painofhell
Active+ Member
- Messages
- 2,851
- Joined
- Aug 21, 2014
- Messages
- 2,851
- Reaction score
- 54
- Points
- 30
Over the past two years we have covered a variety of topics. Things such as why price action is all you need to become profitable and how the daily time frame can be more reliable than the lower time frames.
But what about those missing ingredients? The principles and ideas that not many successful traders talk about, but ones that undoubtedly played a role in creating their success.
That’s exactly what today’s article is all about.
I’m going to share with you ten little known ways to improve your Forex trading. Some of these you may find familiar, others may be new to you, but I bet there is at least one that could improve your trading if applied correctly.
So without further ado, let’s begin!
Disloyalty is a Good Thing
In any other area in life, loyalty is a good thing. Loyalty to family, friends and pets is always a good trait to have and one that is desired by everyone.
But for the Forex trader, loyalty can have disastrous consequences. It’s loyalty to a position that causes you to hold on to a losing position longer than you should or otherwise would. Similarly, it’s loyalty to a trade idea that pushes you to take a trade when your gut is telling you to stay on the sidelines.
We’ve all been there – watching each tick in the market as if our mere presence will result in a favorable outcome. Each tick in our favor is a victory while each tick against us inflicts pain. It’s a terribly destructive mindset to have as a trader.
A much better approach is to always remain disloyal. Never, ever get attached to a position or trade idea. Another way of saying it is to always remain flexible, knowing that the market can invalidate your idea at any time.
If the market invalidates your idea, close your position and move on. If a great trade idea becomes unfavorable due to an increase in volatility, forget about it and move on to the next idea. There will always be more opportunities tomorrow.
Never Think in Absolutes
Forex trading is not about being right or wrongAlong the same lines of being disloyal is the idea of never thinking in absolutes. As a Forex trader it’s important to keep an open mind. You never want to find yourself saying things like, “EURUSD will test parity next month”, or “if GBPUSD breaks 1.5170, it will test 1.4980”.
Could those two things happen?
Of course. But you don’t know that; nobody does. Furthermore it is never your job as a trader to know these things. Remember, it’s simply a game of probabilities.
You may have noticed that I always use language in my commentaries such as, “likely”, “probable” or “the odds are…”. I never talk or think in absolutes. To do so would put me in a position of loyalty to that idea, which would not allow me to be flexible should the market invalidate the idea.
The same goes for something as simple as a trend. We all know that a trend is a trend until it isn’t, but that can happen at any moment in time. Therefore you need to always be on the defensive and go into every trade with an anything-is-possible mindset.
Your job as a trader is not to be right, it’s to make money…those two don’t always coincide.
Always Have a Trigger
Have you noticed that I often talk about a “trigger” in my commentary? I do it quite often and for good reason.
A trigger is the combination of price action and a key level that helps to confirm a trade idea. A great example would be the neckline of a head and shoulders pattern. The combination of a daily close below the neckline would be the trigger that confirms an opportunity to go short.
There are a few reasons why using a trigger can be advantageous…
It keeps you disciplined
By having to wait for a pattern or breakout to confirm, you’re forced to wait patiently until it triggers. There is never a need to chase the market or be fearful of missing out on the move.
It gives you a precise invalidation point
If 1.50 is the neckline of a head and shoulders pattern, and the pair closes the day back above this level after confirming the pattern the day before, the idea to go short has been invalidated. Using a trigger leaves ambiguity on the sidelines by giving you a precise invalidation point.
It keeps you objective
A trade setup has either been triggered or it hasn’t. There is no interpretation needed. This is especially true on the higher time frames where key levels are easier to identify and closing prices are much more telling.
Forget About the Pips and the Money
Forget about the pips and the moneyWant to know what the most common question is that I receive throughout the week? It isn’t about pin bars or head and shoulders patterns. It isn’t even about what or how I teach inside the member’s area.
The most common question is, how many pips will I make per week if I join?
Now, obviously this question is impossible for me to answer as I cannot guarantee anyone’s success, especially the number of pips they will make.
But this question presents a problem aside from being impossible for me to answer…
It tells me that a lot of traders are focused on the wrong thing.
Becoming a successful Forex trader does not involve focusing on the pips or the money. In fact that kind of thinking will get you in trouble, fast!
If you are not yet profitable, focusing on these two things will increase the pressure you feel when you lose. Instead of seeing a loss as a learning experience, it becomes a painful event that has cost you the very thing you desire most, money.
Focusing on these two things also forces you to trade more often. And as we all know, overtrading is one of the leading killers of Forex accounts.
Don’t do it for the pips or for the money. Forget about all of it. If you are serious about becoming a successful trader you need to work on your craft first and foremost. The pips and money will come later as a byproduct of the skills you eventually develop.
Focus on the process of learning how to trade Forex and the money will follow.
Less is More
This is one of my favorite subjects. Partly because of its contradiction to the way most people think but mostly because of how effective it can be to develop a less-is-more mindset as a Forex trader.
In almost all areas in life, the more we do, the better the results end up being. The more clients a real estate agent brings in and helps to find a home, the more money the agent makes. The more doughnuts a doughnut shop sells, the more money the shop makes.
But Forex trading is a different animal. As a trader, the less you do the better your results are likely to be. This is especially true when trading the higher time frames.
A quote from Bill Lipschutz sums up this idea nicely…
If most traders would learn how to sit on their hands 50% of the time, they would make a lot more money.
What is he implying?
He’s telling you that quality trade setups don’t come around all that often. This means that at least half of your time as a trader should be spent doing nothing. Personally, I would put that figure closer to 80% rather than 50%.
But the idea is the same – staying patient and only trading the quality setups will get your profit curve moving in the right direction much faster than attempting to jump into every setup that comes along.
Boring is Good
Another paradox in the Forex market and one that follows closely to that of the less-is-more mindset is the concept of boring trading.
Many traders come into the market thinking that it’s a fast-paced lifestyle. Perhaps they saw something in an older movie or TV show where floor traders were jumping up and down, screaming out their orders on one of the exchanges.
Does that still happen?
To some degree, but most of the transactions these days are made via handheld devices. But that’s only the case for floor traders. The life of a retail trader is much different.
My trading is boring…really boring. If I ever find myself jumping up and down and screaming at my monitors, something has gone terribly wrong.
Because I trade the daily time frame, I might take (on average) three to eight setups per month. And once I’m in the trade and have my orders set, there isn’t much for me to do until the next daily close rolls around at 5pm EST.
That paints a very different picture from what many new traders expect to find when they first enter the market.
But you know what? I love it!
I wouldn’t have it any other way. The truth is, I didn’t become a Forex trader for the excitement. I became a trader because I love trading. Everything from the dynamics of interrelated markets to the way price respects key support and resistance levels. I love it all.
If you need some excitement in your life, there are hundreds of extreme sports you can take up. But when it comes to your trading capital, boring is the way to go.
Forget About Your Win Rate
Forget about your forex win rateThis is one of the most talked about figures in all of Forex trading. It is also the most controversial, at least in terms of its importance. But here is my stance…
It is absolutely meaningless.
I never said I was going to sugar coat it. That just wouldn’t be my style.
Here’s the deal, you don’t have to win more trades than you lose to make money consistently as a Forex trader. What you have to do is make more money on your winners than you lose on your losers.
A perfect example is my four-month NZDJPY short position. The total profit on that trade was 54R. Now if I’m risking 1R on each trade after that, guess how many I can get wrong before I start losing money on the year?
A lot.
That may be an extreme example, but it certainly proves my point.
To clarify, this does not mean that you don’t need a trading strategy that stacks the odds in your favor. But part of that strategy needs to include maintaining a favorable risk to reward ratio. Because the truth is, your win rate won’t always be stellar, nor does it have to be to make money consistently.
This idea of needing to win 90% or even 80% of your trades in order to make consistent gains is ridiculous. It simply isn’t necessary. I have had several months since 2010 where my win rate dropped below 50%.
But guess what?
Most of those months were profitable because the lowest multiple for me to even consider a position was and still is 3R. That means I had a target of 300 pips for every 100 pips at risk. And that was just the minimum. Many of my trades were much higher than that.
To reiterate so I don’t get myself in trouble, I’m not saying that you don’t need an edge, nor am I saying that it’s okay if your win rate is below 50%. If you find that happening more often than not, chances are your trading strategy needs some work.
However what I am saying is that your goal should not be to achieve a 90% win rate. Your goal should be to maximize gains and minimize losses.
How do you do that?
Two ways. The first is to always use a favorable risk to reward ratio. The second is to pyramid into a winning position, but only when you have reason to believe the market will continue to trend in your favor.
There are many figures and ratios that should be at the top of your list as a trader, but your win rate should not be one of them.
Maximize Gains
As mentioned above, one of the best ways to become a profitable Forex trader is to maximize your gains. That may sound a bit obvious, but let me explain…
Most Forex traders attempt to maximize their profits by taking more trades. The problem with this is that it goes against one of the key principles we just discussed – that less is more.
So of the two ways to make more money as a Forex trader, we know that taking more trades is not the answer.
What is the answer?
Maximizing the setups that you do take. After all, if you are staying patient and only taking the best trade setups, why not squeeze every bit of money-making potential out of each one?
By pyramiding on trades where the trend is strong, you can squeeze a lot more profit out of each trade. Of course it’s extremely important to be selective, not only in terms of which positions you choose to pyramid but also where you decide to add to a position along the way.
Trying to take more setups will always get you in trouble. Instead, maximize the gains on each “A+” setup you do take by always keeping your eyes open for setups that have the potential to be pyramided.
Percentages Are Not Enough
currencyHow much do you risk per trade? Is it 1%, 2% or maybe 3% of your account balance?
Most traders stay in that range of 1% to 3% when they put on a position. This is okay, but what if I told you that by keeping your calculations one dimensional, you are actually feeding the potential for an adverse emotional reaction should the market move against you?
If I asked you how much money you risk per trade, you would probably pull out a calculator and tell me what 2% of your account balance is. Again, that’s okay. I wouldn’t expect anything different.
But here’s the thing…
The Forex position size calculator on this site has a “swap with money” button for a reason. In fact every time I calculate my position size, I always do it based on the amount of money I’m willing to risk on the trade, not simply a fixed percentage of my account balance.
The most painful part of a losing trade is losing the money, right? That’s a big trigger for most traders and for good reason. After all, as humans we are wired to think in terms of money in, money out. Money in is always a good thing. Money out, not so much.
A great example is to think about the idea of always risking 2% of your account balance. If you have a $1,000 account at the moment, $20 should be pretty easy to part with.
But what happens when you grow that account to $100,000? That same 2% is now worth $2,000.
Are you going to be okay risking $2,000 on a single trade idea?
Maybe this wouldn’t bother you, but that’s more than most traders are willing to part with, even those with a $100,000 account.
With that in mind, it makes a lot more sense to calculate your risk based on the amount of money you are willing to lose. Of course that doesn’t mean risking $500 on a $1,000 account. The percentage portion of the calculation is still important.
For that reason it’s a good idea to think in terms of money risked but also have a percentage cap.
An example would be a trader who has a $10,000 account and uses a 2% cap. This means that the trader can risk up to $200 per trade.
But let’s assume this trader is only willing to lose $150 on any one trade. Losing more than that may lead to emotional decision making for this trader in the event of a loss.
In this case the $150 risked is well within the limit set by the 2%, which would be $200 of the $10,000 account. By doing this the trader manages to minimize risk and also fully accept the dollar amount that could be lost at the same time.
Hope and Trading Do Not Mix
There are a lot of four-letter words in the Forex trader’s dictionary, most of which I can’t post here, but the word “hope” should not be one of them.
Having hope at most times in life is fairly harmless. You may hope for great weather on your vacation. You can also hope that your car’s repair bill isn’t too high.
But hoping for a trade to play out in your favor is disastrous. There are no two ways about it.
When you begin to hope that the market will move in your favor, you build up emotions. Those emotions can quickly turn into expectations of something you want to see happen.
As we all know, the market does what it wants, when it wants and there is nothing we can do to influence that outcome.
Becoming a successful Forex trading is about putting the odds in your favor. It’s a game of probabilities plain and simple. It is never about crossing your fingers and hoping for a favorable outcome.
Nobody likes to loss money, but if you find yourself hoping for a win, you are sabotaging the neutral state of mind that is necessary to become consistently profitable.
But what about those missing ingredients? The principles and ideas that not many successful traders talk about, but ones that undoubtedly played a role in creating their success.
That’s exactly what today’s article is all about.
I’m going to share with you ten little known ways to improve your Forex trading. Some of these you may find familiar, others may be new to you, but I bet there is at least one that could improve your trading if applied correctly.
So without further ado, let’s begin!
Disloyalty is a Good Thing
In any other area in life, loyalty is a good thing. Loyalty to family, friends and pets is always a good trait to have and one that is desired by everyone.
But for the Forex trader, loyalty can have disastrous consequences. It’s loyalty to a position that causes you to hold on to a losing position longer than you should or otherwise would. Similarly, it’s loyalty to a trade idea that pushes you to take a trade when your gut is telling you to stay on the sidelines.
We’ve all been there – watching each tick in the market as if our mere presence will result in a favorable outcome. Each tick in our favor is a victory while each tick against us inflicts pain. It’s a terribly destructive mindset to have as a trader.
A much better approach is to always remain disloyal. Never, ever get attached to a position or trade idea. Another way of saying it is to always remain flexible, knowing that the market can invalidate your idea at any time.
If the market invalidates your idea, close your position and move on. If a great trade idea becomes unfavorable due to an increase in volatility, forget about it and move on to the next idea. There will always be more opportunities tomorrow.
Never Think in Absolutes
Forex trading is not about being right or wrongAlong the same lines of being disloyal is the idea of never thinking in absolutes. As a Forex trader it’s important to keep an open mind. You never want to find yourself saying things like, “EURUSD will test parity next month”, or “if GBPUSD breaks 1.5170, it will test 1.4980”.
Could those two things happen?
Of course. But you don’t know that; nobody does. Furthermore it is never your job as a trader to know these things. Remember, it’s simply a game of probabilities.
You may have noticed that I always use language in my commentaries such as, “likely”, “probable” or “the odds are…”. I never talk or think in absolutes. To do so would put me in a position of loyalty to that idea, which would not allow me to be flexible should the market invalidate the idea.
The same goes for something as simple as a trend. We all know that a trend is a trend until it isn’t, but that can happen at any moment in time. Therefore you need to always be on the defensive and go into every trade with an anything-is-possible mindset.
Your job as a trader is not to be right, it’s to make money…those two don’t always coincide.
Always Have a Trigger
Have you noticed that I often talk about a “trigger” in my commentary? I do it quite often and for good reason.
A trigger is the combination of price action and a key level that helps to confirm a trade idea. A great example would be the neckline of a head and shoulders pattern. The combination of a daily close below the neckline would be the trigger that confirms an opportunity to go short.
There are a few reasons why using a trigger can be advantageous…
It keeps you disciplined
By having to wait for a pattern or breakout to confirm, you’re forced to wait patiently until it triggers. There is never a need to chase the market or be fearful of missing out on the move.
It gives you a precise invalidation point
If 1.50 is the neckline of a head and shoulders pattern, and the pair closes the day back above this level after confirming the pattern the day before, the idea to go short has been invalidated. Using a trigger leaves ambiguity on the sidelines by giving you a precise invalidation point.
It keeps you objective
A trade setup has either been triggered or it hasn’t. There is no interpretation needed. This is especially true on the higher time frames where key levels are easier to identify and closing prices are much more telling.
Forget About the Pips and the Money
Forget about the pips and the moneyWant to know what the most common question is that I receive throughout the week? It isn’t about pin bars or head and shoulders patterns. It isn’t even about what or how I teach inside the member’s area.
The most common question is, how many pips will I make per week if I join?
Now, obviously this question is impossible for me to answer as I cannot guarantee anyone’s success, especially the number of pips they will make.
But this question presents a problem aside from being impossible for me to answer…
It tells me that a lot of traders are focused on the wrong thing.
Becoming a successful Forex trader does not involve focusing on the pips or the money. In fact that kind of thinking will get you in trouble, fast!
If you are not yet profitable, focusing on these two things will increase the pressure you feel when you lose. Instead of seeing a loss as a learning experience, it becomes a painful event that has cost you the very thing you desire most, money.
Focusing on these two things also forces you to trade more often. And as we all know, overtrading is one of the leading killers of Forex accounts.
Don’t do it for the pips or for the money. Forget about all of it. If you are serious about becoming a successful trader you need to work on your craft first and foremost. The pips and money will come later as a byproduct of the skills you eventually develop.
Focus on the process of learning how to trade Forex and the money will follow.
Less is More
This is one of my favorite subjects. Partly because of its contradiction to the way most people think but mostly because of how effective it can be to develop a less-is-more mindset as a Forex trader.
In almost all areas in life, the more we do, the better the results end up being. The more clients a real estate agent brings in and helps to find a home, the more money the agent makes. The more doughnuts a doughnut shop sells, the more money the shop makes.
But Forex trading is a different animal. As a trader, the less you do the better your results are likely to be. This is especially true when trading the higher time frames.
A quote from Bill Lipschutz sums up this idea nicely…
If most traders would learn how to sit on their hands 50% of the time, they would make a lot more money.
What is he implying?
He’s telling you that quality trade setups don’t come around all that often. This means that at least half of your time as a trader should be spent doing nothing. Personally, I would put that figure closer to 80% rather than 50%.
But the idea is the same – staying patient and only trading the quality setups will get your profit curve moving in the right direction much faster than attempting to jump into every setup that comes along.
Boring is Good
Another paradox in the Forex market and one that follows closely to that of the less-is-more mindset is the concept of boring trading.
Many traders come into the market thinking that it’s a fast-paced lifestyle. Perhaps they saw something in an older movie or TV show where floor traders were jumping up and down, screaming out their orders on one of the exchanges.
Does that still happen?
To some degree, but most of the transactions these days are made via handheld devices. But that’s only the case for floor traders. The life of a retail trader is much different.
My trading is boring…really boring. If I ever find myself jumping up and down and screaming at my monitors, something has gone terribly wrong.
Because I trade the daily time frame, I might take (on average) three to eight setups per month. And once I’m in the trade and have my orders set, there isn’t much for me to do until the next daily close rolls around at 5pm EST.
That paints a very different picture from what many new traders expect to find when they first enter the market.
But you know what? I love it!
I wouldn’t have it any other way. The truth is, I didn’t become a Forex trader for the excitement. I became a trader because I love trading. Everything from the dynamics of interrelated markets to the way price respects key support and resistance levels. I love it all.
If you need some excitement in your life, there are hundreds of extreme sports you can take up. But when it comes to your trading capital, boring is the way to go.
Forget About Your Win Rate
Forget about your forex win rateThis is one of the most talked about figures in all of Forex trading. It is also the most controversial, at least in terms of its importance. But here is my stance…
It is absolutely meaningless.
I never said I was going to sugar coat it. That just wouldn’t be my style.
Here’s the deal, you don’t have to win more trades than you lose to make money consistently as a Forex trader. What you have to do is make more money on your winners than you lose on your losers.
A perfect example is my four-month NZDJPY short position. The total profit on that trade was 54R. Now if I’m risking 1R on each trade after that, guess how many I can get wrong before I start losing money on the year?
A lot.
That may be an extreme example, but it certainly proves my point.
To clarify, this does not mean that you don’t need a trading strategy that stacks the odds in your favor. But part of that strategy needs to include maintaining a favorable risk to reward ratio. Because the truth is, your win rate won’t always be stellar, nor does it have to be to make money consistently.
This idea of needing to win 90% or even 80% of your trades in order to make consistent gains is ridiculous. It simply isn’t necessary. I have had several months since 2010 where my win rate dropped below 50%.
But guess what?
Most of those months were profitable because the lowest multiple for me to even consider a position was and still is 3R. That means I had a target of 300 pips for every 100 pips at risk. And that was just the minimum. Many of my trades were much higher than that.
To reiterate so I don’t get myself in trouble, I’m not saying that you don’t need an edge, nor am I saying that it’s okay if your win rate is below 50%. If you find that happening more often than not, chances are your trading strategy needs some work.
However what I am saying is that your goal should not be to achieve a 90% win rate. Your goal should be to maximize gains and minimize losses.
How do you do that?
Two ways. The first is to always use a favorable risk to reward ratio. The second is to pyramid into a winning position, but only when you have reason to believe the market will continue to trend in your favor.
There are many figures and ratios that should be at the top of your list as a trader, but your win rate should not be one of them.
Maximize Gains
As mentioned above, one of the best ways to become a profitable Forex trader is to maximize your gains. That may sound a bit obvious, but let me explain…
Most Forex traders attempt to maximize their profits by taking more trades. The problem with this is that it goes against one of the key principles we just discussed – that less is more.
So of the two ways to make more money as a Forex trader, we know that taking more trades is not the answer.
What is the answer?
Maximizing the setups that you do take. After all, if you are staying patient and only taking the best trade setups, why not squeeze every bit of money-making potential out of each one?
By pyramiding on trades where the trend is strong, you can squeeze a lot more profit out of each trade. Of course it’s extremely important to be selective, not only in terms of which positions you choose to pyramid but also where you decide to add to a position along the way.
Trying to take more setups will always get you in trouble. Instead, maximize the gains on each “A+” setup you do take by always keeping your eyes open for setups that have the potential to be pyramided.
Percentages Are Not Enough
currencyHow much do you risk per trade? Is it 1%, 2% or maybe 3% of your account balance?
Most traders stay in that range of 1% to 3% when they put on a position. This is okay, but what if I told you that by keeping your calculations one dimensional, you are actually feeding the potential for an adverse emotional reaction should the market move against you?
If I asked you how much money you risk per trade, you would probably pull out a calculator and tell me what 2% of your account balance is. Again, that’s okay. I wouldn’t expect anything different.
But here’s the thing…
The Forex position size calculator on this site has a “swap with money” button for a reason. In fact every time I calculate my position size, I always do it based on the amount of money I’m willing to risk on the trade, not simply a fixed percentage of my account balance.
The most painful part of a losing trade is losing the money, right? That’s a big trigger for most traders and for good reason. After all, as humans we are wired to think in terms of money in, money out. Money in is always a good thing. Money out, not so much.
A great example is to think about the idea of always risking 2% of your account balance. If you have a $1,000 account at the moment, $20 should be pretty easy to part with.
But what happens when you grow that account to $100,000? That same 2% is now worth $2,000.
Are you going to be okay risking $2,000 on a single trade idea?
Maybe this wouldn’t bother you, but that’s more than most traders are willing to part with, even those with a $100,000 account.
With that in mind, it makes a lot more sense to calculate your risk based on the amount of money you are willing to lose. Of course that doesn’t mean risking $500 on a $1,000 account. The percentage portion of the calculation is still important.
For that reason it’s a good idea to think in terms of money risked but also have a percentage cap.
An example would be a trader who has a $10,000 account and uses a 2% cap. This means that the trader can risk up to $200 per trade.
But let’s assume this trader is only willing to lose $150 on any one trade. Losing more than that may lead to emotional decision making for this trader in the event of a loss.
In this case the $150 risked is well within the limit set by the 2%, which would be $200 of the $10,000 account. By doing this the trader manages to minimize risk and also fully accept the dollar amount that could be lost at the same time.
Hope and Trading Do Not Mix
There are a lot of four-letter words in the Forex trader’s dictionary, most of which I can’t post here, but the word “hope” should not be one of them.
Having hope at most times in life is fairly harmless. You may hope for great weather on your vacation. You can also hope that your car’s repair bill isn’t too high.
But hoping for a trade to play out in your favor is disastrous. There are no two ways about it.
When you begin to hope that the market will move in your favor, you build up emotions. Those emotions can quickly turn into expectations of something you want to see happen.
As we all know, the market does what it wants, when it wants and there is nothing we can do to influence that outcome.
Becoming a successful Forex trading is about putting the odds in your favor. It’s a game of probabilities plain and simple. It is never about crossing your fingers and hoping for a favorable outcome.
Nobody likes to loss money, but if you find yourself hoping for a win, you are sabotaging the neutral state of mind that is necessary to become consistently profitable.
