Forex trading is one of those things that can seem really subjective. Everyone has their own preferences on how to get the job done. I don't think I can say for sure that there is an absolutely right way, but there is many wrong ways.
As a trader, your method has to be something that makes sense on paper, and when you are trading live. If you want to make money trading forex, there is more than one way to skin a cat.
Scalping
This is one of my least favorite methods. Scalping is when you are basically just trying to scrape a few points here and there. It can seem easy if you manage to be successful at it for awhile, but it tends to be a method of luck, meaning you can lose just as easily as you can win. There isn't much rhyme or reason to it.
The Forex Daytrading Method
Along with scalping, daytrading is one my personal least favorites. There are people that do like to be tied to a screen all day and make money while trying to make intraday trades. Day trading is typically technical trading that is based on technical indicators and occasionally some news. It requires some reasonable amount of skill, that usually has to be learned with experience. If you are just beginning to trade forex, day trading probably isn't for you unless you start very small with your lot sizes.
Big Picture Forex Trading
Big picture trading is looking at the larger charting timeframes. Looking at currency pairs over days or weeks and trading the trend of those timeframes. This is one of my favorite methods because you aren't left hinging on every pip up or down. You work over many days, or months and set big targets and wide stops. You still need to trade small as a beginner, particularly because on these charts moves can be thousands of pips, so you need to plan accordingly. However, the movement is so slow that it lessens the emotion if you are trading with care.
Automated Forex Trading
There are several different ways to do automated forex trading. You can depend on signals given by a signal provider or simply run an expert advisor on an install of metatrader that trades based on preprogrammed signals. I don't personally care much for automated trading as it's pretty difficult to find a good system that survives in most market environments. I consider automated trading something that is good as an alternative strategy that you run alongside your real trading strategy. If you plan on engaging with automated forex trading, make sure to keep it a small part of your trading plan. Don't wager large amounts on software with a slick sales page. Unless you've seen results for yourself, nothing is guaranteed.
No matter how you plan to trade, you need to keep your emotions in check, watch your risk, and be honest with yourself when you are having trouble. Even professional traders don't like to admit when they are having a losing streak, or what is causing it, but it only hurts your bottom line when you don't face problems. That's a bit of a general business principle, but it strongly applies to trading.
Forex trading will eat you up and spit you out if you don't handle yourself and your trades properly.
Did you find this blog helpful? Let's start your forex trading with us as we have been award as FOREX EXPO AWARDS 2011 Best Forex Broker In The Middle East.You can contact us at http://www.gcminternationalinc.com/
If you are serious about making and keeping money by trading stocks, then there are three things you need to do, and do well.
- Money management
- Orders
- Trading system
Money management
Money management comes first. Without a rock-solid method of managing your trading funds, you trading results will be only be fair at best. Money management is more than just knowing how much money you have tied up in a trade. It's a method of using the right portion of your trading account on any one trade relative to the perceived risk and reward.
There are a few things to consider to managing a trade successfully:
What is your account size?
Your account size determines how long you stay in the trading game. If you are skillful, then you will not require a large account. On the other hand, even if you are a new trader, you can use a small account as long as you control your risk.
Controlling the risk means never using more money then you need on any one trade. A very simple formula for stock market success is to risk less than 3% of your total account value on a single trade.
If you have a $10,000 account, this means you never lose more than $300 per trade. If your account drops to $9,000, then you risk less than $270.
As your account grows, while the total amount at risk increases, you still only risk a maximum of 3% of your account. Say your account is at $12,000, then your maximum amount at risk is $360.
In theory, this ensures that you never go broke! And that is of utmost importance.
How profitable is your trading system?
If your system is profitable, then you will typically win more money then you lose. While some consider the percentage of winners relative to the number of losers, nothing could be further from the truth.
It doesn't do you any good to have a system that wins on nine out of very ten trades if you give all of your gains back on the one loser. More important is that the winners overwhelm the losers.
A profitable trading system might have a third of the trades result in the maximum loss planned for, a third of the trades either make or lose a little money, and a third of the trades bring in the profits.
What is the initial amount at risk on a per share basis?
It's worth repeating, risk no more than 3% of your total account value on any one trade. If you keep this in mind, you are ensured of minimizing losses to your account. At what price you enter a stock and where you place your initial stop price are used to determine how many shares you trade.
What is the profit potential?
The profit potential of a system is the 'edge'. If you can estimate how much money you *might* make over time, and if that profit comes from many trades over time, then you probably have a winning system.
A trading system will either have a profit target that determines when to enter AND exit (good) or it will tell you when to enter and keep you in a profitable trade as long as possible without giving back much, or any, gains (better).
Orders
No matter what trading pattern you use to enter a stock, you will make the most money by using the correct orders.
When you wait until a stock has proven it's intensions - typically by trading above the previous day's high for a buy, or below the previous day's low for a sell short - then having an order in place that captures that exact price is crucial.
Let's say your favorite trading pattern signals a buy for. If you are an end of day trader, then the next morning you watch the opening price for the stock. If the stock opens less then yesterday's high, you place a stop order to buy above the previous day's high. Even better is to include a limit price with that buy stop order.
How much above the previous day's high is your call. As long as it is greater than the previous day's high, you are making the stock prove that it is going up.
Sure, you give up some of the profit potential. But you are more likely to turn a profit with a stock that is moving in your favor.
Once you are in a position, then you need to protect yourself from loss. If your method of picking stocks is good, then it's unlikely that the stock will revisit the current prices. Continuing with the buy example, to protect your account from a catostrophic loss, place a good-till-cancel sell stop order below the recent low. If yesterday's low is lower then the current day's low, that's where the sell stop order goes.
And make certain that the order does not include a limit. Stocks can and do gap down. Expecting that you will have a sell order filled at your stop price is a quick way to the poor house.
Trading system
Your choice of what method to enter and exit stocks plays a critical part in your stock market sucess.
A great trading system looks for low risk opportunities to enter a stock. Knowing at exactly what price signal to enter and when to exit - even if it is for a small loss - will keep your account growing. As long as you consistently follow the rules layed out by a well designed trading plan, you can count on steadily growing your trading account.
My favorite trading pattern does a great job of identifying stock likely to move rapidly in your favor. There is no reason to be trading stocks that are not ready to deliver the biggest gains in the least amount of time.
If you are serious about taking your stock trading to a higher level, then read about this trading pattern.
Develop your trading strategy based on an edge
A trading strategy is a set of rules that help a trader make decisions in the market. It takes away subjective judgement and guessing. A strategy is based on an edge and the rules identify when that edge in the market is present.
A trading strategy answers the following questions:
What are the best conditions in order to enter the market?
What are the best conditions in order to exit the market, i.e. where are your stop losses and profit targets?
The basis of a strategy therefore consists of the following elements: an entry, a profit target and a stop loss.
First you find an edge in the markets
Observing the markets over time will help you understand that market behaviour repeats itself.
Let’s say you have identified a price level where the price seems to reverse back to the upside. In other words, at this price buyers are entering the markets.
If the price seems to reverse back to the upside at this level, then you have identified a market condition where something seems to happen. You have identified an edge – a level where there is a higher probability of the price reversing. This price level is known as a support level.
There is always the possibility that the price may not reverse and that it could break through the support level. Most of the time, however, it does not – the probability of the price reversing back to the upside is higher and this presents an opportunity to buy. This is illustrated by the chart below:
Note that in the chart above, the price does eventually break through the support level. This illustrates that even though a condition has been identified where the price reverses, it is only a higher probability that this will happen, as sometimes it does not.
You develop the rules of the strategy based on an edge
You can use a similar basis to exit the trade. For example, you may have also identified a price level where selling takes place and the price starts to reverse to the downside. This is known as a resistance level. This is illustrated by the chart below:
You have identified a set of conditions: a price level where the price reverses to the upside and a price level where the price reverses to the downside. There are multiple levels at which the price will reverse the other way, in other words, there will be other support and resistance levels.
If you then buy at support levels and take your profit at resistance levels, you now have a rule for an entry and a rule for an exit.
If you buy at a support level and place your stop loss below the support level, in the event that the price does not reverse to the upside, then you have a rule for placing your stop loss too. You now have the basis of a strategy: an entry at support levels, an exit at resistance levels and a stop loss below the support levels.
Elements of a trading strategy
To recap, a trading strategy consists of the following elements: an entry, a profit target and a stop loss.
So to use the support and resistance level example above, the basis of a strategy would be as follows:
- Entry: Buy at the support level.
- Exit: Take profit at the next resistance level up.
- Stop loss: Place your stop loss just below the support level.
The entry and exits are not the entire strategy. You need to incorporate money management for example. However you have identified a set of markets conditions on which you can develop a set of rules and build a trading strategy on.
The difference with random entries
Let’s take a different approach. Say you enter into the markets randomly. The price may go up or down, however, you have no basis for why you entered and so you do not have a reason to exit either. This leaves you with the following questions:
- Even if the trade has gone straight into profit, at what point do you take your profit?
- What happens if the profitable trade then starts to reverse and go against you?
- How much of the profit do you give back to the market until you decide to take what is left?
- Do you let your trade run into a loss?
- What if the trade goes straight into a loss?
- How much of a loss do you take?
Without a reason to enter or exit the trade, you are simply buying or selling something with the hope that your trade will somehow end up in profit. Then, even if your trade does go into profit, you will still not know when or how much to take of your profit.
Developing a trading strategy allows you to enter and exit the market in the right conditions and you know exactly where you will take your profit and loss.
