A Beginner’s Guideto Forex Trading
by Chris Capre
Having a Successful Trading Psychology
So far we have talked about the need and the importance of developing a trading strategy and adhering to it. However, quite often traders deviate from their established path or thoughts and take decisions which are actually in contrast to their trading plan.
Actual trading decisions are very often driven by the mindset of a person and the way he/she reacts to the market movements. So the key to successful forex trading is to develop a trading plan and manage your trades correctly by ensuring that your psychology and mindset are geared towards successful trading.
There are many things you will become aware of when trading forex, such as;
The bottom line is trading forex is a highly mental game, and it is a tool you have to constantly prepare and sharpen to trade successfully.
Fear and greed are the two main emotions that need to be watched as they are capable of forcing a trader to over-react. Fear often manifests as either not taking a trade when your system gives you a signal, or exiting a trade too early before your stop or limit is hit.
Similarly, greed may cause a trader to use too much risk or violate their risk profiles which is often the result of over-confidence in one’s ability. The best way to conquer fear of the market is to make sure that you never risk more money than you are comfortable with losing on a trade. In fact, you can reduce the risk to a ‘I don’t care amount’ so if you lose, you will not be thinking about how much you lost.
Another thing that traders need to know is that there is no sure way of trading and so if they suffer a loss when they were sure of earning good profits, they should not go into a spiral of anxiety. Try not to define yourself by every trade you make. It is just a small drop in a bucket of hundreds of trades you will make over time. Professional traders are trading and thinking in probabilities, not just what happened on the last trade.
So the best option for successful forex trading is to develop a sound trading plan based on rational thinking, and adherence to it at all times despite your fears, greed and other emotions. But in addition to this, one must work on building a successful trading psychology.
Building a Trading Plan
The key to becoming a successful forex trader is developing a sound forex trading plan and using it on a daily basis. One must remember that a trading strategy that may be working well for one person might not do the same for you. This is because everybody has a different style of thinking, risk tolerance levels and market experience. It is always better to develop one’s own personalized trading plan and modify it as your experience grows.
So, a trading plan should define a few things;
- what trading strategies you are using
- what pairs/instruments you are trading
- what are your risk tolerance levels
The first thing it should mention is what strategies you are using. So if you are trading pin bars or engulfing bars off key support and resistance levels, then it should state this in your plan. If you find yourself trading something else like inside bars, then you know you are deviating from your plan.
The next thing it should state is what instruments you are trading. For example, you may be only focusing on the EUR/USD, or perhaps the EUR/USD and GBP/USD. Make sure to state this in your plan.
Lastly, you want to have your risk tolerance levels clearly stated. This is not just % risk per trade, but also per session and per month. This way if you ever go over these parameters, you stop trading for the month and take a break as something is clearly not working.
But the key is to have these clearly defined ahead of time.
- Make sure that you maintain a trading journal which has logs of all your trades. This is important because it allows you to analyze your trades and the success of the plan adopted by you. It should include the entry date, entry price, exit price, stop, limit, total profit/loss, and final notes which are your personal notes on each trade.I also suggest taking screenshots of every single trade you take, and color coding them based on it being a win or a loss. Then at the end of the trading week, reviewing your trades to see how you did, what mistakes you made, and what you can improve/focus on for next week.
- The plan can have a checklist of what you are looking for in the market before you decide to enter a trade. A list of such prerequisites helps to keep you trading with discipline and avoid any careless moves.
The creation of a trading plan is highly useful as it reduces the possibility of bad or irrational decisions based on emotions. The outlining of a plan for every potential market action will help you minimize such decisions and thus your losses. The key to disciplined and objective forex trading is to establish a trading plan and stick to it.