the really juicy trades come up you can maximize them. With sound money management principles even a second-rate trading system would grow an account over time; but with poor money management you could promptly blow your trading account even with a good trading system.
If you really think about it, there are only two things you can control in the markets: your risk and the quality of your trade setups. Once the trade is under way everything else is pretty much determined by the market. In fact, even the best trade set-ups do not always lead to the best outcomes eventually. So it is really important to have a good grasp of risk control when trading.
Number Two is Discipline. This entails sticking to your system rules and trading plan through thick and thin. A successful forex trading plan should take every eventuality and possible turn of the fluid market into consideration, and detail the appropriate steps you would take in each case. It is better to write such plans down and re-read them often until they are firmly imprinted on the mind and can be followed. The ideal action when a particular market scenario arises and you take the required steps in your trading plan, is not to reverse those steps no matter what happens afterwards. A good price action-based system would discourage sitting at the computer for an extended period of time, by setting up and executing as much as possible set-and-forget trades which would take care of themselves profitably in the trader’s absence.
The majority of traders believe that they have to sit at their PCs for hours on end, babysitting their trades, watching out for profitable opportunities and exiting at the earliest signs of price reversal. Such steps could lead however to self-doubting and destructive habits guaranteed to give your profits back to the market as soon as you make any. On the contrary, once a profitable price action trade setup is identified on a chart, all you would need to do is calculate your risk, place your trade with appropriate Stop Loss/Take Profit values, and walk away, leaving your trade to take care of itself. Such trades if well executed will more often than not turn out profitable. Learning to trade with such methodologies not only builds your self-confidence over time, it prevents you from second-guessing yourself and trying futilely to wrestle with a market that is far bigger than yourself, and beyond your individual control or influence.
The Third Pillar is a Good Trading Method. Notice that though also important, it is only a minor component (about 20%) of successful trading. it is therefore necessary to have a simple, robust system with straightforward rules that could easily be interpreted in any trading situation within the minimum time, and executed promptly so as to take advantage of potential market moves. A myriad of trading systems are marketed on the internet almost on a daily basis. In selecting an ideal system an important factor must be considered: it must be as close to actual floor trading as possible. Most traders in floor exchanges base their trading plans on order flows; a simple identification of the trend through observing price action, and not more than one or two simple indicators. Conversely, most off-floor traders use systems burdened by a mass of technical indicators, most of which lag because they are based on second-hand data. Such systems would do no more for you than hinder your attempts at successful forex trading. Little wonder the majority of off-floor traders lose, because relying on secondhand, lagging data in a fast-changing market like forex could only lead to more losses than wins in the long run.
In conclusion, we have briefly discussed three components vital for anyone seeking success in the financial markets to acquire. While many tend to focus on a good trading method as being primarily critical for success, you need to realize that developing sound money management principles as well as discipline are even more significant. In the journey toward a successful forex trading career and professional status therefore, one needs to seek a training course that would comprehensively address each of these components adequately and with proper bias, without letting one suffer at the expense of another.
Babatunde Adejumo is a medical practitioner with a strong side interest in the foreign currency markets, which he has been studying for several years ‘with the same passion he attacked his books with in medical school’. He believes forex trading can be learnt without undue reliance on lagging indicators and black box systems, as he teaches on his website http://www.tradeforexnaked.com. His price action-based forex trading system as well as a detailed Mentoring course are readily available on his website.