If you ever have the chance to meet and talk to professional traders, the one question to ask them is which strategies they use and why, for underlying this simple question, is an undeniable truth which is simply this – that without a strategy, then you will fail and ultimately lose all your trading capital. It is as simple and brutal as that. Now some reading this may disagree, but in my humble opinion, and as someone who has been involved in forex trading for many years, the difference between success and failure is largely governed by your ability to stick to a pre-defined FX trading strategy.
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Trade in the forex market without a strategy (or indeed any other market ) and you will fail. To become a great trader and become one of the top 10% who survive and make money in the long term, you need a trading plan, and a set of FX trading strategies that you follow to the letter, each time a forex trading signal appears. As in many other activities, doing the simple things well, will ultimately lead to success longer term, and developing your own forex strategies in advance, will provide the platform for you to succeed. Without one, you will fail, I can guarantee it!
Anyone who has ever traded knows that at the end of a forex trading session, you will be drained both mentally and physically as the forex markets exact their toll on your trading psyche. Although trading is not easy, many novice traders make it even harder, firstly by failing to have any strategy in place, and secondly by failing to understand that their own style of trading should be matched to their underlying personality. Trading against your natural persona is another classic mistake that many traders make when first starting out, and before checking out the various brokers or forex trading platforms such as ETORO, the first step is to understand your own personality, and then to match your forex strategy accordingly. In other words, what kind of trader is inside, and to illustrate the point let me give you two simple examples as follows :
Forex Trading Strategy – Short Term
This is a simple FX trading strategy using mini lots, where a 1 pip movement in the currency market, equates to a $1 movement in your fx account and involves scalping over very short time frames. The strategy can be based on any forex trading signal, such as a tweezer bottom or tweezer top, a break above or below a moving average, or perhaps a breach of a bollinger band. Whatever the trading signal in our strategy may be, we would be trading many times a day, with small profit and loss profiles on each trading position, tight stop losses and controlled risk.
Now the key point to realize from a trading personality perspective is that this strategy highlights several different aspects of forex trading, which could either reinforce or run counter to your underlying personality, where risk and stress correlate directly. Whilst it is true that using this strategy your risk on each trade is low, the stress of trading many hundreds of times a day is extremely high, and of course, although each trade loss could be small, over a day these could easily amount to a substantial loss. The flip side of course is that each trading position may only yield a small profit which may be less stressful for you, rather then letting your profits run as all traders need to, and then having the stress of seeing a potentially large profit disappear as you wait in the hope that the market continues on it’s original path.
The stress during a potential loss making position is in fact lower than that created from seeing a potentially profitable position evaporate, which will occur all the time in a forex strategy based on scalping or shorter time frames. So whilst the strategy appears low risk and potentially low in stress levels, this is not necessarily true, and you therefore need to consider carefully how your underlying personality will cope with the huge emotional swings you will suffer as a result when trading using this particular forex strategy.
Forex Trading Strategy – Long Term
As an alternative to the above, consider a longer term trading strategy using trends. The currency markets are one of the strongest trending asset classes available, and as such provide the forex trader with the option for long term FX strategies based on a buy and hold strategy. The stress of intra day trading is dramatically reduced as trades are generally open for several days if not weeks and months. Stop losses are often very wide, and positions swing in and out of profit but without the stress of short term whipsaw price action taking out your stop loss. This form of strategy may be more suitable if your underlying personality traits are patience, discipline and a methodical approach to life in general. Naturally any losses could be larger but this is offset by the reduced intra day stress of high speed trading.
Between the above two extremes, there are of course many different FX trading strategies, each of which will require different trading skills, and also offer different levels and types of stress to the novice forex trader. However, as I have outlined above, there is more to the above forex trading strategies, than simply a technical difference between one that is based on short term multiple trades, and another that involves fewer trades over a longer term. Underlying each strategy is a series of stresses, and in order to be a top forex trader, you will need to analyse your own personality, and to match your forex strategy accordingly. If you fail to follow this simple strategy, then all your other efforts will be wasted, as you are essentially trading against yourself, all the time.
As such, fear and emotion will rule all your trading decisions, as you are not in control, and are trading well beyond your comfort zone. So take the time to analyse yourself, and be honest with yourself – if you cannot handle losses, then you will not be suited to trading, whatever the trading strategy you finally choose. Last and by no means least, at some point in your forex trading career, whether you are self taught forex trader or a professional, you will have to ask yourself one simple question which is this : ‘Am I improving?’ – a question that you have to answer honestly.
The simplest way to do this is to check your forex trading records, and see whether your profits are increasing over time, or decreasing. If they are increasing then continue, develop your forex strategy, and continue to make money slowly, learning as you go. If the answer is no, you have a decision to make. The first is to change your FX trading system and try to develop one that is more aligned to your personality. The second is harder, and it is to accept the fact that you are not suited to forex trading, many people are not, it is a simple fact of life, but at least you can comfort yourself with the fact that you have tried – there is no shame in trying, and provided you have used solid risk and money management techniques, then you will not have lost all your trading capital ( well I hope not anyway!). In the next few weeks I will be adding detailed explanations of some of the FX strategies that I use myself, which I hope you will find useful.