The 3 Essential Ingredients You Need to Trade Forex
By admin | November 19, 2008 - 8:14 am - Posted in Articles

So you’re interested in but you’re losing like an addicted ? Have no , here’s the solution.

Your System with The

Of , whatever style or method you choose to trade, it needs to be . Mathematically, this means that at the end of the day (or month, or year), if you clump all the winners and losers, you’ll end up net positive. Statiscally, this is called having an edge, or having a positive edge. You must make sure, through backtesting and managed forward testing, that your system is indeed . You might be asking, “But I can’t seem to follow my plan.” We’ll get to that later, but for now, let’s assume that you CAN follow your system perfectly.

Matching your system with the means that the system works for that at the time. Keep in mind your system might work for the EUR, but maybe not for the CAD. Also keep in mind that the system might have worked for the previous 6 months, but something happened to the that the participants are acting differently now; this would mean that your system was for the past 6 months but the change has nullified your system’s edge.

Let’s assume that your system is somewhat if you could follow it perfectly. So what’s next?

The System With Yourself

At this point, you might be thinking, “Hey, I was looking for a How to trade article, not some self-help psychoanalysis article.” Do yourself a favor, and read through the entire article, because this might be the key ingredient your has been missing.

This is the part where 99% of the traders don’t seem to understand. If you happen to talk with other traders, please feel free to point this section of the article out; it might be the missing key ingredient in your .

It’s pretty obvious that if you have a system written down in your plan, but you can’t seem to follow the rules, that plan is as good as useless. So why do you deviate from you plan that you’ve researched so hard for? There are two primary reasons: 1) Your expectations as an analyst versus your expectations as a trader. And 2) Your ’t your . I could write an entire book on the first issue, but we’ll on the second issue in this article.

To trade with , you need to understand how your subconscious mind works. If your system contradicts who YOU are as a person, your mind will NATURALLY pull you away from that style, and SUBCONSCIOUSLY gravitate you to a particularly different style. A of get confused here, and this is one tough concept, (and really, not too many want to learn about it) so don’t worry if you’re confused. Let me give you a few examples, the first ones illustrating basic principles, then drilling down to more subtle points:

First example is John. John likes playing video . He loves playing 5 handed table Texas Hold’em (poker) with his . He likes playing hardcore sports. He is a -seeker. His natural style is day and/or fast . He cannot naturally trade longer time frames because that’s not who John is, and John is a fast-paced guy. So no matter system he’s researched, backtested, and written, he won’t be able to trade it unless it fits his naturally fast-paced . Also note that his has gravitated John towards all these other fast-paced activities like video and poker.

Let me give you a more subtle example: Susan was an underdog all her life. So she pictures herself as David who fights against all the Goliaths of life. Whenever there’s a competition, election, or , she always roots for the underdog because subconsciously she relates more with the underdog.
How does this affect her ? She’s naturally a fader. Fading the means going the opposite of the major . So while followers go with the majority of the participants’ , Susan is the opposite; she naturally likes to bottom/top pick and go against the . This means that she has to either 1) change herself to the following system (which is hard), or 2) find and develop a fading system (which is easier). Mostly likely, she’ll have a better time sideways , fading at the edges of the channel. Of , how she decides to trail also depends on her self-image.

At this point, you might be thinking, “Ok, this is starting to make a little more sense now. But I don’t really know how to do all this .” Let’s move on to the final point.

Know Yourself

Schedule a 1~2 hour block of and go through this this action plan:

  • 1. Make a list of all the activities you enjoy doing.
  • 2. Make a list of all the you naturally enjoy hanging out with.
  • 3. Make a list of all the movies, TV shows, sports, etc. you naturally find in.
  • 4. (Insert more you can make up)

Take a close look at all those items, and on analyzing what kind of item it is. For each item determine:

  • 1. Is this fast-paced, medium-paced, or laid back? Are you a New York City person or a Southern California person?

  • 2. Is this more number smart or smart? Are you naturally good with numbers or with peoples’ ?

  • 3. Is this more of an underdog or topdog activity? When you watch a tennis , do you root for the topdog or the underdog?

All these things reflect who you are at the time. The more laid back you are, the larger the timeframe you need to trade (because you would trade less frequently and the trades would take a longer time). The more fast-paced you are, the more you should trade or even day trade. The more number smart you are, the more systematic, quantitative, and progamming-oriented you are with your backtesting and . The opposite would be much more of a discretionary trader. The more topdog-inclined you are, the more of a -following system you need to trade. The opposite would be fading at the edges of a sideways channel.

But keep in mind that most are a combination of the two. Explore yourself. Take some time for self reflection. Here’re more for you to really think about:

  • 1. What does this list say about how I should trail my trades?

  • 2. How should I enter and exit? Partial or not?

  • 3. Which should I trade? Which session should I trade?

  • 4. Should I consider , options, or instead?

  • 5. Should I use technical , , or both?

  • 6. Am I even right for ?

Let’s look at one last example:

Mathematically, if you don’t take partial - that is, you enter and exit only once, and not exit multiple positions - you would make approximately 3~4 times more than traders that do take partial . To clarify, let’s say you’re long 3 contracts, and you unload 1 at +25 , the second at +45, and the last at +60: this is what I mean by taking partial . But let’s say you’re short 3 lots, and you decide to exit all 3 lots at +47 . That would be the opposite of taking partial .

But again, let’s take a at what I talked about in this article and relate it to this point: Sure, on paper you’d be more , but then again, all are . It’s just that you couldn’t follow that plan in the first place. Just as likely, not taking partial is more , but it’s the same - it’s easier on your mind to take partial . It’s a trade off between psychological ease and economical gain.

There is a deep underlying why every trader naturally wants to take partial , and I could write a separate article on it, but suffice it to say that everyone initially is naturally inclined to cut short and let run. (As a teaser, it’s about how we grew up in society/school/ that has instilled beliefs that are beneficial to us in society but detrimental in the .) The more question is can you trade this way? Should you trade this way? Forget about what’s more on paper. on being able to trade with by according to your natural self.

Well I hope this article has shed some interesting insights with your . Perhaps you’re ecstatic at this new finding, perhaps you thought this was a waste of time, or perhaps you don’t even have a system yet. Don’t worry, take your time.

So what now?

So now you’ve done your and now you know what your ideal system is. Well, good news! We’ve done most of the research for you. My website has compiled most of today’s forex trading system. If you’re somewhat of a discretionary trader, I highly suggest this Forex trading system. Feel free to browse for the right system for you. Feel free to even browse for more .

Now, before I finish, I’d like to leave you with this: is not a function of the , but a function of the . The greatest thing you can in is not in a specific instrument or . The greatest thing you can in is yourself. Never stop reading, never stop learning.

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