Online Forex Trading
Let’s conclude this brief study by noting that in the chaotic environment of the Forex market diligent money management methods, and emotional control are just as important, if not more important than any kind of strategy or analysis. To learn Forex, we need to preserve our capital. And money management is what teaches us how to preserve it. With patience and commitment, it is not hard to succeed in Forex, but without those two, there’s no point in entertaining dreams about bathing in pools of gold and silver either.
You may feel as if you’re at a disadvantage starting your trading career with a relatively small trading account. But, as we will discuss in today’s lesson, that feeling is simply an illusion that stems from focusing on the wrong things.
One of the biggest challenges that most of you face as you trade is thinking that if you ‘only had more money’ you would somehow become a profitable trader faster. If you measure you profitability over one or two weeks, sure you may get lucky on a big account and make a good chunk of change real quick, but if you give it all back right after that, what does it matter? Profitability should be measured over a much longer period of time; at least six months to one year.
The point is this; if you don’t know how to trade profitably on small account, you won’t trade profitably on a big account either. Simply having more money to trade with does not mean you will become a successful trader faster. In fact, if you don’t know what you’re doing, it can mean just the opposite; that you can lose MORE money faster than if you had a small account.
You should read the rest of this article because it will help you…
I know exactly how you feel, I’ve been right where you are myself. You feel like you take one step forward and two steps back with your trading. You feel like ‘if only I had more money I could just make a bunch of money real quick in the market and quit my job’.
Sadly, my friend, it doesn’t work that way…
Do you think if you gave a $100,000 trading account to someone with absolutely no trading experience, they would do well with it? I’m sure you’ll agree they would probably not do well, at least not over a period of six months. In fact, they’d probably be down to 50k or less within a few months.
So, why do you believe that if you ‘just had more money’ it would dramatically improve your trading results? Not that you have ‘absolutely no trading experience’, but it’s safe to say if you’re reading this article, you probably are looking for some help for one reason or another and you haven’t quite become a master of your trading strategy yet. So, the problem is not money, the problem lies within you, and until you fix it, you will continue to experience disappointment and loss in the market.
You should actually consider yourself lucky if you don’t have a large trading account right now, because it’s better to learn and make mistakes on a small account than on a big one where there’s potential for greater financial and emotional loss / stress.
Change your mindset
The first thing you need to do is adjust your mindset from one of ‘I want to make a lot of money trading’ to one of ‘HOW can I make a lot of money trading?’ Once you do this, you will experience a change in what you are focusing on…
Think about this…how WOULD you think IF YOU DID have a big trading account? Well, you would not be thinking ‘if only I had a big trading account’…because you have it, so you would instead be focused on learning to trade properly and developing a successful trading strategy and plan.
Thus, you NEED to think ‘as if’ you have a big trading account already, because if you don’t trade ‘as if’ you will never make money. Instead, you will be constantly forcing the issue by risking too much and over-trading, since you believe so deeply that ‘money’ is the issue.
Your trading mindset NEEDS to make a switch from ‘money’ to ‘the process’. I’ve said it before and I’ll say it again; if you want to become a successful trader you have to focus on the process of trading, not on the money.
So, if you have a small trading account…
Here’s where the ‘rubber meets the road’, so to speak…
If you are going to trade as if you’re a millionaire, THEN you’re going to have to accept some realities of the situation…
You won’t be taking a lot of trades, instead you’ll be trading like a sniper.
You will be trading small position sizes on a small account, that is if you want to manage risk properly, and trust me, you do want to do that, you NEED to do that to not only build your account up but to stick around long enough to learn proper trading skills.
Money cannot motivate you at this point. Instead, be motivated by learning proper trading processes and habits, i.e., staying disciplined and patient / following your trading strategy to the T.
You cannot think about ‘recovering’ your losses…that’s the wrong mindset and it will only lead to more losses.
Why it’s ‘so hard’ to build a small account
As I mentioned earlier…you probably feel like you take one step forward and two steps back sometimes with your trading. On a small account this can be maddening because you feel like you’re never going to build it up.
Well, you need to also focus on holding onto profits. Don’t give back your winnings on the very next trade because you over-traded and were greedy. Imagine you are trading a 100,000 account…let’s say you made 10 grand on a trade…how would you feel if you immediately gave that much money back? Well, if you are giving back $100 winners on small account, you would be giving back $10,000 winners on a big account. You need to get all of these issues fixed before you trade bigger amounts of money. So, once again, be glad you don’t have a big account yet and focus on the process and on becoming a good trader.
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Trading a small account is not a disadvantage, especially if you’re relatively new to trading and you aren’t yet a consistent trader. How big your trading account is plays no importance in your overall trading performance or trading skill. Sure, if you have a bigger account you can trade larger position sizes and potentially make more money, but if you don’t know HOW TO TRADE, all the money in the world won’t do any good.
So, learn how to trade first, focus on the method and enjoy the journey. Stop worrying about ‘making money fast’ or ‘getting rich and quitting your job’, because the less you focus on those things the more likely they are to happen.
Anyone can become a trader, but not everyone becomes a successful trader who is able to trade for a living. In fact, as you probably already know, most traders do not succeed over the long-run. Why is this? What are some of the core traits you must possess in order to trade successfully long enough to be able to make a living from it?
Trading for a living is the dream, yet so few traders achieve it, and as you probably already know, the most frustrating part is that you only have yourself to blame for failing at trading. Let’s discuss six of the most important things you must possess if you ever hope to be able to make a living as a trader…
This one is pretty obvious, but I find that many, if not most traders, are trading for the wrong reasons and don’t really have the passion for it that they might think they have.
The best traders trade not only because they want to make money, but because they genuinely enjoy the intellectual and emotional challenges that trading the market provides. In order to become a consistently successful trader, you essentially have to have yourself mastered. Most people fail at trading because they eventually give into emotional impulse and urges; they want to make money fast and this desire clouds their judgement and logical / objective decision making and planning. You have to accept the mental challenge of trading, and enjoy it.
I can tell you right now that if your primary motivation for trading is to ‘make money fast’ or to ‘quit your job’ or to ‘save your life’, etc. you will not succeed and you will probably lose money rather than make it.
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“Of course I need patience to trade successfully”, you think to yourself. It seems like everyone agrees on this and understands it, yet so few traders actually have patience as they trade.
Patience in trading means that you wait for your trading edge to form before you trade. It also means that you are patient with your trades and you give them time to play out; you don’t get emotional at the first sign of a trade moving against you. Patience in trading means you take a ‘forest for the trees’ approach, meaning you don’t get lost in the temptation of the market, instead, you are constantly focused on the bigger picture.
If you are not a patient person, you will probably struggle with trading, but that doesn’t mean you cannot learn to be patient. You simply need to understand that patience will make you money much faster than if you aren’t patient. If you over-trade and over-risk (not being patient), you will lose money which obviously will set you even further behind your goals as a trader. If you haven’t already, check out my article on high frequency and low frequency trading to learn more about how trading less and taking a patient approach will actually make you money faster in the end.
Discipline and patience are closely related, ‘cousins’ if you will. Where they differ, is that discipline means you are sticking to your trading strategy and trading plan, that you aren’t changing trading methods constantly every time you have a losing trade. So, you have to have the discipline to stick with your trading strategy through the ups and the downs and understand that your trading edge (strategy) takes time and needs a series of trades to play out in your favour.
If you constantly waffle and change methods, you will never actually get your feet off of the ground so to speak. As I stated before, any trading edge needs a series of trades to see the edge play out. If you don’t give it a large enough series or sample size of trades, you won’t actually be seeing the true power or profitably of the strategy.
4. Confidence and independence
To make a living as a trader, you have to trust yourself first and foremost. If you find you are constantly looking for other traders’ opinions on a trade or on a market, you aren’t ready yet. You have to learn your trading strategy and master it, and then simply trust yourself and trust your gut feel.
You will not become a professional trader from taking someone else’s signals or subscribing to some signal service. You need to learn how to trade the market by reading the price action on the charts and then making your down decisions from there. Always remember that no one cares more about your money and your trading account than you do.
When I say ‘security’, I am talking about financial security. I am not saying you need to be rich, but in order to trade successfully and make a living at it, you have to be trading from a mindset of wanting not needing to trade. If you feel like you ‘need’ to trade in order to be happy or be successful in life, you are going to get too emotional and lose money.
People who feel they have no other option but trading, are starting out with an emotional trading mindset, which is definitely not what you want. You want a clear, calm and unemotional mindset as you trade, and this can only be achieved if you already have a ‘Plan A’, whether that is a job that pays your bills or school, etc. Trading can be your ‘Plan B’, but you need that more secure ‘Plan A’ in place so that you can develop and maintain the proper trading mindset that will allow you to eventually become a full-time trader.
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Finally, you need a trading edge if you hope to trade for a living eventually. A trading edge is the same as a trading strategy and it means the ‘event’ or pattern in the market provides you with an ‘edge’ over just a random entry. For my students and I, this edge is price action. We use simple price action patterns to give us a better than random chance of making money on any given trade.
Now, that does not mean that every trade will win, it means that over a series of trades, if we follow our strategy of price action, we have a positive expectancy. Meaning, over a series of trades, for every dollar risked we hopefully are making more than one dollar. Of course, this is also a function of your trade exits and money management, all of which I discuss in-depth in my price action course and members area, to learn more, click here.
You may have found yourself landing on a very convincing sales page recently for any one of the many automated Forex trading systems out there on the internet these days. Often referred to as ‘expert advisors’ or ‘trading robots’ when they are applied to the MetaTrader 4 trading platform, these trading robots are extremely marketable because of the pipe dream they give people.
The pipe dream of the fully automated expert advisor / trading robot system, goes something like this: “If you buy our system, you will be able to put your trading on autopilot and watch the profits build up in your trading account, nothing is required of you except buying and installing this amazing piece of software into your trading platform”.
Sounds (too) good right? On the surface, of course this type of thing sounds good and as a result, of course it’s easy to sell to unsuspecting newbies in the Forex market. However, as we will discuss in today’s lesson, a little savvy research on your part and a sceptical approach to these robotic trading systems will turnover a whole host of ugly problems that should make you RUN, not walk away from them….
What is an Expert Advisor or trading ‘robot’?
Expert Advisors are programs that allow automation of the analytical and trading processes in the MetaTrader platform. They typically do this via you buying and then downloading a file onto your computer and then installing it into your MetaTrader 4 trading platform as a plugin / add on.
After this, the ‘magic’ (supposedly) happens; the software will determine when to buy and sell various currency pairs (usually you have to only use the pair or pairs suggested by the software seller), it will also typically include a risk management script of some type.
The main attraction here is that there is little to no need for you to do much of anything other than install the software. You can even set the number of lots to be traded, although you can typically over-ride this input, so that essentially eliminates a lot of that “no human emotional errors” advantage that these systems try to sell you on.
In short, trading robots and expert advisors promise to fully automate the trading process with the main marketing attraction being that the human emotion and thus human errors are removed from the process, or so they claim. However, as we alluded to earlier, this is little more than a pipe dream when you dig down into the surface a little further…
Why you should stop falling for robotic trading systems that ‘look’ amazing…
Unfortunately, in the world of Forex trading systems and strategies, there are all sorts of people looking to sell you very expensive trading systems via very convincing sales pages that look and sound very professional. However, if you dig into them a little bit (literally any of them) and do some research, you will quickly find the systems are unsustainable and they are just showing you an ‘ideal’ looking track record over a fixed period of time. It’s also possible to make fake track records that look ‘real’, so take any ‘track record’ you see advertised as ‘proof of performance / results’, with a grain of salt.
These system-sellers (notice I didn’t say ‘traders’ because real traders wouldn’t sell these things) aren’t typically explaining to you that you will need very large stop losses on many of these robot expert advisor trading systems, so large that one losing trade will wipe out of much of your account.
When market conditions switch from favourable for the system’s rules to unfavourable (typically trending to non-trending), the system will result in losing trades, and as market conditions are never fully predictable, the only way to truly adapt to changing market conditions effectively, is with the discretionary capability of the human mind trading from the natural price action of the market.
Not only will you lose money on the cost of buying these robotic trading systems (many are $800 or more), once the system fails you, you will probably lose any profits you’ve made. Not only will you lose profits, you will have learned absolutely nothing about trading or how to read a chart’s price action, so you will be left in a frustrated and angry / desperate state of mind which will probably cause you to lose even more money in the market via over-trading / gambling.
Don’t be fooled by the modern day snake oil salesman approach to trading the Forex market; there’s no easy way to make money as a trader, and indeed I might be one of the few trading educators who will tell you that, but it’s the truth. The ‘easiest’ way to make money is by learning a sound and logical trading method that is either purely or mostly dependent on reading the price action in the market, proper trading psychology and proper money management practices. This basic formula has worked since the days of Munehisa Homma; one of the first price action traders, and through proper training and screen time, it can still work today.
Don’t underestimate the power of the discerning human mind
All you need to do is look back at the greatest traders of our time and of generations past. Were they fully dependent on automated trading systems? No. Sure, they may use some type of trading software, but behind any outstanding trading performance is a human being, more importantly to my point, a human mind.
The traders and investors interviewed in the market wizards books largely had a discretionary and discerning approach to the markets. In other words, when you boil it all down, they were making judgement calls in the market, and very good ones at that. They were not using ‘expert advisors’ or automated trading systems, and for good reasons.
The only way any computer program will ever be able to compete with the potential of the human mind in trading, is if (when) we develop true A.I. or artificial intelligence, which by most accounts is quite a ways off. Until then, your best bet is to rely on the best ‘computer’ of them all to make your trading decisions; the one between your shoulders. Your mind is your biggest and most powerful weapon in the market, make sure you develop it properly by getting a solid trading education that will help you build yourself into a skilled and successful price action trader.
If we sat down and had a conversation about trading in person, I would discuss the following ‘ten commandments’ of trading with you. What follows are ten of the most important aspects of trading that you need to understand, accept and implement if you want to trade successfully and profitably. So, without further ado, here they are…
1. Know what your trading strategy is and master it.
It’s always surprising to me how many people don’t actually even have a trading strategy but still try risking money in the market. If you do not have a strategy that you’re trading with, meaning a trading edge that gives you a better than random chance in the market, you are just gambling and may as well just go to the casino instead.
Having a strategy and mastering it, takes time, effort and discipline, which is also why many traders do not have one; they don’t want to put in that time, effort and discipline. If you think you will just ‘wing it’ and somehow make money in the market, you are wrong. Trading success is not the result of luck or an accident, it takes effort, dedication and passion.
Furthermore, once you have actually mastered an effective trading strategy, like price action, you have to stick to it, you cannot waffle and jump between trading strategies as many traders do. Trading involves both losses and wins, and you’ve got to be able to have the fortitude to keep focused during the losses. If you jump ship, and abandon your trading strategy after a couple losses, you haven’t given it the proper time to play out and work in your favour, and you will just be on a never-ending, futile quest for a ‘Holy Grail’ trading method that does not exist. Have a strategy, know it, master it, and stick to it.
2. Be honest with yourself.
If you’re drowning in a sea of debt and you really can’t afford to lose any money, you probably should not trade live any time soon (but you can learn and demo trading in the meantime). If you aren’t in a financial position to risk money in the market, you won’t be in a mental position to do so either.
What I mean is, people who are trying to trade but who also can’t really afford to lose any money, are already approaching the market with the wrong trading mindset. You will never be able to let a trade play out or properly absorb losses if you are constantly worried about losing money. Losing money is a part of trading, you will lose and win, and if you know what you’re doing, hopefully you will win more than you lose at years end. But, to do that, you must be in the right frame of mind, and this won’t happen if you can’t afford to trade. Be honest with yourself about this so that you aren’t starting with the wrong mindset.
3. Trust yourself – trust your gut and ignore ‘tips’
Once you learn a solid trading strategy, it’s time to block out the rest of the world. Ignore the pundits on CNBC and other financial media; these people get paid to provide an opinion…an OPINION, not a fact!
I don’t know about you, but I trust my own opinion about whether to risk my money or not, more than anyone else’s. If you don’t yet trust yourself, you will eventually. You just need to get some training and screen time in the market, and over time you will gradually build your own trading skill and gut feel about the market. This is really the only way to ‘beat’ the market in the long-run. This is also why anyone trying to sell you some mechanical trading system is simply full of B.S. and doesn’t know what they’re talking about, or simply doesn’t mind stealing your money. Professional traders trust themselves first and foremost and they don’t give a S%@! What the rest of the world is saying; they only care about what the price action on the charts is telling them.
4. Don’t let the results of your last trade influence your next trade
This one is big. Traders often become overly-influenced by their most recent trade. For example; you had a trade that hit your stop loss by one pip, then went roaring back in your favour. What do you do? How do you react? It’s these situations that make or break you, that separate the winners from the losers, the pros from the amateurs.
A pro trader in this example, will not be affected by such a situation, whereas an amateur will be mad, angry and want revenge on the market. It is true that you’ve got to have ice in your veins to trade successfully, because if you give in to every little feeling and emotion that the market stirs up in you, you will be an emotional wreck of a trader and quickly lose all your money.
The main piece of logic or fact that will allow you to trade with ice in your veins, is that any one trade has a random distribution of being a winner or loser. What that means, is that your winners and losers are going to be randomly distributed across a series of trades, to learn more about this, check out the article I wrote on it here.
For example; if you expect to win 60% of your trades, over a period of 50 trades that means you’re going to lose 20 of them…but you don’t know WHICH 20 will be losers. Therefore, if you have 5 losers in a row, but you haven’t yet lost 20, it’s still within the natural statistical variance of your trading edge and so there’s absolutely no reason to become emotional or do anything stupid as a result of those 5 losing trades. It can be tough to remember this in the ‘heat of the moment’, but if you don’t, you will probably give in to those emotional impulses that drive you to make stupid trades, and lose money as a result.
5. Control losses, do not avoid them
I get emails from traders every week who are clearly trying their hardest to avoid losses. They tell me they aren’t trading with stop losses or ask me “why a perfectly good trade setup failed?”
The truth is; you cannot avoid losses in trading. So, learn to control them through risk reward and money management. The sooner you do this, the easier your life as a trader will become. If you try to avoid losses, you may do it for a while, but when you do inevitably have one, it will be big and bad, and cost you a whole lot of money.
Trading is about controlling losses and containing them under a certain 1R dollar amount per trade; not avoiding them altogether, because that is an impossibility.
6. Preserve your trading capital for the ‘easy prey’ trades
Too often, traders waste their trading capital on trades that either don’t meet their trading strategy criteria, or are very poor setups. One of the most important ‘rules’ of trading is to preserve your capital so when the obvious setups come along, you can ‘jump’ on them like a trading predator and get the most from them.
This means, you shouldn’t be in the market all the time. In fact, most of the time you should not be in the market, but you should be observing as a ‘bystander’, waiting for those ‘easy prey’ trades to form. Then, when they do, you have plenty of money in your account to take advantage of them since you didn’t waste it all on poor trade setups.
7. Be excited about trading, not about money
To excel at anything in life, you have to be passionate about IT, not about what it can do for you. Trading is no different; you must love trading and love looking at charts and price action to become a good trader and eventually make money. Professional traders make money AS A RESULT of their love and passion for trading, not because they ‘want to make a lot of money’. Therefore, you need to put your focus on learning to trade properly and becoming the best trader you can be, not on ‘making money’.
8. Plan your trades
Too often traders jump into the market with no plan. They have no risk management strategy, no exit strategy and often even just enter on a random ‘gamble’, with no entry strategy.
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Next, you need to know what your entry is and when you see it, you can enter, but only then. Don’t jump in when your entry signal or strategy is not present, this is called gambling. Before you enter, you need to plan where you’ll exit or at least plan your trading exit strategy. You might end up deviating from this strategy depending on market conditions, but it’s important that you have a plan of how you’d prefer to exit a trade and not deviate from that unless you really feel compelled to by a dramatic change in the price action as the trade unfolds.
If you just randomly jump in the market with no risk, entry and exit plan, you will end up losing money for a whole number of reasons such as over-trading, over-leveraging, not taking profits / letting winners become losers, etc.
9. Be realistic.
You aren’t going to become a full-time trader in six months, probably not a year, maybe not even five years. I hate to be the one to break this to you, but someone has to. You need to be realistic if you want to succeed at trading. I consider ‘succeeding at trading’ to mean making money over the course of a year, but if you have a small account, you aren’t going to get rich quick, nor should you be concerned with doing so. Your goal at year’s end should be to have made a profit, if you did that, then you can consider that a successful trading year. Obviously, some years will be better than others.
Furthermore, the trading mindset required to make money, is one of being focused on learning how to trade properly, not on ‘getting rich’, profits or rewards. Making money at trading is the end result of being realistic and doing a lot of things right, consistently over time. It doesn’t happen just because you want it to. People often assume trading is an ‘easy’ way to make money, but like anything else, it takes time, effort, dedication and passion to the craft. A professional sports player makes a lot of money, but only because they are sickeningly passionate about their chosen field. Thus, the passion and mastery is something you must possess before the money will come, in trading as with anything else in life.
10. Get proper training
Whether you’re a total beginner or you’ve been trading for a while but never really had any real training, you need it. Trading education is the foundation of your trading career, without it you will basically be wandering around in the dark hoping to stumble upon the right path. I am always surprised how many traders are willing to lose money in the markets before they’ve actually learned how to trade. Take the time to learn and make a small investment in your trading education if you want to give yourself the best shot at becoming a successful trader. To learn how I trade with simple price action strategies, check out my trading course here.http://theforexlibracode.com/