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How to trade successfully in the Forex Market by Abandon_Sem


									How to trade successfully in the Forex Market


This article is about money management and trading psychology. This is the lesson that you never get with 99%
of other Forex systems that you have come across.

I find it interesting that most of the systems out there don't include this because if they actually were successful
traders, they would know that this was the key to success and to leave it out makes an incomplete system that
won't work!! This tells me that the people that wrote them or are selling them aren't traders at all. They are just in
the business of selling HOPE!

Well, if you haven't noticed yet, I am a trader, and I am different than the others. Don't get me wrong, there are
honest trainers out there, I learned from one and I am eternally grateful to him.

So let's get on with this. First of all, this is my own interpretation of several sources, and the practices that have
worked for me. Please read EVERYTHING you can find on trading psychology, and money management. There
are a lot of slightly different views but overall, they are very similar and the main important points are all pretty
much the same.

There are two main issues that cause 99% of the problems. Can you guess what they are?

If you answered FEAR and GREED, you are correct. These two emotions are probably responsible for 99% of the
worlds problems as well but that is beyond the scope of this course À .

So, now that we know what the big obstacles are, let's try and figure out how to overcome them. In the course of
my lessons, I have listed a few but I will put them all together here in one place so that it is easier to follow, and
perhaps make it easier for you to develop your own system to help you trade better.

We can't eliminate fear and greed. They will still be there in your heart and mind, but we can make some rules so
that they don't interfere with your trading success. We can come up with systems and procedures to follow, since
we KNOW ahead of time that fear and greed are major problems. I'm sure you have heard the statistic that 95% of
all speculative leveraged traders FAIL. This is absolutely true. Here is another statistic that I believe... 100% of
traders that don't know how to overcome fear and greed will FAIL. So does that mean that if I can teach you how
to overcome these problems that your chance of success is 100%? Of course not. But I can tell you that you
cannot be successful if you don't protect yourself from yourself.

In lessons 1-3 I have outlined a trading system. The first thing you must do, whether you follow my system,
another system, or your own system is to follow the rules of the system WITHOUT FAIL. If your system calls for
a certain entry point, do not enter until there is a signal to enter.

Systems are designed for a reason. That is why it is called a system. What do we learn from this? Patience.
Perhaps the stupidest thing you can do is enter a trade on a hunch.

This brings us to our first FACT:

The odds are in your favor before you enter a trade. This is true for most trading systems. Void of fear and greed,
if you follow each system exactly, you will profit. Some systems may offer better profits than others, but overall
you should be able to profit with any system, IF you have no fear and no greed.

This brings us to THE BIG SECRET. Other than omitting trading psychology, other systems also don't tell you
that you are playing a game of odds. Let's say for example that we are playing "coin toss." Theoretically, for 100
flips of the coin, 50 will come up heads, and 50 will come up tails. Of course, the first 100 may be 55/45, but the
more you play, the closer to 50/50 the numbers will get. Our system for "coin toss" is as follows: We play for 20
hours, and flip the coin exactly 5 times each hour, and for every heads that comes up, we get paid $2, and for
every tails that comes up we pay $1. This should be a profitable system. After our game we see that heads came
up 50 times and tails came up 50 times. (Stay with me here). So at the end of 100 tosses, we have paid $50 and
received $100. A profit of $50.

So let's say that during our second game of coin toss, we decide that we are going to let the flipper(hint: the
market is the flipper) keep flipping the coin for an hour while we take lunch but we are not going to pay or be
paid for those flips. During our lunch hour, heads comes up 5 times in a row (which is theoretically possible, and
not that unlikely). And now we are back from lunch, and we are down $10 for the hour. Now, theoretically the
odds of 5 tails in a row coming up after 5 heads in a row are pretty good because for every ten tosses, you should
have about 5 heads and five tails. So now we get 5 tails in a row and now we are down another $5, for a total of
$15. So not counting the 5 tosses during lunch, this leaves 90 tosses that we still have to account for and let's say
that they were 45 heads and 45 tails. Our profit for these tosses is $45 (45x2 minus 45x1), now if we take away
the $15 for the tosses we didn't take, and that string of losers, we are left with a profit if $30. So lunch and 5 lousy
spins cost us 40% of our profits.

Now this is theory but it absolutely applies to this market. If you are picky about what trades you want to take and
what trades you don't want to take, you are MESSING WITH THE ODDS. My point for this whole big story
about "coin toss" is this: If the conditions are met, TAKE THE TRADE without hesitation. The odds are in your
favor, but only if you take ALL of the trades that meet the conditions. When I say ALL trades I know the market
is open 24 hours a day and you can't possibly take every trade. You need to pick a time frame and stick to that
same time frame everyday and take ALL trades during that time frame.

I can tell you that in the month before I realized this (my first month of trading real money actually), my total
profit was 92 pips. I had an idea of what I was doing wrong so I was keeping track of the trades that I didn't take
along with the ones that I did. I included entry point, day, time, and whether the profit target was hit or if it was
stopped out. Don't get me wrong, I was extremely happy to be in profit after trading for only one month with real
money. But then I went back and looked at the numbers for "what could have been." Guess what? Had I taken
every trade that met my conditions, my profit for the month would have been 355 pips! I was not happy. But soon
I realized that I had messed with the odds. After realizing what I had done wrong (or not done right in this case) I
began to have more confidence in my systems. The very next month my total profit was 515 pips, or a 560%
improvement just for taking all of the trades that met the conditions. I think that is enough said about that.

Sorry to stay with the coin flip game here but it actually works very well in teaching these principles.

This brings us to:

FACT #2. You do not need to know what is going to happen to make money. If we know that we are going to
make $2 fifty times and pay $1 fifty times as long as we flip the coin, are we going to play? Of course! Well, all
trading systems have similar odds. From my testing, I know that this system on average will produce 9 wins of 20
pips for every 1 loss of 40 pips (that number may vary but that is the maximum loss I ever take). So we know
ahead of time that 9 wins at 20 pips is 180 pips, and minus the loss of 40 pips, leaves us with 140 pips profit. Now
keep in mind that you may be 8 and 2 this week and 10 and 0 next week. We never know when a loss is going to
come. We may even lose every trade for a week, but not lose a trade for the next 9 weeks. Believe me it happens.
You do not need to know exactly what is going to happen, you just need to take every trade that meets the
conditions and then count your profits at the end of the month/week/year etc.

This section deals with money management as well as psychology. Back to coin toss for a minute. We know that
each win brings us $2. And we know that for each win in this trading system we get 20 pips. We know that each
tail that comes up costs us $1. And in our system we know that each loss is 40 pips. If we know what our loss is
going to be ahead of time, we know what it is going to cost us to find out "what is going to happen." From this we
can decide how much we want to risk based on our account size.

FACT 3: You know how much it will cost to find out. I have decided not to ever risk more than 5% of my
account on any one trade. So knowing that, I can figure out how many lots to trade ahead of time based on my
account size. It may cost $250 in margin for a 1 lot position but this is not what we are risking, we are actually
risking ten dollars times the number of pips in our stop. If our stop is 40 pips, we are risking $400. Now we know
that we better have at least $8000 in our account to take a position of this size. If this trade turns out to be a loser,
and our balance falls to $7600, we know that we can't afford to take that trade again because a loss of $400 is
more than 5% of our balance. We would need to adjust our number of lots down accordingly to keep our risk.

Author Bio

Ben Rose


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