The Importance of Having a Strategy

Trading Forex is not an easy game. Unless you are truely remarkable, i would not expect anyone to be able to jump in there and start trading anyhow they like and return profit. Perhaps for a week, maybe even two weeks- but in two months, two years, where will they be? 

Many pro traders spend a lifetime learning about their profession and putting in great time and effort to acheive their success. I have yet to meet a successful trader who truely has a “secret” strategy for success other than hard work, discipline, determination and commitment. It would be a lie for me to suggest otherwise. Trading, even if you have a brilliant strategy, is hard work and as much a journey of personal discovery as it is one of academia/work.

The Biggest Failing…

One of the biggest mistake traders make is to not be disciplined. If you don’t have any kind of plan it is even harder to be disciplined since you have absolutely no boundaries for your trading and are subject to acting on your emotions at any moment.

Have you ever been trading and had these thoughts….?

• “I’ll just hang on for a couple of extra pips”
• “I know the market is coming back eventually i’m going to hang onto this trade even though my trading guide/rules/common sense tells me not to”
• “I don’t know what i’m meant to do. Should i close this trade or leave it open?”
• “If i keep on adding extra trades it will all work out”
• “i’m soooo excited! (or scared)”

Firstly, you shouldn’t be hanging on for extra pips. Why would you do that if your studying and training tells you to exit now? Likewise with the second thought, why would you spend a long time studying and developing a plan if you are only going to flout your own rules? Don’t get me wrong, there is a time and a place for breaking the rules as with all things (take a look at the structure of the English language for an example) BUT first you have to learn the rules themselves before you can learn how to break them correctly.

The third thought on the list indicates someone who has no real plan and didn’t know what the plan was before they entered the trade. If they did have a plan before they entered the trade then they should be sticking to it. There are times when it may be wise to deviate from your plan, but you should have planned for a plan B, plan C, plan D etc BEFORE you enter the trade, not during it when it is hard to distinguish if you are making sound judgements due to money being on the line.

The fourth thought on the list- now, this is a valid strategy for some methods of trading. But when you don’t know what you are doing and you are just adding trades here and there to make up for losses this is a bad sign. Generally speaking you should be adding to winning positions to take full advantage of markets moving in your favour, not adding to losing trades. 

Finally, being excited or scared is extremely detrimental to trading. It is hard enough to make decisions as it is without trading at levels of risk where you get rushes of adrenalin continously and are then forced to make further decisions. Adrenalin-fueled decisions are rarely good in trading. It is exciting when you first start out trading, and for this reason it is wise to keep risk very very low, trading at the minimum possible lot size (0.01 lots) particularly if you do find yourself prone to these ‘rushes’.  I have an excitement about trading too, it is only natural, but you MUST learn how to control these emotions in relation to your trading.  This is something which becomes easier with time.

Where You Can Go From Here

If you don’t have a trading plan and you are trading live with real money now- STOP.  Don’t even consider trading not even on demo unless you have a plan. It is impossible to know how to improve upon a strategy unless you actually stick to it and trade it for at least a few weeks first. 

Form a plan. Even a very basic one and even if you have no knowledge of forex at all and don’t even know what an indicator is. It can be as simple as “i watch for 3 bars rising in a row then i enter a trade in the same (or opposite maybe?) direction. I hold on to that trade for exactly 5 minutes and i exit after 5 minutes no matter what my profit or loss is. I always trade using 0.1 lots for every $500 in my account” Whatever you decide to try first, make your plan explicit. It MUST cover all eventualities, tell you when to exit, when to enter, and exactly what size your trades should be, etc.

Once you have your plan. ACT on it. Follow it to the letter. Keep doing this without changing anything for the first week. After one week site down and evaluate your trades. What is working? What isn’t working? What ideas do you have for avoiding some of the losses that occurred? Can these ideas be incorporated into your plan? If so go ahead and add them in. Evaluate again after another week. Did your new idea prevent some of those losses? Did it limit the chances you had to profit?

After the initial stages, when you feel you have a strategy which is starting to get somewhere, you will want to run the SAME strategy with no alterations for a period of around a month, preferably longer. Now we are starting to see how it performs over a longer period of time.  At this point you might consider adding the strategy to a SMALL live account. 

Going Live

Going live with a new strategy is never easy. If you have tested your strategy on demo for a period of a few months then you should be reasonably confident of success however. To ease the transition it is a good idea to trade at the lowest possible risk you have available to you with your broker, preferably 0.01 lots. At this time you need to focus on examining your attitude and emotions around trading. It is important to get very critical of yourself and the “inner voice” which could be telling you “go on, put on a few more lots, you could double your money today!”. IGNORE IT!! If you have a great strategy you don’t need to start off trading at very high risk, even very low risk will reap you huge rewards, and in such a way that you never have to be sitting on the edge of your seat biting your nails wondering when the next margin call will come. 

Have A Limit

Sometimes market conditions will not favour a particular strategy you are trading. In this case it is important that you do not keep “beating a dead horse” but stop for a moment, and either make an alteration to your strategy or wait for a while to see if conditions improve.

One good way of doing this is by setting yourself a limit for the amount of loss you will withstand in any one month. If you hit that limit, then STOP. Instead of trading live, for the rest of the month continue trading on your demo account and monitoring the situation. Now might be a good time to take stock of the situation and examine where the problem lies, whether it be in the markets or in yourself. This also ensures that you survive to trade another day- and survival is what you need if you intend to be in this for the long haul. If you for instance set yourself a loss limit of 10% a month, then it is going to be a lot of months of continous losing before you wipe out your account. By the end of that time you will almost be certain to have learnt a lot about trading and know how to improve your strategy! 

Enjoy Yourself

From reading this article you may get the impression that manual trading is joyless and boring. This is most certainly not true. You need to pick and work with a strategy that you not only understand but also enjoy. We become good at the things we enjoy, therefore if you find a strategy which is fun for you to apply you will be more enthusiastic about it and pick up all the nuances of that strategy much more quickly. 

Finally,  join in with some trading forums, such as my forum, where you can meet other likeminded people and also get help and advice with your strategies should you need it.