by Sam Evans, Online Trading Academy
As most of us already know, trading isn’t the easiest professional career to take up and when you have been struggling, it can always be good to hit the reset button at the start of the New Year and get things in order to face the upcoming market activity of 2014. Simply the best way to tidy things up for the coming year is to review that all important trading plan. The very best signal of success or failure in trading is typically going to be down to the quality and implementation of one’s trading plan.
It does still amaze me how many traders out there are not working from a consistent trading plan. In fact it’s the very first thing that we instruct our students to do when they are initially introduced to Online Trading Academy education, during the three day market timing class. With a trading plan nailed down, you are inviting yourself to become unemotional during your speculative activity. By removing the emotions you are also removing the temptation to trade without solid rules and objective reasoning. Nobody can ever predict what is going to happen next in the marketplace, therefore we need to have guidelines in place to tell us what to do when certain criteria and events occur during our trading. With these rules and regulations in place, we can then become consistent and see what works for us and what doesn’t work for us, thus tracking our performance to give ourselves a solid expectancy of what to expect in the future from our trading results.
With 2014 just underway I thought this would be a good time to share with you the 12 rules that we could all use across this year to implement into our trading plans:
1 – Manage your downside
Often overlooked and commonly misunderstood, risk management needs to be the first priority that any Trader has in their plan. The only way to make money from trading FX is to ensure in the first place that you have enough in your actual trading account to place a trade. The smaller the account that smaller the returns, therefore we need to protect our account because the more we have, the more we can protect and grow that account to make better returns over the long run. When the money is gone from our account, our trading career is over. That money in the account needs to be seen as a tool to produce a consistent return from our Forex trading but this will never happen unless this money is protected at all costs.
2 – Get better entries
Many students always come to me complaining about how they get stopped out only to see the market move in the direction they thought it would go. I understand how frustrating this can be as it is something that has happened to me as well as many other traders. This often leads to people complaining that the stop losses are too tight. In my experience this is not correct and it is commonly down to a bad entry. Because of this many traders end up using far too large stop losses because the entries are poor and they need to give the market room to move into a profitable situation.
In class I teach people how to find imbalances between institutional supply and demand. This gives our students a precise entry that allows them to use a tight stop loss which tells us when we are wrong as soon as possible. This also allows a far greater potential for reward because we are able to buy lows and sell highs. There is always a right time and a wrong time to buy or sell a currency pair. Your trade plan needs to know the difference between the two. A good entry will always give you the strongest reward to risk ratio which in the long run allows you to be wrong more than right and still make good returns.
3 – Understand your profit targets
Why would you ever take a trade if you didn’t know where you are going to get out for profit? While I know this question does seem a little absurd, don’t be surprised to learn that many struggling traders never actually have any idea where their profit objective is on a trade they take. Because of this they often find themselves seeing profits forming from the position, only to then watch this go all the way back to break even or maybe even into a losing situation. Personally I don’t think there’s anything more frustrating than when this happens. Nobody out there wants to be remembered as the world’s greatest break even Trader do they? One way to overcome this is to know before you actually take a trade where your profit target will be and how to do this as objectively as possible. Knowing when to get out for profit is just as vital as knowing when to get in for an entry.
4 – Know why you’re taking the trade
One of the easiest things to do when sitting at your computer is to click the buy or sell button to enter a currency trade. Let’s face it, this does not require any skill whatsoever and is often the reason why many traders get themselves into trouble unnecessarily. They simply have no reason for entering the trade and usually as a result of either boredom or attempting to chase the market when it moves without them, they enter into a trade impulsively and without any real reason at all. In our classes and XLT online programs, our instructors teach the students how to recognize where institutions are buying and selling FX currency pairs on a price chart and this gives us our exact entries ahead of time.
When we see an area of demand we know that we should be buyers and when we recognize an area of supply we set up our orders to sell. It is as mechanical as that. This is how institutions trade, so why shouldn’t we? Trading this way removes emotion and allows you to behave in an objective and disciplined manner. It also takes the guesswork out of it which for me makes me a far happier and relaxed Trader!
5 – Understand your Fundamentals
Some of you may be surprised to see me including this as a rule in my plan. If you have read any of my previous articles you will know that I don’t tend to use fundamental analysis as part of my reasons for taking a trade. I am a pure price action Trader by heart. However this does not mean that I ignore fundamental relationships that are common in all of today’s currency markets. This would be a foolhardy practice, as there are many intricate fundamental relationships present between currency pairs and other related markets which can help to increase the odds of success when I’m trading. Knowing the impact of the US dollar and Oil on currency, as well as a variety of other markets like bonds and stocks, can help the disciplined trader to know how to better time their entries into the FX markets. Go and study these fundamental relationships and I promise you there will be advantages to be had.
6 – Use News the right way
How do currency traders work with news? When I was first introduced to Forex trading I was told that News trading was a smart thing to do. Little did I realize how wrong that advice was. Many currency traders have the misconception that because we all receive the economic news at the same time, this gives us a fair advantage to placing trades around these violent and volatile times in the marketplace. Many times we see violent moves up or down on the candlestick chart, only to see these moves reversed in the blink of an eye, resulting in vicious stop outs and bad fills. They also lead us into the nasty habit of chasing each and every candle move up or down and costing us many losses unnecessarily.
However there is light at the end of the tunnel, and the educated Forex trader will know the news can actually provide some incredibly low risk, high reward trading opportunities if you have a good thorough understanding of pure price action and supply and demand. If your plan is to stay out of the market around the major economic releases, then I will applaud you. If you don’t know how to handle news then stay away from it, as there is plenty of other time to trade. But when you do understand how to handle it, a whole new world of opportunity will present itself to you. Just remember that news is called news because it’s already happened. It’s not the news we care about as traders but rather the price action following it that really presents us with our trades. If in doubt, then stay out.
7 – Trade Price not Indicators
Regular readers of my articles will know that here at Online Trading Academy, we encourage our students to focus on price first and foremost using our core strategy of recognizing institutional supply and demand on a price chart. Many new students come to our Academy having spent a lot of time reading indicators and chart patterns. One of the dangers of relying too much on these secondary tools, is that they need price to give us a signal. This will always result in a lag and delay in the signal itself, getting the Trader into the position far too late and affecting the overall risk and potential reward outcomes.
By focusing on price primarily, we will always get the very best signals at the earliest possible times. What better way to read the market them by what the price is telling us as opposed to a technical indicator? If you know how to read price on a chart, you will understand how to recognise the true footprints of the major market players, mainly the institutions. As much as they would like to hide their trading and market activities, they struggle because of the patterns that they create due to the imbalances of their order size and the retail customers order size. Know this and you will know exactly where to get into the market and this is only something you will know by studying price not a technical tool.
8 – Limit your use of Technical Indicators
Please don’t take my previous point as a suggestion that I hate all technical indicators! This couldn’t be actually further from the truth. I believe that technical indicators, if used correctly are a very powerful tool to help the decision making process and filter opportunities out when presented with too much. Even when relying on supply and demand levels alone we can often be faced with one too many trades. This is why we employ Odds Enhancers in our curriculum, so as to help students come to a more objective and rule-based decision about which opportunities they are going to take.
Technical indicators such as Moving Averages, Bollinger Bands and other oscillators, can all be used in the decision-making process, so as to give some extra support to the supply or demand level opportunities themselves. However as I previously mentioned, the technical indicator should not be the primary decision-making tool and should be used only after the trader has found a good quality level which they would trade from alone. My suggestion however, is if you are going to employ technical indicators, just choose one or two to aid you in your analysis process. This way there will be little danger of focusing more on the technical indicators rather than the price itself. Also occasionally traders can wait for too many signals crossed too many indicators, often resulting in missing the trade altogether when waiting for their “perfect set up”.
9 – Focus on a few time frames
This point is short and simple: less is more is the rule. If you look at a different time frames when trading in particular currency pair, you will one into the danger of never being able to make a decision. As traders we need to be able to make decisions on the spot and with clear rule-based objectivity. The more we look at the more dangerous areas of over analyzing the opportunity and never taking the actual trade itself. This is a common mistake that a vast majority of new traders tend to make. Multiple time frame analysis is a key skill which needs to be developed if you are to ever achieve overall consistency in your currency trading.
I would suggest looking at no more than three or a maximum of four time frames when you’re trading, so as to give you a broad picture of the trend and the overall market direction. Using any more than this could potentially result in you forcing a trade, meaning that you flick through multiple charts to find an opportunity because you’re keener to take a trade, rather than wait for the right trade.
10 – Keep a Trade Journal
This one always seems obvious when I tell students about how important it is to keep a trade journal but it’s surprising how many people have never thought about it before I mention it. Let’s face it, we all come to the market wanting to trade, to get into the action as soon as possible an attempt to make money. The last thing we really think about is journaling and tracking our actions themselves. Well here is some news for you: you need to record your activity in your currency trading. How can you ever analyse what you been doing, if you don’t record what you been doing? The only way we can learn about what works and what doesn’t work, is by keeping a journal of what our activities have been and then learning from this. Start that journal now and track your performance from this day forward.
11 – Don’t become Isolated
Trading is a lonely business. Most new traders love the idea of making money on their own terms but forget that this also comes with the disadvantage of being one of the most lonely careers or activities one could ever embark upon. At least when you go to work you get to have a break and communicate with other human beings. When you’re sitting at home in front of a computer screen, typically the only person you have to talk to is yourself and let’s be honest, talking to our self when trading usually is a bad thing.
People need people, that’s a fact. Here in the Academy we’re fortunate enough to have a true family environment within our worldwide campuses, our XLT programs and Mastermind Community, which provides our students (and instructors) with the level of contact that they need to be the most successful traders possible. Sharing your goals with individuals on the same path as yourself will always promote success. Put yourself in a group with other like-minded individuals and emulate the success of people who are good at what they do. Going it alone is not always the best course of action.
12 – Hold yourself accountable at all times
The final point is accountability. I am fortunate to have come from a performance coaching background before becoming a trader and instructor. This gave me the advantage of understanding what makes me tick as a human being and how my belief system plays such an important role in the goals I set myself and the results which I achieve. As people, we are responsible for our own lives and the decisions which we make. Trading is a decision making process at its core foundation and requires us as market speculators to take responsibility for the choices we make to buy, sell and manage our risk. We all need to understand our success is down to us and us alone. After all, we are only trading what we believe about the markets and what we believe is true, isn’t it?
I hope you have enjoyed these insights. In the meantime enjoy your New Year celebrations and I wish you all a very prosperous and rewarding 2014!
Be well and profitable.....