Forex Trading Strategies #1 – The Real Reason.

By  Henry Liu,

Far too many times Forex traders get into the market without the right reason, or for that matter, without a good enough reason. Usually the emotion factor is driving the trade, such as greed or fear of missing out on a potential profitable trade… And I have to confess to this as well, because when you take away all of the technical mambo jumbos, the only reason that sometimes compelled me to take a trade was: greed…

They say that to sell to a man you need to give him 2 reasons, the real reason and the reason he tells his wife why he bought it. Most of us traders tell ourselves the wife-reason, but the real reason is that we just wanted to make money fast…  Of course, fundamentally there is nothing wrong with being greedy or wanting to make money, or we wouldn’t be in this business in the first place. However, we have to be smart greedy, not stupid greedy and get our hands caught in the cookie jar. That’s why it is so important to have a right reason to take a trade, instead of chasing after the market like a chicken without a head…

In a fair game, as defined by 2 players with the same odds, or neither one has an advantage over the other; it is proven that the one with the biggest purse will  win the game. In Forex Trading however, it is NOT a fair game  for Retail Traders because:

1. We enter the market at an immediate loss due to spreads
2. We have limited margin accounts
3. We use methods that are well-known and studied by traders all over the world, and
4. There are so many underlying factors that move the market and no one can be certain at times.

…all of these put us at a great disadvantage in our trading, and it’s no surprise why most traders hit or miss with their trades all the time…

That is why we need to identify The Real Reason behind our trading decisions.  Ask yourself why are you in this particular trade, is it because you saw how the market jumped 30 pips in the last 5 minutes? Or did you have a strong fundamental reason to take this trade?  Is it because you’ve been sitting in front of your PC the whole day and you haven’t made any money? Or you took this trade because it was the entry level you’ve been waiting for the whole day?

So make a habit to always ask yourself when you are about to take a trade, and pretty soon you’ll realize that you no longer look at the 5-min chart and fly by the seat of your pants… And since you are always looking for the real reason, you’ll soon anticipate the market and plan ahead…  It is always a good habit to plan ahead, knowing where you want to get in, why you want to get in, your stop loss, and your take profit levels, so you can see some consistency in your trading.

How to Create a Trading Plan That Works For You

By Alwin Ng

The last two months has been amazing for me as I continue to develop myself in the areas of trading psychology as well as building new trading systems for my portfolio. The idea of continuous learning is utmost important for any trader and I definitely encourage everyone to do so if you can.

In the process of building a new trading system, I had to sit down to write a new trading plan and I had to go through various market scenarios before I could nail down a system that works. Even though I've written past articles around this subject, it still amazes me that I'm still learning and I'm able to discover new trading insights or lessons.

I would like to share this experience with you and to remind everyone the importance of creating a trading plan that works. More importantly, to creating a trading plan that works for you - yes, it must work for YOU! With that, enjoy today's article!

 1. Technical Know-how is a Must

This is probably the most laborious part when creating a trading plan yet this is also the least significant of the entire plan. When writing a plan on a new trading system, you must have the technical know-how before you even consider trading it in the market.

You will also need to take time to understand how the system works. So, ask as many questions and make use of Google as much as possible because everything you ever need to know about trading systems can be found on the internet. Of course, where possible, make sure to check that it is from a reliable source.

If Google doesn't know about it, the chances are it's either something very niche or that system may not exist. While there's nothing wrong with that, it just means that you have fewer resources to use. Either way, do your homework and find out as much as you can.

It goes without saying that you need to test it out. As you test the system, you will generate even more questions. From personal experience, DO NOT ignore those questions during testing because these are the things that you won't learn on the internet. Make sure to find those answers (through coaching or more testings) because trial and errors are the best and quickest way to learn about any thing and that applies to trading the market too.

 2. Risk/Money Management Trumps Technical

Risk and Money Management should be on the top of the priority list when writing a trading plan. Think about it, you cannot make money without learning how to manage money. Make sense?

To keep this simple, I'm going to summarise some rules that I frequently use.


  Do not trade on money that you cannot afford to lose. And I'm not just talking about financial account - this includes your emotional account as well. For example, $1,000 might be a lot of money to a middle income trader. However, sometimes you might find that $500 means even more to a high earner because he/she gets so stress that one cannot make rational trading decisions. If you can't afford to lose (financially and emotionally), then either reduce the pot or keep it to demo trading while you continue to build your confidence.

  NEVER enter the market without knowing when to exit. You make money by cashing out as well as cutting losses. You'll lose money if you don't know when to exit the market.

  As a rule of thumb, beginners should position size and keep trading risk to 1% (per trade) of your account and one should not go any more than 3-5% per trade. You might wonder, why am I being so vague? Well, to be honest, there's no fix and hard rule about this. Trading is all about your own risk appetite and whether or not you can handle the emotions when things don't go your way. Do not trade what you cannot handle.


The list can go on for awhile but I think you get the point. Again, if you need to, buy books, read or get a coach to teach you about risk/money management.

 3. Emotional Checker

Once you got Pt 1 and 2 sorted, here comes a trading secret/method that I use - I call this the Emotional Checker.

As you go through your trading plan, try to visualise a trade set up happening in the future. This can be any point in time in the future but visualise yourself actually taking this trade. As you see the trade (using your imagination), you place your orders and you let it run. Ask yourself - how do you feel? Comfortable? If yes, good. Now try the following:


  Visualise the trade going in your favour. How do you feel?

  Visualise the trade going against you. How do you feel?

  Visualise the trade going in your favour and now you following your exit plan. How do you feel?


Essentially, this is what I call scenario planning but using your emotions to check that you are fine with it. When ever you feel uncomfortable or fearful, you should consider tweaking your trading plan. Then, repeat the exercise.

Think about this, if you have done your work in Pt 1, you should have a thorough understanding of how the market works. It can work in your favour as well as go against you and you should have captured this in your trading plan. If you haven't done your homework, that's the reason to you feeling uncomfortable or fearful.

 Conclusion

In the end, it's all about trading a system that works for you. The key success factor of any trader is that their trading plan must work for them. Many amateur traders buy trading systems from trading schools and assume that it will work fine. Unfortunately, it might work for some but, chances are, it won't work for everyone.

These traders forget that, at one point in the future, you might not feel comfortable with the system. If you're not comfortable with it, that's when your emotions kick it and followed by a long list of negative actions (which I will not dwell into today).