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27 Rules for Forex Trading A Primer for all Investors
By GetForexSignalsNow.com
© 2017 GetForexSignalsNow.com All rights reserved.
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IMPORTANT NOTICE
Forex Trading is not for the get-rich-quick. You need to make your best effort to learn. There is a potential for profit. There is the potential for loss.
Past performance is not necessarily indicative of future results. You need to understand the risks and accept them in order to trade responsibly. Never
trade with money you can't afford to lose.
27 Rules for Forex Trading is designed to assist you in making informed trading decisions. Feel free to disregard the information entirely or to act on it accordingly. No representation is made that any trade based on use of the information herein will or is likely to achieve profits or losses. We have done
our best with this book.
But past performance of any trading system or methodology is not necessarily indicative of future results.
WARNING
All content provided in this book is protected by copyright law and international treaties. Unauthorized reproduction or distribution of this information, or any portion of it may result in severe civil and criminal
penalties, and will be prosecuted to the maximum extent possible under the law.
© Copyright 2017 GetForexSignalsNow.com ALL RIGHTS RESERVED
NOTICE: This publication is informational only. It is offered with the understanding that neither the publisher nor author may render legal, accounting, or other professional service. If legal advice is required, a
competent professional should be sought.
No part of this book may be reproduced, transmitted, stored in a retrieval system, in any form, or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior written permission of the publishers or author.
Note: Cartoons shown throughout are done by Ron Leishman purchased at ToonClipart.com
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Rule 1: Treat Forex Trading as a Business This is by far and away the most important rule for anyone who wants to trade. For this reason, we make this our number 1 Rule.
DayTrading is not some Get-Rich Quick scheme. You will not become a multi-millionaire overnight. Do not listen to those who tell you they turned $1000 into $2 Million in 1 year. DayTrading is not gambling, it’s no casino.
DayTrading is a business, pure and simple.
The reason most people fail at trading is because they do not consider DayTrading to be a business. Deciding to become a trader requires a lifestyle change. This is especially true for those of you who work at home. Suddenly you are your own boss. You now work for yourself. There is no one to tell you what to do. There is no one to tell you when to do it. There is no one to punish you if you break the rules. The only one who cares if you are profitable is You!
The Market does not care if you make money or you lose money. The market does not even know you exist. You can do anything you want while you trade. The Market has no control over you. It does not tell you if you are trading by rules, if you are trading correctly or incorrectly.
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The only limitation the Market (or your broker) imposes on you is the amount of money in your trading account. For this reason, those who purchase trading software packages are rarely successful traders. A few instructions on a package do not make a professional trader. It takes time to be successful at any skill and trading is no exception. Software packages do not have anyone to explain to them that trading is a business and must be treated with the respect that any business commands.
Making daytrading a business is especially difficult for those who have spent their lives as an employee. Suddenly, there are no weekly paychecks, no boss to tell you if you have done well or done poorly, and NO promotions.
In fact, in many cases, there is no one to even talk with during the day. For many people, the lack of human interaction is by far the hardest part of trading.
If you have a cat or dog, that may be the only one you will talk with (or at) all day. For those who have worked for a living and are accustomed to the daily human interaction found in a business environment, it may take time to transition to working at home.
Treat daytrading as a business. After all, it is your own portfolio you are trading. I know someone who gets up every morning, puts on a business suit and tie, goes to the office in his home, and trades in a business-like fashion. If that is what it takes for you to be profitable, you had best buy a lot of ties.
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Rule 2: Discipline Day Trading requires self-discipline. If you were at a job, you would have rules to follow. You would arrive at your job at a certain time. You would work for a certain number of hours. If you performed your job well, you would receive a regular paycheck, perhaps a year-end bonus and maybe even a promotion. However, if you break those rules, you may get yourself fired.
To become a successful Trader, you must create rules for your business and have the stick-to-it-ness to adhere to the rules you create. Otherwise, your business may fire you. You can learn all the rules to trading. You can develop a truly profitable trading strategy. If you do not have the self-discipline to follow your own rules, you will never be a successful trader.
If you find you are not successful, you may need to take stock of your own strengths, weakness and your inabilities to maintain discipline. Focus on your strengths, overcome your weaknesses.
Here’s an important part of Rule 2:
You must be disciplined 100% of the time!
Trading with discipline is not like claiming you’re on a diet while sneaking a candy bar every afternoon. If you only trade with discipline some of the time, you are simply not disciplined.
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Overtime discipline trading will result in fewer losses and more profits. Here are some tips to follow so you can remain disciplined:
● Take baby steps when learning to trade. Start by trading with smaller lot sizes and gradually build up
● Develop a plan that you can follow with every trade. The plan includes specific steps for BOTH profits and losses. Know exactly what you want to get out of each trade. If you hit your target, exit. Don’t push the umbrella
● If you are in a losing trade and it hits your trading plan’s stops, exit. Better to lose $100 than $500 or $600
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Rule 3: Be Your Own Boss You are the broker of your own business. You are solely responsible for the success or failure of your business. You should have the same expectations you would have if your account were at a large brokerage being traded by a professional broker.
If the professional were sick or angry or had come to work right after a fight at home, would you want that person trading your account? Then why would you trade for your own account in that condition?
Trading requires complete detachment. If you are feeling sick, or you are angry about something, or you are rushing to make an appointment, that is not the time to be trading for your business.
Moreover, do not get "married" to any trade. You planned to enter the trade, profit quickly, and then exit. But the trade did not go the way you planned. Do not become emotionally attached to that trade. If it is unprofitable, know when to exit. Better to exit with a small loss than remain married to something unprofitable. What marks the difference between a novice trader and a seasoned professional is the ability of the professional to know when something is not profitable.
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There is an old adage that all professional traders live by: "You can be Right or you can be Profitable". The key to successful trading is your ability to LET GO. You must let go of your emotional need to be right.
The trade is going against you. But you just cannot accept the loss. Now instead of a small loss, you are looking at the trade having to make a sizeable recovery just to get back to where you entered, let alone make you any profit.
You might be right that eventually the trade will go in your direction. But meanwhile, there are lots of trades you could have made had your funds not been tied up. Unfortunately you remained married to the original, unprofitable trade.
Your Emotional Mindset accounts for 100% of the success or failure of your trading business. Find this hard to swallow?
If 10 people were given the same exact trading formula to follow, there would be 10 completely different financial results. Why? Because some traders would be able to let go of their unprofitable trades and others would not.
If you have a trade that does not go your way, do not take it out on yourself. If you are upset by the mistake, turn off the computer and go take a walk. Do not continue to trade. It is the old "woulda, coulda, shoulda" routine. If only I had done this or that. Forget it. Its history. Move onto the next trade. Do not try to "Make it back". Ok, you had a losing trade. Do not beat yourself up about it. Learn from your mistake. THANK the market for the education and move on.
Seasoned traders have all made mistakes and continue to make mistakes virtually on a daily basis. The one common denominator they all have is a willingness to learn from their mistakes.
The last point about being your own coach is, careful of being overconfident or "cocky".
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You had 10 profitable days in a row and now you are feeling as if you could never lose. Being cocky could lend itself to overzealous trading and a failure to follow your trading plan.
Again, stick with your trading strategy. It is successful for you. Do not introduce new (and untested) techniques. Trade what you were profitable with again and again. Be a good coach. It is even ok to pat yourself on the back when you do well.
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Rule 4: Develop Your Own Trading Strategy It takes time and patience to develop a trading strategy or system. It takes an equal amount of time to learn to follow it. You need to be consistent. Each trade should follow the system you developed, even if you just had 3 losses in a row.
It is essential that you trade with your own strategy. You need to develop a trading style that matches your comfort zone. How many traders are always looking for the "Holy Grail" system. "If I just had that this system or that system, I could be consistent."
Pssst...there is no Holy Grail.
Just because some system works for Joe, does not mean that Sam will be able to make money with that system as well. Trading strategies must be tailored to each individual investor. Why? Because each investor has his own risk tolerance.
Put 10 traders in the same room. Give them all the
same charts, the same amount of money to start with, the same time to trade. You will see 10 different results. Some investors will be extremely profitable. Some will lose their shirt. Some will break even. Each investor has his own risk tolerance. All trading strategies must consider money management, the degree of risk the trader feels comfortable taking on while trading.
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Perhaps the worst thing any trader can do is listen to some pundit on the news television. Buy this stock, it is going up. It is going down? No problem, hold on, it is coming back up. Listening to news pundits is almost a guaranteed lose for you. Why? Because pundits do not know your risk tolerance.
One rule of thumb: Never trade with more than 30% of your portfolio on one trade.
Those 10 traders in the same room with the same starting funds and same charts. Some of those traders will be comfortable with a small profit and others will demand more. Remember, this is your trading strategy not theirs. You could be in the room with all those traders, walk away with only $200 while others walk away with $1000 and you can still be happy. Because that is your strategy, you made it and kept what you made. Just because your neighbor, friend, or the guy at work made $1000 doesn’t mean that your $200 win is worthless.
Make sure your strategy is comprehensive and covers every contingency, including entry and exit. Have the patience to wait for the proper strategy setups and the discipline to follow your entry/exit.
Do not chase the market. If the setups do not align with your strategy, have the self-control to pass on the trade.
You develop your own trading system through trading. Initially, spend time doing the research needed to determine a profitable approach to trading.
Perhaps you can purchase a couple of books and read up on the subject. Maybe invest in a software package that gives you the basics from which you can build your own system.If you have enough money, attend a seminar or get one-on-one mentoring from someone who really knows how to trade.
Regardless of how you go about building your system, the real way you will learn to trade is by trading. A surgeon does not learn to operate by reading a book. A pilot does not become a captain because he used the company’s flight
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simulator. A teacher becomes a better teacher by standing in front of students.
To become a better trader you must trade. Want to build a better mousetrap? Build a mousetrap. Once you have built a good foundation for trading, you can expand on what you built.
You will need to be willing to experience some losses along the way while you are perfecting your trading. But if you trade your strategy and experience losses, at least you traded your strategy. Once you have tested your strategy again and again, you will gain the confidence needed to rely on the indicators your strategy provides.
For day traders, look to trade shorter-term trends where you can enter and exit quickly several times a day. That way you are not tying up your capital for too long a period. Regardless of your trading pre-disposition, make sure the strategy you choose aligns with your risk tolerance.
If you develop/test a trading strategy and never follow the strategy you develop, you can never know if the losses could have been avoided. You will be back to "woulda coulda shoulda".
An essential part of your strategy must be "take what the market gives you". If the trade goes your direction and suddenly turns against you, take your profit and exit.
Do not develop a strategy that calls for a profit above and beyond what the market gives you. You wanted to make 50 cents per share. The market turns your direction, but 15 cents per share into the trade, the market begins to turn. You made a profit-take your profit. Too often the market will turn against you and take back the 15 cents or more.
Another important part of your strategy is ensuring that the trade setup is really as you expect it to be.
Before you enter a trade, ask yourself why you are entering the trade?
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Are you entering the trade because you have a legitimate strategy setup or because you are feeling impatient or are you pressed for time?
You almost want to talk yourself out of the trade instead of into it. If you cannot talk yourself out the trade, do the trade.
While you are in a trade, take stock of your emotions. If you are worried about the success of the trade, you can always exit early. If you are trading more than a few shares, you can close half of your shares and leave the other half running.
Once you exit the trade, you should review your strategy. Ask yourself, "Was the strategy setup correct?" "Did I exit the trade before I should have?" "Was my exit too late?"
You become a better trader by trading and after the fact, reviewing your successful trades along with your mistakes.
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Rule 5: Do Not Trade Beyond Your Comfort Zone Paper trade your trading strategy. Do not trade with real money before you have fully tested your plan and contingencies. Brokerages offer E-Mini market simulators that you can use to develop your trading system. Invest the time to gain confidence trading before you trade for real.
Once you begin trading live, build up to larger trades. Begin with a handful of shares, perhaps a 100 lot or maybe 2 contracts. When you are accustomed to trading with that amount of money and you are making consistent profits, increase the number of shares.
Too often novice traders want to make a quick killing, trading 500 or 1000 shares without having first made consistent profits with 100 or 200. Professional traders know better. Only risk a small portion of your capital on any one trade. If you can only afford to open an account with 200 shares, do not risk it all on any one trade. Look to minimize your losses.
If the trade is not going as you planned, exit the trade rapidly for a small loss.
If you are under-capitalized, you may end up trading with "scared money". Scared money generally leads to poor trading habits, more mistakes, and an almost self-fulfilling prophecy that you really cannot make good trades. Failure to enter trades timely per your trading strategy for fear of losing capital may ultimately cause you to make even more mistakes.
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"I can / I cannot, I can / I cannot" trading can only prove disastrous for you in the long run. Do not let others convince you to trade beyond your means.
Your broker calls you up and tells you about a hot tip. "You gotta get in on this trade". He convinces you to buy shares on margin (where you borrow the money from the brokerage). You know you cannot afford to lose the money because you could not pay the margin back. Why are you out on margin? Why trade beyond your comfort zone? Would you not be better off buying shares you can afford to lose?
I knew a man who traded "Black Wheat" (used for delicate pastas such as Japanese Udon). He was on a "hot tip". He mortgaged his home and was out on margin almost twice as many shares as he was on real cash. That year there was a shortage of Black Wheat and the U.S. Department of Agriculture had never allowed Black Wheat to be imported.
This gentleman was about to make a killing. The operative words here are "had never" and "was". That year the Department of Agriculture made an exception and allowed Black Wheat to be imported since it was at such a shortage. This gentleman was wiped out. The bank foreclosed because he could not afford to repay the margin.
Wait until you have the financial wherewithal to trade live. From paper-trading you develop the skills to quickly recognize proper strategy setups and the confidence to enter and exit trades in a timely fashion.
You alone will know when you are ready to trade live. Once you decide to trade live, start slowly and build up. You will be amazed how quickly you can increase the size of your portfolio, even if you trade conservatively.
The secret to improving the size of your portfolio is not always more pips or more trades. It is being consistent. If you consistently have winning trading days, your portfolio will grow without having to take unnecessary chances, such as using margin you know you cannot afford to repay in case you lose the trade.
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Rule 6: Do Not Trade When You Are Sick Do not trade when you are sick. Sounds silly right? Self evident truth?
I had a broker once. Called me up. He was sick as a dog. Hacking and coughing. He wanted me to buy stock in some company. I could barely make out what he said. I told him to call back when he was not sick. The broker had no respect for my portfolio. I do not have that broker any more.
If you are sick, not feeling up to trading, dizzy, or hung over from yesterday’s party, do not trade. Have respect for your own portfolio.
Say you are playing tennis, championship game. The referee makes a bad call. You get angry. You are no longer playing tennis. You have probably become tense. Has anything really changed except your interpretation of the event taking place? What are your chances that you will now win the game?
One of the important keys to online trading is hand / eye coordination. Being able to rapidly use your mouse and keyboard when a hot opportunity presents itself. If you are sick, do you honestly
believe you have the same abilities you have as when you are well?
This also applies to times when you are hungover. Last nights party was excessive to say the least. This morning your eyesight is blurry and you head heavy. Respect your own portfolio. Do not trade.
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Rule 7: Do Not Chase a Trade Do not chase a trade. You have decided to enter a trade. You see a setup. You know you want to enter the trade. Find the close price from the last bar click execute.
If you do not get filled, wait for the next trade. Do not change your price and keep trying to get filled.
If you do not get filled right away, no problem. Wait for the price to come back to you. The price generally swaps back and forth between the Bid and the Ask. If the close price of the bar happens to be the Bid price and you want to go Long, it might take you a minute to get filled. Unless you feel very strongly about the trade, wait for the Bid price to be filled.
Do not enter at the Ask price. If the close price is the Ask price and you want to go Short, it might take you a minute to get filled. Just wait a minute. Unless you feel very strongly about the trade, if you do not get filled on your limit price, wait for the next trade. Your next entry is just around the corner. Never chase the trade price. "Oh I did not get in at $1800. Now the price is $1801. I will change my enter price. That nearly always guarantees you a lose. Most of the motion of that trade has already passed you by.
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Rule 8: Pick Your Battles One error traders make comes up continuously: Trading after trading after trading. You do a trade, it’s successful, you are profitable. During the trade you have your attention on the trade, adrenalin is flowing. You make a successful trade and instantly, voila, you are on a "high".
While still on this high, you make another trade. With the second trade, you are not nearly as careful because you are still on the high from the previous
If you are trading right after a first trade, you do not have time to recover off the high. Now you make mistakes. You are not as careful as you were
before.
After a mistake, it seems the first thing anyone thinks of is "I must get it back. NOT! Before rushing into another trade, take some time. Have coffee, walk around the room, open the window, take a walk outside. If you come back to trade again, come back as if you never made the first trade. Do not trade to "Make It Back". Apply the rules, trade systematically and you will recover..
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There are plenty of trades to make everyday. It’s not as if that was the last one for the day. There will be another taxi along in a few minutes.
If you tried to make a trade and the market did not fill you, wait for the next trade. All too often traders change their offers to buy and sell and chase the trade.
The most important tip you can have: "Pick Your Battles". Find trades you feel most comfortable about. Try to talk yourself out of the trade not into it. If you cannot rapidly talk yourself out, it’s probably a good trade.
Wait wait for the FULL confirmation.
Yes, you are trying to win the war. You can win the war by picking YOUR battles. You cannot win the war by picking the MARKET’s battles. It’s almost a guaranteed lose.
If you did not get filled and the price moves away from you, wait for the next taxi. Do not "chase" the price. If the market did not fill you at the price you entered, wait for the next setup. Do not be impatient.
Someone actually said once "I have been waiting for 5 minutes and I have not made a trade yet". Oh Please..................
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Rule 9: Learning to Scalp A Scalper is someone who buys and sells quickly to take advantage of small price fluctuations.
A scalper buys at the Bid and Sells (or Shorts) at the Ask with a limit order. Scalpers actually provide liquidity to the stock market. A trader who looks for trades in this fashion has been nicknamed a Scalper because they attempt to Scalp the small differences in price between the Bid and Ask.Scalpers do not enter positions and carry them overnight.
In any market, there are buyers and sellers. Whether you are selling real estate, antiques, or stock shares, there is always someone who is willing to buy and someone who is willing to sell. When larger ticket items are involved (such as homes or automobiles), there is generally some sort of negotiation. The seller wants a certain price that the buyer may not be willing to pay. The price the seller wants is known as the Ask price (the price the seller is asking to receive).
The price the buyer wants to pay is the Bid price (the price the buyer is offering to pay). Essentially the difference in price between the highest price that a buyer is willing to pay and the lowest price for which a seller is willing to sell is the Bid/Ask Spread.
Why does Scalping work with Forex trading? There are 3 reasons:
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1) You limit your exposure to risks. You are in the market for only a brief moment, thereby diminishing the probability the market can take you out.
2) Smaller tick moves are easier to obtain. It is easier to get a 2 pip win than a 7 or 8 pip win.
3) Smaller pip moves are more frequent than larger ones. Even during relatively quiet market times there are many small movements that you can exploit.
As a Scalper, you Short on the Ask or Buy on the Bid. The question is: which one do you enter. Do you Buy on the Bid or Short on the Ask? The market is breathing between both of them. Which direction should you take?
Here is where confirmation can be very helpful.
Put on a MACD on the 1 MINUTE CHART. If the MACD is pointing downward, Short on the Ask. If the MACD is pointing upward, Buy on the Bid.
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Rule 10: The Big “I” The one most common error that every novice trader makes is being IMPATIENT.
I have not traded for the last 5 minutes so I just gotta jump in.
Do not do it!!!!! Wait for your setups. See the trade in advance.
Trade the setup. If the setup falls through, wait for the next setup. The key to trading is Waiting.
Remember: There are 3 positions that one can take in trading: Going Long, Going Short, Sitting on the Sidelines waiting. Sitting on the sidelines is just as important as being in a trade. Be patient.
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Rule 11: Big Winners -- Big Losers You never want your largest loser to be bigger than your largest winner. Your stops should always be smaller than your profit targets. And always respect your stop losses, don’t ignore them.
Keep a trade log of all your trades throughout the session. That way you can know your largest winner and adjust your stop losses accordingly. It is not necessarily the case that the strategy you created 3 weeks ago, with its accompanying stop loss, is still relevant today. You may need to adjust your trading strategy according to the prevailing market conditions.
If you keep your losses lower than your gains, at the end of the day you’ll
have net profit.
When you are first starting out as a Forex trader, don’t look to hit a homerun with each trade. Set your profit goals realistically. Concentrate on making small profits every day. As you gain more confidence with trading, do one of two things.
1. Expand your profit targets. You’ll also need to expand your stop losses, but to a lesser degree.
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2. Do more trades. If you make two trades a day and one is a loser, your net, while profitable (winners larger than losers), is very small. Through confidence, executing more trades continues to give more profit over losers.
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Rule 12: Adjust Your Expectations
Look -- not every day is a good trading day. Some days may just not be a good day to buy and sell. Perhaps the markets are waiting for the ECB or Feds reports. Maybe there was a negative news report that left the markets flat. You’ve been trading gold and now gold is not as volatile as it was.
In this case, adjust your expectations.
You’ve been trading a full standard contract. Why continue to lose while trading a full contract. Trade a mini-lot instead. If you have two or more consecutive losing trades, lower your profit targets and reduce your trade size. Once you see the markets performing well again and you are winning more than losing, go back to your original strategy.
So often especially novice traders feel that since they open their brokerage account with a large deposit, they should trade large size regardless of market conditions.
Evaluate the conditions before determining trade size!
If you are new to trading, prove to yourself that you can buy and sell profitably before increasing your trade size. Trade for a week or two. When you can be profitable over consecutive days, and you have proven to yourself that you know what you are doing, increase your trading size -- gradually.
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Rule 13: How Long Should You Trade In the world of trading -- less is definitely more. The less time you are in the market, the fewer opportunities the market has to take the money from you.
Interestingly enough, the first trades you make each day are generally the best. So if you are trading live and also using the simulator in the same day, use the simulator after you finished live trading for the day. That way, if you make a mistake, you make it on simulated trades.
Most important, do not trade all day, bell to bell. That is a disaster in the making. Trade an hour or two, end off. Go take a walk. If you want to trade again later, that is fine. But do not continue to sit in front of the monitor all
day.
If you have a bad trade, do not try to get it back. Thank the market for the education and continue trading. Do not spend all day in front of the machine getting it back. That rarely works. Just as soon as you feel tired, end off.
Forex trades round the clock. There was one trader who traded 24 hours a day, no sleep. He was successful up until the moment he finally fell asleep...and lost all he had gained. Trading 24 hours a day would probably not be advisable!
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Rule 14: Back to Back Trades Doing back to back trades is rarely profitable, especially when the first trade is a loss. The thought being: "I will just reverse my direction and it will be correct".
Back to back trades generally means the trader is frustrated and not waiting for setups. Remember: wait for setups per your own trading strategy. When you see them, make your trade and get out of the market as fast as you can.
With back to back trades, you barely have enough time to settle down from the previous trade before you enter a new trade, (still on that adrenaline high if it was profitable). Take a tip. Do a trade (good or bad) and chill out. Then walk around the room, look out the window, take the trash out, clean the toilet, pet the cat, feed the fish, water the lawn, read a book, fly a kite, get yourself a jump rope and do 10 minutes of exercise.
Do anything but another trade. You may even have to close the trading platform out completely...the old "out of sight out of mind" game.
Remember: When it comes to executing trades, more is less, more is not more!
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Rule 15: Don’t Be a Contrarian Yesterday the market was up 222 points. It was simple to just Buy. All day long you could just Buy. When the trend is that strong, why look to trade in the opposite direction?
Go with the trend. If everyone is clearly Buying, then Buy. If everyone is clearly Selling, then Sell. Why be a contrarian?
Know what the definition of a contrarian is? "One who takes a contrary view or action, especially an investor who makes decisions that contradict prevailing wisdom, as in buying securities that are unpopular at the time."
The market is up 222 points. Why look for a trade to go Short? Just wait for the next Buying Setup and enter. How easy is that!
But when the market is over 100 points in any direction, trading against the market is risky. It dramatically reduces the probability of a good trade. Why? Because: MARKET EMOTION IS SO STRONG
When market emotion is strong, it dictates the direction of the trades. Do not trade against strong emotion. It is too easy to make money following the herds.
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Rule 16: Cocky Why only trade for a few minutes every day if you are winning? Why not trade all day long? To sum it up in just one word, the answer to that question is simple: COCKY
When you make several trades in a row, you forget the rules and develop this weird viewpoint that you can do no wrong. You are no longer vulnerable to
the Market. "Yeah, I can make that trade, sure the indicators are going the other direction, watch this."
You might get away with one or even two trades, but then, wammy...you overstayed your visit. Kind of being with your relatives for Christmas
dinner...the first couple of hours are enjoyable, but as time goes on...
It does not take a brain surgeon to figure out the derivation of the word Cocky!
The hardest part of trading is trading. It’s not finding the trend or entering the trades or getting your profit. It’s keeping your profit consistently, day after day after day. That is the real trick to trading. The fewer trades you do, the less opportunity you give yourself to become cocky.
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Rule 17: I Can -- I Can’t Syndrome Here is one of the hardest things for novice traders: Transitioning from Simulator trades to Live trades
You are on the simulator, trading well, very few bad trades. Change to trade with live money and you cannot make a good trade to save your sole from the devil. The odd part about this is that it is harder to trade with the simulator than it is to trade with live money. Simulators have built in bugs and often lag the real live Market. So what is the problem?
Novice traders have fallen prey to the evil "I can - I can’t syndrome".
Here is how it works...
Trading with the simulator, you learn the indicators, you see the market setups, you enter trades based upon what you see at the time you see it. Now comes trading with money. Oh, you see the trades ok, you see the market setups, but you cannot enter the trade.
You want to enter but you cannot pull the trigger.
I can - I can’t. I can - I can’t.
You begin to doubt yourself. You doubt you know what you see. You doubt your indicators are telling you accurately. You doubt you will ever be a
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professional trader who trades for a living. And most importantly, you doubt this will be a profitable trade.
Finally you begin to conquer your doubt and make the trade. But by the time you overcome your own emotions, it’s too late. The trade has passed you by.
Entering late, you now have a bad trade. You have successfully self-fulfilled your own prophecy that you cannot make a good trade to save your sole.
How do you overcome your own doubts? By undercutting...
Underneath the "I can - I can’t" syndrome is an underlying doubt that your indicators are trustworthy. If you felt that your indicators were reliable, and that you could successfully identify market patterns, you would not fall prey to the syndrome. What you need to do is this.
Stop trading. Even stop entering trades on the simulator. Spend 3 or 4 days, whatever you need, and watch the market. Watch your indicators give you the setups you need to be profitable. Just watch the charts and your indicators. Do nothing more. Do not even make simulation trades.
Sometimes even entering simulation trades is above the undercut you need. That is why you just want to sit and watch the market until you KNOW you can trust your indicators to give you profitable entry points.
When you have CERTAINTY that the indicators are identifying the trades correctly, begin to trade on the simulator again and finally trade with real money.
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Rule 18: Don’t Get Pressured to Trade Trading is not a horse race. There is no reason to feel pressured. It’s not like
you only get 1 chance per day to make a trade. You get lots of chances. So do not feel bad because you missed a setup and did not enter that trade.
The objective of technical analysis is to see the setup well in advance of its happening.
In essence, you’re waiting for the Market to come to you.
There should never be stress in trading, no "gotta" do’s anything.
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Rule 19: 3 Basic Elements of Any Trade Virtually every successful trade has three basic elements:
Divergence, Penetration and Slope. Each of these elements comprises 33% of a successful trade.
Look at it this way... Every time you remove one of the 3 elements from your trade, your trades success potential drops 33%.
Divergence: Definition: The comparison of averages between two time frames, a shorter time frame and a longer time frame. Since the shorter time frame’s average will be more affected by the addition of the new bar than the longer time frame’s average, we can expect the two comparison averages to change at different rates.
Example: MACD has two exponential moving averages with different time frames. When the shorter time frame moves in the opposite direction of the longer time frame, that is divergence. When divergence occurs, there tends to be more volatility, and thereby more setup possibilities.
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Penetration: Definition: The point on a chart when Price and an indicator intersect, with Price pushing past the indicator.
It is especially important for trading through barriers, such as Moving Averages and Pivot Points.
Example: When the Price of the Currency Pair crosses above a resistance Pivot, expect to see new buying possibilities. If the Price remains below the resistance Pivot and above the Support Pivot, the trend will probably continue without new entries.
Slope: Definition: An attempt to explain the relationship between a straight line Price. It is a measure of the height and angle difference of the previous and current bars.
It is especially important for Moving Averages, MACD (which is comprised of Moving Averages), and Stochastics.
Example: When the slope (angle) of the Moving Average is flat, do not expect to see new trading entries. However, when the slope of the Moving Average begins to accelerate, either up or down, then expect to find new setups for entry.
If one of the three, divergence or penetration or slope, is missing, it becomes much more difficult to find new entry possibilities. Expect short lived trends, and choppy trading.
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Rule 20: Knowing You Don’t Know Let’s get to the meat of this rule right away. The truth is, there are no "easy paths", quick success to trading. There are dozens of gurus selling snake oil on the net. There is even an entire website that sells nothing but cheap $50-200 strategies. If it were such a good strategy, why would someone sell it for $50?
Being a consistent trader is more than just opening an account with a broker, depositing some money, and then trading live. One of the first hurdles any novice trader must face is realizing that they know they do not know.
In order to trade successfully, there are two important considerations you need to know:
1) How the market trades, its underlying behavior.
2) You need to know yourself, your underlying behavior when trading.
Overcoming the first consideration may be easier than the second. Getting a basic education on trading, time with simulation, creating a trading plan and experiencing trading live will help handle your first obstacle.
Someone who wants to become an ace at computer games would not build his own computer without first playing the games to determine which computer parts give the best advantage.
One of the key differences between novice traders and seasoned veterans is that the seasoned veteran knows he does not know. Experience has taught
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him that there are things about trading even seasoned veterans will never know -- probably because they are simply unknowable.
It is difficult at best to predict future Market direction. Watch the business news channel and you will see pundit after pundit telling you that they DO know where the Market is going. These are the same pundits who said that the Market crash in 2008 could not happen.
Trading is not a business of predictions. Trading is a business of high probabilities based upon live experience, research, and human reaction.
Here is the only trading rule that you can know:
Knowing that you do not what the Market will do makes you a better trader.
If you believe you already know where the Market is going, you’ll have a bias as to the trade entries you are watching. Say you believe the Market is going up. You won’t be watching for selling opportunities because you bias is already set.
Chances are, if you know you do not know, you’ll be a more cautious trader. You’ll be watching for buying and selling setups. You’ll have laid out a conservative plan in case the Market turns against your trade.
Knowing you do not know is in fact, NOT detrimental to your success as a trader.
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Rule 21: Trading Starts with Psychology In order to be a successful trader, a trader needs to know himself. You probably think that "psychology of trading" is nonsense, that some how if you learn technical analysis, you can readily overcome the mental aspects of the game of trading.
Seasoned professional traders will tell you: “trading is a mental game."
50% of trading is technical analysis and 50% is psychology, controlling your emotions, especially fear and greed. The mental game is all about personal discipline, especially after a string of losing trades. If you cannot accept losses, the odds of being a consistent, successful trader are very low.
Seasoned veterans will tell you that it is important to take small losses than try to recover from in a big losing trade.
There is an old adage in trading "it is better to be profitable than be right." There is no such thing as a perfect trader. The more you trade, the more experience you will acquire and the fewer losses you will take. But no one is absolutely perfect.
Think of trading like opening a restaurant. When you first open the restaurant, you really have no idea what you are doing. What will the menu be? How much food needs to be bought? How many customers will there be? What should the average menu item cost and will the customers agree to this?
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As months of operation go by, answers to these questions are simple. You know how many customers you have every day, how much food to buy, what the menu looks like, etc. At that point, running the restaurant becomes a business, a livelihood, no emotion, no fears, no real thrills either. It is a very uneventful day. Trading is like that too. At the point at which trading becomes uneventful, the psychology of trading becomes less important.
To get to the point where trading becomes uneventful, here are some key points you should consider that may help reduce the mental side of the game.
1) Set your profit target goal for the day, make your target and end off. Do not try and make a killing every day. When you have a loss, take it in stride. When you have a win, understand that it is just 1 trade closer to ending for the day. Keep your ego out of trading as much as possible. You are just running your restaurant. The more uneventfully you run your restaurant, the easier it will be for you to control your own fear and greed.
2) Look for as many confirmations to your trade as possible. Try to talk yourself out of the trade before you make it. If you cannot talk yourself out the trade, go ahead.
3) Look to exit a losing trade quickly. Do not remain in a losing trade, tying up your funds, while watching profitable trades pass you by. Remember, you are solely responsible for your wins and losses. You cannot blame anyone else. You are the banker for your own account.
4) Get yourself the proper trading education so you will know what you are trading, when you can trade, etc. Find winning strategies that you can watch for every day. Trade with the same strategies over and over. It,s like making the same pancakes in your restaurant day after day. Do not look to trade new strategies you have never tried, especially high risk strategies. Try your high risk strategies out on a real time simulator many times before you go live with real money.
5) During the course of the trading day, identify who is in control, the bulls or the bears. Do not trade against the trend. On a bullish day, trade long. On a
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bearish day, trade short. Do not be a contrarian. Follow the adage that the trend is your friend.
6) Never expect the Market to give you money. The Market is not an ATM machine. Do not say, I need to make $200 on every trade. Take what the Market gives you. If the Market gives you $12, take it. Understand one basic adage, the Market is always right.
7) Do not spend all your time over-analyzing your trades, to the point that by the time you have determined it is good, it is too late. There is an old adage in the world of education, "Those Who Can’t Do Teach.” For trading, that adage says "Those who can’t trade become technical analysts.” Technical Analysts can’t push the button and enter the trade. They wait and wait and finally when they do enter, it is too late and the trade has passed them by. They end up with a losing trade and a self-fulfilling prophecy that they in fact can’t trade.
Psst just remember….the Market has more patience than all its traders and will try to drive them insane.
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Rule 22: Self-Destructive Trading You must be very careful to avoid emotional trading. If you tend to be reactive, you may be in for some serious trading losses.
Never become married to a trade. The current trade is only one in a long series of trades. If you have decided to trade for a living, then you are in this for the long haul. Just do not get too attached to any one trade.
Your frame of mind is so important. Say you have a loss. Calling yourself stupid or moron may only result in your becoming just what you call yourself.
When you are trading, again, no emotion, no fist pumping on the desktop. The more neutral you remain about trading in general and your trading it in particular, the more likely you are to be profitable.
Before you commence trading each day, take a few
moments to reflect on yourself. You must decide that you can be a professional trader, and that your trades will be successful. Close your eyes and visualize the charts. See yourself making trades and winning by the end of the trading session.
When entering a trade, enter relaxed. Do not pull every hair out of your head if it goes against you. Do not get involved in the trade emotionally. Do not make trading a self fulfilling prophecy: "I can’t get my trades to be
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successful." Say that over and over and sure enough, you will only have losing trades.
Your mind will play funny tricks as you continue to trade, especially if you have a couple of losses. That is why you need to keep a level head while you are entering and exiting your trades.
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Rule 23: Don’t Lose Your Day Job -- Yet One of the scariest stories was about a novice trader that had quit his day job to day trade full time. He had been trading 1 week, and as beginner’s luck would have it, did very well. He had been a carpenter for years and years, and
after 1 week, he was now a day trader.
His reasoning was this, he had done well as a part-time trader and if he could trade full-time he could be that much better. While many carpenters have indeed made the leap to full time trading, they did so with hard work, education, and experience. He did not learn to build cabinets in one day.
So what will it take him to become a full time trader? While there is no simple checklist you can look at so you can say, ok, now I am a
full time trader, here are some points to consider before you tell your boss to shove it.
1) Do you have the trading psychology to be a full time trader? Could you handle 3-4 months of continual losses should it happen? Most day traders do have a second or even a third source of income. That way, should they encounter a string of losses, they are not financially bankrupted.
2) Do you trade from a psychology of fear and desperation, diminishing your chances of being successful. Do you tend to trade ultra conservatively being scared to enter trades for fear of loss, and thereby passing on good trades?
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Do you hesitate to pull the trigger entering a trade, and by the time you do enter, the trade has passed you by and you have a loss? If you can handle your fears, if you have a second or third source of income and are not putting yourself under needless risk, then you can talk about being a full time trader.
3) Are you the sole supported of your family? What happens when you are not making the money you projected to make? Will your family be ok? Everyone wants to tell their boss to shove it. As a consistent trader, you’ll know when you can.
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Rule 24: Trading is not Based on Hope / Pray
Successful trades are not based on hope. Successful trades are based upon reliable strategies tested over time.
Praying does not make a trade successful.
If you find yourself sitting in front of the computer wishing your trade becomes profitable, exit the trade.
If your trade is going nowhere for a long time, exit the trade.
If your trade has gone past your stop loss and is still losing, exit the trade.
If you made a mistake on entry, meant to buy instead of sell but you clicked the wrong button, exit the trade.
If the technical indicators are turning against you, exit the trade.
Better to take a small loss quickly than a larger loss later in time.
Going on hoping or praying for a “trading miracle” is rarely profitable.
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Rule 25: The Market Trades on Fear and Greed
There is an old saying that the market is driven by two emotions: "Fear" and "Greed". You need to handle these two emotions on a daily basis as you trade.
All traders experience emotion. The distinction between the professional and the novice comes down to how they deal with these two emotions.
Let’s look at some scenarios that distinguish the professional trader from the novice.
[Scenario 1]: The last 2 trades were not profitable. The novice will be unsure about his next trade, fearful that it, too, will end up unprofitable. He goes through the "I can / I can’t" syndrome, delaying his entry. This
almost self-fulfills his prophecy that the third trade will also be unprofitable. He loses confidence in his strategy and himself.
The professional has a well tested strategy, confident that the strategy produces results, and well aware that some losing trades are inevitable. He monitors his wins and losses. He always ensures that he enters trades based upon a working strategy. The fear of trading is lessened because he knows there could be several losers in a row .
[Scenario 2]: A trade is entered and is almost immediately profitable, moving in the traders direction. The novice trader sees a chance to capitalize, to pay
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for his children’s college education or a new car all in one trade. He forgets the simple exit strategy he set for himself.
Instead he lets his trade ride. Caught up in the greed of the moment, he does not see the market turn against him, price retreating to below the original entry. (Markets rarely move in one direction for long).
Greed turns quickly to fear as he hopes the price at least return to where he first entered.
The professional, on the other hand, has a pre-determined target already set and exits the trade as soon as it is profitable. He knows there will be other trades, other days. He again confirms for himself that his strategy is profitable.
The professional knows that each trade is completely independent from any previous trade and from any trade in the future. He knows that there are always opportunities in the market and he can patiently wait for his strategy setups.
When people hear that they can make the same money or more that they work all day for, in just 1 hour, it tends to magnify their personality traits, especially greed.
They can rapidly become their own worst enemy. While you may not be able to turn off your emotions 100% during trading, you can learn to focus on your strengths and address your weaknesses.
It is important to divorce yourself of any attachment you may have to any trade or trading itself. Whether your trade nets $5.00 or $5,000, do not to fixate on the profit, or worse, spend the profit before you make it.
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Rule 26: Late to the Party
Here is another big time error that traders tend to make...Entering Late.
At 9:00am in the morning. You’ve been sitting for 2 hours waiting for the perfect setup to enter a new trade. Finally all of your confirmations align. But you were out of the room making yourself a cup of coffee.
It is now 9:15. Yes, the trend is still ongoing, BUT -- that first momentum that comes when all the confirmations align is long gone.
Look, you came late to the party. Drinks and hor d'oeuvres have already been served and eaten. What is left are the bread crumbs.
Still want to trade?
The answer is...wait for the next setup.
You went to the restroom, your dog was barking, someone was at your front
door. Wait for the next setup. Why enter a trade when it is clearly late? Why enter a trade when all you might get out of it are the leftovers?
If you have something else to do, somewhere else to go...go do it. If you just want to get trading out of the way, remember: Not waiting for the setup dramatically reduces the probability of your having a profitable trade.
Hey, it’s your portfolio…..
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Rule 27: Live to Trade Another Day
If you learn nothing else from the above 26 trading rules -- remember this:
Never, Never, Never Lose More Money Than You Can Afford
Tomorrow is another trading day. You can always come back.
If you lose the entire equity in your account today, you’ll have nothing to trade with tomorrow.
Here’s the problem with Big Losses:
It is very very hard, psychologically speaking, to recover.
Doubt settles in. Confidence vanishes.
One big loss can wipe out all the smaller winners you worked so diligently to acquire throughout the day.
Remember: Never allow any one loss to be greater than the biggest win you had for the day.
Important tip: During the course of the day, write down your largest win. That way you will know just how large a loss you can take and still be profitable.
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Note: Cartoons used in this book are created by Ron Leishman purchased through ToonClipart.com
