After having been in a forex market for 6 years I feel that I can already share one simple and yet harsh fact for many traders which I still cannot avoid in my trading. This truth doesn’t have to do anything with your trading strategy.
In fact, I believe that many trading strategies are good and are profitable if they are used properly. I’ve even heard of a “flip a coin” strategy where you decide to buy or sell a particular pair just by flipping a coin. I didn’t practice this one (luckily)”¦
Take for example a simple “sell high and buy low” trading technique. It’s the best thing you can use when forex or stock market is in a ranging or swinging pattern. One can make considerable profit just by entering the market at the same strong resistance or support levels that were not broken in weeks, months or even years. The same can be said about smaller time frames, but then you have to be careful about false breakouts that happen quite often wiping out stop loss orders of scalpers. In this kind of strategy you just have to set the risk/reward ratio accordingly, so that when false breakouts happen, they wouldn’t take all your profit. 1:2 or 1:3 could be enough for selling high and buying low strategies.
What about following the trend or breakout strategies? They are the perfect tools when a forex pair breaks out of daily or weekly boundaries and starts moving fast in a trending pattern. Then all you need to do is just follow the trend, entering the market during the pullbacks or resistance/support breakouts and moving your stops along with the price. Nothing new here also (at least for me); we all know the rules and we all know more than one super duper strategy that could really make more than a hundred pips per week. So why are we losing in a forex battle? Why do we still have to face margin calls in our accounts and keep wiring more and more money to our brokers instead of wiring money from them to our bank accounts?
Well, it’s not a strategy that is pulling us down. It’s us, my fellow traders. It’s our character, our emotions, our lack of control and discipline. It’s lack of effort to move stops closer to entries, to close our trades when the market turns against us, to close our PC’s when the market goes nuts (it does that so often), to get out when the turmoil starts and to stay away for a while. It’s a lack of discipline in our money management, which turns out to be more important than just having a good trading system.
I’ve seen enough forex trading techniques and strategies in various copy trade sites that looked so promising at the start, yet failed many investors who relied heavily on them. It’s seems that there’s always a turning point or big failure at some time for every trader and the way he deals with it usually determines his future success in investment business. I can say exactly the same about my trading about 5 years ago. I started with a capital of 4000 USD and soon when the 2008 crisis came I made 8000 in just two months. My strategy worked and I was really ecstatic. However, when the bottom was reached major pairs started to recover bouncing up and down and my trend trading strategy wasn’t bringing vast profits anymore. It still worded, but I wanted those fx pairs to go another 1000 – 2000 pips down. I had a very positive recency bias and couldn’t believe that the trend was over. Well, every trend has an end and the rule “trend is your friend” works only when a trend is in progress. After 10 – 20 bad trades I still couldn’t believe that the trend is over. My capital was already diminished by 20% and all I had to do was take a break for a day or two, calm down, analyze my weak points and start over looking for opportunities to enter a new trend. I didn’t do that and instead I recklessly made another trade with a large margin against a new trend. I was angry that my strategy didn’t work and that was my problem. I was losing money instead of making money and that was so painful, especially when I dreamed about making a living from currency trading. In fact, my strategy did work, but it wasn’t suitable for that kind of volatile currency behavior at that moment. I just had to wait for my indicators to turn green again and enter the market with the same money management rules that I applied before. I didn’t do that and lost my money simply because my emotions took over my discipline and money management rules.
There isn’t a strategy that’s perfect and every strategy will bring you losses from time to time. Take a look at any currency charts – they are all chaotic with spikes, erratic movements caused by economic news, interventions, manipulation etc. That’s why we use stop losses and strict money management; to protect our capital against such unexpected price movements. What’s important here is sticking to your trading plan despite all the unexpected price movements and spikes and not changing your trading behavior. If you plan doesn’t work, then wait for better market conditions and make a trade again.
This is a guest post by Forexsignals24
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