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Forex Trading - Mindset, Money Management & Methodology


The Three "M's" You Need To
Succeed as a Forex Trader

 

Mindset

Of all the skills that you must master, having the proper mindset to trade is the most important.  90% of your success will come from your ability to trade Forex with discipline.   

There is a substantial difference between simulated trading and actual forex trading from a psychological standpoint.  When you trade in simulation, the brain applies 100% logic.  Emotion plays no part and has no effect.  Therefore, achieving 15 days of consecutive success on a demo account is achieved by simply following the trading rules.  When you start trading with real money, a whole new range of issues suddenly comes into play.  It is vitally important that you fully understand the emotional side of trading before you ever consider trading real money.  When you go from simulation trading to trading real money, the brain will apply only 10% logic and replace the other 90% with emotion.  It’s as if suddenly two “devils” jumped upon your shoulders …two devils named “Fear” and “Greed” and they always tell you to do opposite things.  When you are not in the market, Fear says, “Stay out!” and Greed says, “Get in!”.  When you are in the market, Greed says “Stay in!” and Fear says, “Get out!”.  Both of these devilish emotions pulling you in opposite directions at the same time creates uncertainty in the traders mind.   

Suppose we put a two-foot wide lumber that is twenty feet long on the floor in a room and we asked you to walk from one end to the other as quickly as you can.  You would confidently go from one end to the other in a matter of seconds with no difficulty.

Now, if we put the same piece of lumber on top of the 50th floor between two buildings and asked you to cross it, how long do you think it would take you now?  You would probably never even try because fear would be telling you that you could fall.  Is that fear based on the fact that you suddenly forgot how to walk?  No, it’s based on your fear of falling.  Just as the fear of falling applies in this example, the fear of losing applies to the trader using real money.  How do we learn to overcome these fears?  What if we simply raised the lumber off the floor only one inch and we had you cross it over and over until you were completely confident then raised it another inch, etc, etc.  We would eventually reach a point where the lumber would be 50 stories high and you could still cross it with confidence because you learned how to ignore your fear emotion through a controlled step-by-stop process.  This is why simulation trading is so important in the process of becoming a successful trader.  Step-by-step you gain confidence in yourself and your trading method.  This confidence is vital.  Even after completing your simulation trading with 15 consecutive days of profit, do not begin trading real money with large amounts.  As with the lumber example, you will want to inch into the market with the smallest amount…only one E-mini contract per trade.  By doing this, you are able to put your discipline on trial, so to speak, with the least amount of capital risk involved. 

Once important consideration is the fact that you must never trade with capital that you cannot afford to lose.  It is extremely difficult for the trader to trade unemotionally when he is constantly in fear of losing money he cannot afford to lose.  

No one ever likes to lose.  We must accept the fact that taking a loss is, and always will be, a part of trading forex.  It’s how we deal with those losses that affects our ability as traders to trade effectively on a long-term basis.  You must be willing to accept stop outs as a cost of doing business, not loss, as long as that it was based on following correct trading rules.  As an example, imagine you are the owner of a very profitable store.  As a business owner, you know that there will be those inevitable bills to pay…employees, utilities, insurance, rent, etc.  You pay them without thinking about them as a loss.  They are merely the cost of doing business.   This is exactly how you must think of the occasional trade stop outs.  It’s going to happen and you should simply put it behind you and go on to the next trade.   

Never let the result of one trade affect how you feel about entering another one.  If a stop out in one trade causes you to hesitate taking the next trade you should be aware that you are now trading emotionally instead of logically.  Reacting to the market and chasing it in order to “get even” are sure signs of emotional trading and certain to go bad very quickly.  Steps must be taken immediately to correct this emotional reaction.  Accept the inevitable stop out as just a cost of doing business as long as it is based on correctly trading the method and as long as the overall results are positive.   

If you have made a trading mistake, then you must take the necessary steps to insure the mistake is not repeated.  There are not many different mistakes that you can make so make the commitment to learn how to recognize them and correct them immediately. 

Here is a good effective strategy that will help you stay unemotional in the market:  First, when you take a trade, make sure that it is based on your trading method and that you are not violating any trading rules.  Next is to be prepared mentally for the worst-case scenario (getting stopped out) by accepting the loss already in your mind as you enter each trade.  By accepting the possible loss, the fear of being stopped out is removed and, since there is nothing else to fear, you can then trade with total logic and no emotion.  

Since trading is 90% a mental exercise, getting in the right mindset erases the emotion and lets the logic do its work.  The best mindset is to actually feel positive and good about a stop out (as long as it was not the result of a mistake) because it means that you did your job correctly and cut your loss short and now that trade is behind you.  

There is another consideration that is somewhat the reverse of losing.  Sometimes traders experience a period of extended winnings and this causes them to become overconfident and start taking wild risks and abandoning their rules.  This is not to be confused with trading aggressively.  You can be aggressive and still trade by your rules.  But senseless risk taking is a common story you hear of people who were once winners but went home with empty pockets. 

Money Management

 Always be sure to place a protective stop loss order immediately after entering the market.  Having an actual protective stop loss order, in the market should not allow a substantial loss in a single trade. 

 As a rule, you should never risk more than 5% of your trading capital in any single trade. 

 The best way of doing this type of day trading is by setting a weekly goal.  If you set a weekly goal such as 100 pips, which is way below the weekly average result, it becomes easy to achieve that very reasonable goal on a consistent basis. 

 As you start experiencing the consistency in achieving your weekly profit goals, you will want to inevitably increase your weekly profit goals.  The best way to do this is to add more lots based on the money management concept explained below.  Trying to trade more to make more points in order to increase the profit, is not the right way. 

 The best way to manage your trading capital and risk is to base it upon your results.  As you begin trading with one mini contract, withdraw some percentage of your profit to reward yourself and leave the remainder in your trading account. The percentages will vary depending upon your needs.  As you are rewarding yourself, you are also building up your trading capital to the point where you have enough margin to add one more contract to your trades.  (Remember, just because you have the margin to trade more contracts, you should NOT allow yourself to violate the 5% capital risk rule). 

We cannot over emphasize the importance of never trading with capital that you cannot afford to lose.

Methodology

I trade and teach a powerful methodology.  Though I limit attendance in my live training webinar each month to a few students and space is very limited, you are welcome to check the date, details and availability of the next webinar here.  You may also consider one-on-one training which I provide at my home office.  This is an intense session and is offered most Fridays.  There is a waiting list, so please call and reserve your spot now at 415-842-0088. 

Never hesitate to email me if you hare having a problem understanding trades.  Just remember that you should generate at least four weeks of profitable trading in simulation first before actual trading.  Otherwise, your chance of success will be close to zero.

Please notify us by sending me an email when your 30 days of success is achieved.  I am always happy to hear about your progress.

Good Luck and Happy Trading!


·       Read Characteristics of a Good Forex Trader.

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