The first key element is one we have mentioned already, it is also the one element of trading that seems to get the most attention – The Trading Strategy.
1. The Trading Strategy
Your Trading Strategy is basically how you trade, what must happen in order for you to pull the trade trigger? Most trading strategies are based upon indicators such as RSI, Moving Average or a combination of a few different indicators, personally I prefer not to trade based upon indicators. Being able to simply read the Price Action off the charts will provide you with a much stronger base in determining your trades.
Whatever your choice, having a good trading strategy is very important when trying to become a profitable Forex trader. The question is what do I mean by ‘good’? What constitutes a ‘good’ trading strategy? Most traders define a ‘good’ trading strategy as one that has a high rate of success. The truth is you need to ask, how has this ‘success rate’ been established? Over how many trades was it determined, 10 trades? 100 trades? And what about asking the question were all trades taken following the precise steps of the trading strategy?
It is not as simple as finding a trading strategy that claims to have a 70% success rate and then just running with it, chances are if you’ve been in the trading game for some time you will know that it is never that straightforward.
A Trading Strategy claims to have a success rate of 70%
However when you trade it, your success rate is only 40%
Why is this?
Of course it could be that perhaps Trading Strategy A does not have a 70% success rate to begin with, but let’s say for this example that is does. So, what else could be the problem? The answer is you are lacking the other two key elements of a successful Forex Trader, let’s take a look at the second one.
2. Trading Psychology
There is one key component that affects every single trade you take… you. Your Trading Psychology very often is the difference between a successful trade and an unsuccessful one.You can be the strongest minded human being on the planet, but you are still human and as a human you have emotions.
Trading is a very highly charged emotional game, especially when you are trading large amounts of money, naturally your emotions can overtake and influence your thinking/behavior as a trader. Sometimes you will subconsciously take a trade based upon your emotions, whether you are ‘Revenge Trading’ or just being plain greedy, it is all down to how strong your Trading Psychology.
You could have the best Trading Strategy in the World, but if you have a weak Trading Psychology then it counts for nothing. Let’s take a look at some of the ways in which your emotions may affect your trading decisions.
- Emotions that hold you back from taking the trade
- Emotions that entice you to take a trade
- Emotions that cloud your judgement
Your Trading Psychology will improve as your exposure to the markets improve, of course I am referring to LIVE Trading with real money. Trading a DEMO account is fine to start off with, but you do not want to get too comfortable trading DEMO funds, when you are able to start trading LIVE. Please of course ensure you understand the risks involved, and NEVER trade with money that you can not afford to risk.
The final key is a game changer, most newbies don’t understand the power that it yields, the next key is Money Management.
3. Money Management
We are all different, some of us have £5,000 set aside that we can put into trading, some have only £500 and for some those kinds of figures they can only dream of. In other words we are all different, we all have different finances, different aims/goals, different reasons for trading the Forex Market.
Money Management or Risk Management, is that very important part of trading that determines how much money you will risk on a single trade. This amount will be determined by what your individual goal/s are and also how much money you have to actually invest in the market.
As a general rule of thumb, when you are ready to start trading seriously it is best to keep your risk down to 1%, and base your Money Management around that. Unfortunately, there are plenty of ‘Forex Gurus’ out there on the Internet who don’t even mention the importance of Managing your risk (steer far away from these types of people), or say that it’s okay to risk more; say 3% or even 5% (unthinkable!)
The fact is it does not matter how great a Trader you feel you are, it is simply mathematically proven that during your trading activities you will have losses and not just one here and there, but runs of losses. The question you really want to ask yourself is, will I survive during this bout of losses? Or will it wipe my account out?
Let’s say for e.g. you take a hit of 9 losing trades consecutively, you risk 5% of your account balance on each trade:
Opening Account Balance: £5,000
5% Risk per Trade: £250 Risk Per Trade
9 Losses x 5% = 45% LOSS
Remaining Account Balance: £2,750
You will lose just under half of your entire Account Balance! The time taken and the difficulty in trying to make that deficit up will be extremely difficult, and factoring in the fact that you will still have losing trades, makes the whole thing even more messy.
Let’s now take a look at what happens if we risk only 1%:
Opening Account Balance: £5,000
1% Risk per Trade: £50 Risk Per Trade
9 Losses x 1% = 9% LOSS