Along the way to a moderate amount of consistent success (by my own modest standards) in forex trading, I have found a few keys to successful self-management as a would be forex trader. These tools can be used for any type of trader, and in any market.
This should be second nature to a trader in my opinion, as with any mentally intensive field. Even before I started demo trading, I was reading as much as I could, watching as many videos as I could, and organizing my thoughts and observations about trading. Learning is what keeps our minds young, and expands our horizons, so it should be something a trader enjoys. Throughout the course of this blog, I will provide some of my best sources of data, and some of my methods to organizing that data.
Having a plan is an ideal place to start if you are just new to trading, and even if you have traded for a while, it can be a worthwhile endeavor. Where have you been, and where are you going? A good journey often starts with a plan or outline. Sometimes it is thrown together last minute, sometimes that plan is loosely sketched in broad strokes, and sometimes it is planned with extensive attention to detail; regardless, having at least some idea of why you trade and what you plan to achieve is a good idea.
Rules and Strategies
Assembling and improving your tactics is one of the most important aspects to trading; if a trading plan is your outline, then your rules and strategies can be considered your blueprint for constructing a trading business. The blueprint is an abstract concept and is open to change as circumstances change. For example, when I was starting to trade, I primarily used visual analysis, with my main indicator being the bollinger bands. To me, buying low and selling high or selling high and buying low was intuitive and seemed natural. I was even successful for a while, constantly earning, no matter what. However, as the market changed tone, I was slow to notice, and I allowed habit to dictate the course of my trades, which was damaging to my bottom line. I had to expand my strategies, so I researched and I experimented. While I still make use of bollinger bands, that one strategy is only a single tool amongst the many in my tool box, applied when the circumstances indicate their usefulness. Some important considerations for a traders strategies are answers to basic trading questions:
When to enter the market
For me, I tend to trade mornings, during the European/London trading day, and early American times, and occasionally, during the American afternoon. The reason for this is because price action tends to be the most active during these times, which means that if my trades are good, my potential for profit increases. I will occasionally trade outside these times, but rarely.
What conditions are needed to begin trading
I need to at least have the potential to earn money, which means that I need to see opportunities that present a high probability for my strategies to succeed. Also, I need to be in a reasonable state of mind, with a decent night's sleep behind me, usually an hour or so after I have been awake; at this time I am at or near the peak of my alertness and energy levels for the day. I need to either be in a good mood, or on my way to being in a good mood otherwise I will stay out of the action. Everything else in my life is preferably on hold, an out of mind.
When do you avoid trading
Typically, I will avoid trading when the market is erratic. Some people avoid big news days, but since some of my strategies revolve around news, I have learned to adjust to the price action that happens during large news events. I tend to avoid Friday afternoons (16:00GMT and onwards), Sundays, holidays, and periods of low liquidity. The only way that I can describe trading on a holiday is that the price action is extremely erratic and that price can move in a choppy fashion that makes me uncomfortable.
When to open a trade
Obviously this one is subjective, because entries are defined by strategies. The rule here is that the probability of the trade working should be in my favor. I almost always have mental stops placed even before I open a position, and assign them as soon as I hit the buy or sell.
When to close a trade
Again, this is subjective, but with every trade I try to exit when my position is in profit, with the idea that even a partial profit is better than earning nothing or taking a loss. In fact, my profit target is rarely hit, but I have managed to continually improve my equity on the basis that I am always moving my stop loss inside profit at the nearest opportunity when price goes in my favor. In most cases, I have the philosophy of letting my winners run, which means that I give a profitable position a chance to run higher; I use my stop-loss to lock in profit, and then move it up as the market moves up, usually allowing for a decent amount of retracement. Occasionally, I leave a large amount of money on the table if the price swings against me, but sometimes, this has allowed me to take a 1:3-5 risk/reward on my trade when the market has moved heavily in my direction. In terms of losses, the issue is even more subjective. In the first few months, I would take some losses needlessly because I did not understand enough about support and resistance, so I would often set my stop loss incorrectly. There is nothing more frustrating than watching your stop get taken out, and then watching the market swing back in your direction and hit your target. Sometimes, you have to look at larger time frames and determine major areas of support and resistance. If you are too slow to get out of a negative position, it is sometimes beneficial look at a larger time frame, where you can spot a new area of support, place your stop below and apply some patience. This is not for everyone, because it is hard to see a -100 or -150 pip position on your account; but if you have the fortitude of will, the margin, and some solid evidence that the price will move back in your favor, or at the very least, to a break even situation, then you can avoid a loss. The key to this tactic, is to not apply your full commitment to a position at first, where you keep plenty of margin in reserve to absorb a negative balance, and look for other opportunities in the meantime.
The lesson is that the market does change behavior, and when it does, so must the tools. As with strategies, rules must change to suit the market. In my first few months of trading, I would assign stop losses and profit targets based on an arbitrary dollar amount, but as I learned something about resistance and support, this became obsolete. Yet, having and following a set of rules is the only thing that a trader can control, and can save a trader from ruin and guide them to success on regular basis.
Having a diary is great tool for any trader; I've read or heard this tip in at least a dozen places and I don't think I'll stop using mine for as long as I trade. In fact, this blog is part of that journal. How you use the journal or what you write is your business. Some people like to write down all their trade ideas before they execute them. For me, trading is all a matter of successful analysis, planing and timing so I usually do not have the time to write all of my ideas down; by the time I've written it down, in some cases, I've missed my entry, but I do it when I can afford the time, i.e. when the market is moving slowly. I use my journal to write out my ideas when I'm not in the market, most often when I am away from my office, and enjoying a coffee. Being away from the action give me the chance to look at my activities with a more relaxed perspective; I can review my issues, my successes, my opportunities for improvement. I can make plans, go over my goals, review my rules and strategies, and I can be honest with myself if I have adhered to what I have written.
Setting both long term and short term goals is a very good thing to do on a regular basis in order to measure your progress. In my opinion life is about the journey rather than the destination, which means that the bulk of life is spent getting somewhere and the arrival is only a sliver of the whole experience. However, if you have a destination, you have a direction and a purpose, and the impetus to start the important part, the journey. If you have regular goals, you can measure your success by your own standards in time. If you are exceeding your goals you can start increasing your goals. Having progressive goals is one way to give you a motivation for improving your game. If you are missing your goals, or not getting close to them, then you can start to examine why missed those goals; perhaps your goals were unrealistic, or perhaps you had some issues outside your trading activities that forced you to lose some time and productivity, or perhaps you need to identify what you are doing that is holding you back from your potential. Another means of setting goals is to do it visually, both in the mind, and with a goal board. If you want to use your trading proceeds to fund a vacation, put up a picture of where you want to go, or if you want a new car, put that up on the wall.
In my experience, having a good attitude goes hand in hand with goal setting; if you enjoy trading, then it makes the process that much easier. I have found that while I may not always be winning, having a good attitude is key to staying in the game and prospering. Even taking losses can be viewed in a positive light, if you understand that losses can be powerful lessons for your future trading success. If you believe in the Laws of Attraction, as I do, then you can apply them to your trading as well, with often surprising results.
Something that most successful people will do on some level or another is to monitor their activities to measure their progress in life. I can't verify this fact because I haven't spoken to all or most successful human beings, but I do notice that many successful people write about their exploits as either trade books, or biographies which are form of self-review. This is where you can be honest with yourself regarding your activities as a trader. Did you follow your rules? Did you break them? If you broke them, did you do it for a very good reason? Perhaps the rule needs to be changed. You can review your activities daily, weekly, monthly, yearly, but regardless, it is a good idea to go over your performance because it is a great opportunity to spot areas where you can improve your trading.
At first when I started using a graph and spreadsheet containing my profits and losses, I experienced difficulty stopped using it for a period of a few months. I was being dishonest with myself over the fact that for a time I was taking on more losses than gains, and it was painful to commit to a document, and also because, I needed to focus on improving my performance rather than documenting my lack thereof. Nonetheless, even though the losses are painful when they occur and ugly dips in an otherwise increasing curve, I update my equity curve at the end of every trading day to remind myself of what I am doing correctly and what I am doing incorrectly. This provides me with a reality check when I need to improve, and it also shows me graphically the sum of my work over the course of my career. In so doing, it gives me a visual representation (other than my available margin reading on my trading platform) of what I need to protect when I'm in the market; it is an additional pause button for my mind before I think about taking excessive and less-probable risks. Before I open a position think about the other side of the deal, where I may be wrong and I may need to document a drawdown at the end of the day, as a result. This is also helpful in that I have a few built in formulas calculating certain percentage amounts of my available margin, daily. Many successful traders have a rule where you expose a certain percentage of your account on each single trade, some of which apply this to all deals at any single point in time. This percentage varies depending on who you talk to or listen to, it can be as low as 1% or as high as 10%, I've even heard of cases where some traders expose their entire account when they trade, but I imagine they are crazy or that they really know what they are doing and extremely focused and disciplined. Regardless, my spreadsheet shows what the value, in dollars, of 1%, 3%, and 5% of my total margin. This is the amount of exposure to the market I am willing to take in most cases. I have violated the 5% rule on a very small percentage of my total trades, but I have had good reason to do so in these cases; sometimes I have paid the price of a very ugly drawdown, but in most cases, the calculate risk paid off rather well. One argument for going over this percentage might be when you are in a progressively improving trade (but not a progressively diminishing one), you increase your position, or so argues Jessie Livermore. In any case, I have accepted responsibility for each trade before entries, and after exits, regardless of whether or not they were at a profit or a loss.
Although I have found some success with these tools, I am always on the lookout for improving my game, learning new tactics, and overcoming weaknesses and improving my strengths; as with life, trading is not about achieving perfection, but constant attempts at improvement.