“Progress equals happiness”– Tony Robbins
It’s not too late to make 2020 your year.
Whether you’re new to the financial markets or a seasoned professional, there’s always room to improve trading performance and move to the next level.
Work from a Detailed Trading Plan
It’s surprising how many Forex traders operate without a trading plan.
Without clear rules of engagement, you’re essentially flying blind.
Most understand a business plan is a strategic tool for entrepreneurs. Its in place to help make more informative decisions, to avoid large mistakes and communicate objectives to prospective investors. Why should trading the currency market be any different?
Having a well-defined trading plan can greatly increase your performance and success in the Forex market. It will, ultimately, help instil good trading habits.
Among other things, a trading plan should include the following elements:
– Detailed trade setups. This is your trading system. It will, at the very least, include entry, exit (stop loss) and take-profit rules for each strategy employed, with most retail traders geared towards technical analysis. A trading system will also allocate specific strategies to different trading styles, scalping and day trading strategies, for example. Other aspects to consider here are the market conditions best suited to each system.
– Trading goals. Setting clear objectives provides vision and, importantly, motivation in the short term.
– Markets of interest. To help avoid analysis paralysis, traders detail traded instruments in their trading plan, often zeroing in on one or two specific markets, such as the stock market, cryptocurrencies, CFDs (CFD trading) or foreign exchange. Forex traders will note and observe price action in major currencies, such as the US dollar (USD), euro (EUR), British pound (GBP) and Japanese yen (JPY) – EUR/USD, GBP/USD, AUD/USD and USD/JPY remain the most heavily traded currency pairs in the foreign exchange market.
– Trading account(s). A trading plan will detail active accounts and with which Forex broker, as well as which trading platforms are used – MetaTrader is popular for currency trading. A trading plan should also show any demo accounts currently in use.
– Risk-management strategy. This details things such as account balance, risk tolerance (risk each trade), risk/reward ratio as well as margin and leverage.
– Money-management strategy. This is essentially the way traders allocate funds across instruments and strategies.
Explore Higher Timeframes
Many newer traders start trading the lower timeframes, seeking the thrill of minute-by-minute market movement. While it is true, some day traders achieve a positive return, it’s also true the less you trade the more successful your trading can become. Switching things up to the higher timeframes, therefore, may be something you can consider to improve trading performance.
Higher-timeframe signals are thought to be more accurate, providing time to conduct a thorough analysis which just isn’t possible on lower timeframes. The daily chart is a popular timeframe, housing the all-important 200-day simple moving average.
Upgrade Your Mindset
While the Forex market may be absent of emotion, as a human being, you’re not.
If you feel a lasting sting after losing trades, reducing risk can radically upgrade your performance.
Traders must be clear on their risk tolerance and drawdown thresholds. Some traders are more risk averse than others. Without this risk control in place, trading Forex can quickly become emotionally based, often with disastrous consequences.
Besides risk tolerance, understanding a trading system’s statistics is key to improving and maintaining a sharp trading mindset. If you have a trading strategy presenting clear statistics, you’ll know, on average, what to expect over a series of trades – trading expectancy.
Thinking in probabilities is also powerful and can help strengthen your emotional state when trading. Probability measures how likely an event is to occur out of a series of outcomes. If a trading system’s statistics state a positive expectancy: a high probability of making money over the long term, this helps traders become more accepting of losing trades. It basically removes the thinking each individual trade must win, as the trading system’s statistics shows a profitable return over a series of trades. Single trades are, and always will be, random.
Maintain a Trading Journal
A trading journal is a method of recording trading activity and protects against recency bias. It is a way to monitor your trading behaviour.
A diary of trading events is incredibly important for improvement.
Three things you must include in your trading journal are:
– Emotional responses. This is the key into your mind – how you were feeling before, during and after trades. Were you frustrated after entering a trade too soon? Were you too confident from the previous trade and consequently rushed into the next setup? Writing this down provides a way of documenting your mental state. This aids growth in the sense it helps prevent repetitive behaviour.
– Trade performance. This is pretty self-explanatory. Here you document each trade’s performance. Your entry, position size and exit levels are key notes. This helps gather crucial statistics. Additional records are gain/loss on each trade and, importantly, what price movement did before and after the trade.
– Strengths and weaknesses. This involves being honest with yourself. A strength, for example, may be you avoided jumping in too early, perhaps a recurring mistake highlighted in previous journal notes. A weakness, on the other hand, could be entering a trade not according to the trading strategy. This may be due to a lack of patience and is, therefore, something to work on in the future.
In the absence of a trading journal you will not have access to historical events. The bottom line is it is practically impossible to progress without having knowledge of the areas requiring improvement.
A successful Forex trader understands trading is a never-ending learning process.
The information contained in this material is intended for general advice only. It does not take into account your investment objectives, financial situation or particular needs. FP Markets has made every effort to ensure the accuracy of the information as at the date of publication. FP Markets does not give any warranty or representation as to the material. Examples included in this material are for illustrative purposes only. To the extent permitted by law, FP Markets and its employees shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided in or omitted from this material. Features of the FP Markets products including applicable fees and charges are outlined in the Product Disclosure Statements available from FP Markets website, www.fpmarkets.com and should be considered before deciding to deal in those products. Derivatives can be high risk; losses can exceed your initial payment. FP Markets recommends that you seek independent advice. First Prudential Markets Pty Ltd trading as FP Markets ABN 16 112 600 281, Australian Financial Services License Number 286354.