Step 7: Making the jump to
live trading – Preparing yourself for the emotions
When you are demo trading
the markets you naturally have no emotional problems to battle with, because
you have no real money on the line. Thus, many traders do exceptionally well
when demo trading only to find that their fake-money success goes out the
window when they switch to real-money trading. That’s because there are drastic psychological
differences between demo trading and live trading that you need to come to
grips with prior to switching to a live account. Here are some points to
consider before you begin risking your hard-earned money in the markets:
• How to trade like you did
on demo – As I mentioned previously, traders usually do better on demo
than they do on live accounts as a result of the fact that there is naturally
no emotion in the mix when you aren’t risking real money. While it is certainly
easier said than done, what you need to do on your live account is forget about
the real money you are risking.
• ONLY trade money you are
OK with losing – In order to not get emotional while trading with real
money you need to never trade with money that you need for anything else in
your life, as well as never risk more than you are truly OK with losing. If you
can manage to consistently do these two things, you will experience little to
no emotion on any one trade. Most traders end up trading with money they really
shouldn’t be trading with, or they risk more than they are OK with losing per
trade, thus they become emotional.
• Understand you CAN lose
on ANY trade – You are much more likely to have a calm and objective
trading mindset if you always remember that you can lose on ANY trade you take.
Even if you see what you think is a “perfect” price action strategy
in a very strong trending market, it can still fail. The truth is that you can
never know for sure what is going to happen on any given day in the market, so
if you truly accept that and believe it, there is no reason to ever risk more
than you are comfortable with losing.
• Don’t get caught-up
over-analyzing the markets – If you want to become a professional Forex
trader you are going to have to learn how to accurately read and trade off of
the daily charts first. Most traders end up taking the opposite approach; they
start by trying to trade off of lower time frames like 5 minute or 15 minute
charts, and then after they lose enough money they eventually figure out the
daily chart is a lot more conducive to trading from a relaxed and objective
mindset.
• Not every trading
opportunity is created equal – Understand that you shouldn’t stray from
your trading edge once you start trading live. You probably traded your edge
very consistently on demo, because you didn’t feel any “urge” to make money,
try to recapture that same feeling when trading live and forget about the
money. Over-trading is a result of feeling “pressure” and greed to trade. The
more you feel these emotions the more likely you are to trade when you shouldn’t
and thus lose money.
Ultimately, there is a
fundamental difference in how amateur traders think vs. how professional
traders think. The difference lies mainly in the amateur’s “need” to make money
from their trading as well as their inability to trade emotionally undetached
from any one trade. Essentially, professional traders do not become emotional
from any one trade because they know their success is defined over a large
sample of trades, not by one or two. Professional traders also know that the key
to keeping the emotional trading demons at bay is to consistently control their
risk in the market. Your trading psychology is what dictates how you interact
with the market, and this psychology is almost entirely a result of how well
you manage your money as you trade.
Step 8: Managing risk
effectively – The KEY to successful Forex trading
As I just mentioned, risk
management is the “key” to managing your emotions correctly; and thus it is
also the key to becoming a successful trader and eventually a professional
trader. If you practice proper risk management on every trade, it will make
managing your emotions and maintaining the proper trading psychology a very
simple task.
However, most traders do
not manage their risk effectively, and as a result they experience huge
emotional swings in their trading, as we all as in their equity curves. To
avoid the account-destroying emotional trading mistakes that most traders make,
there are some specific forex money management guidelines that you
can follow:
• Trade with only
disposable income – I mentioned this in the previous section, but it’s
worth mentioning again because it really is your first line of defense against
becoming an emotional trader. If most traders would only take the time to
honestly decide how much truly disposable income they have to trade with and
ONLY trade with THAT money, there would be a lot more successful traders in the
world.
• Understand risk / reward
and position sizing – It really is amazing how many traders start risking
their hard-earned money in the markets without a thorough understanding ofrisk
reward and position sizing. If you take the time to understand the math behind
the power of risk to reward ratios, it will allow you to see that you can
actually lose on the majority of your trades and still make money, to learn how
this is possible see this article: Case Study – Random Entry & Risk
Reward in Forex Trading.
• Know what your
risk-per-trade tolerance is and STICK TO IT – Professional traders know
before they enter a trade how much they are going to risk on it and how much
they are emotionally OK with risking on it. If you are staying up all night
watching your trades, you are risking too much. You should risk an amount that
truly allows you to set and forget about each trade you take, because
being preoccupied with every trade you take all the time is a sure sign you are
risking too much.
• Avoid taking on more risk
from adding positions – Some traders like to trade multiple markets at the
same time, and they will actually double or triple their normal risk while
doing so. This is basically trading account suicide. First off, if you are a
shorter-term swing trader like me, you are only in the markets for 1 to 3 days
on average, sometimes a bit longer depending on the trade. But, there’s really
no reason to be in 5 different trades at the same time unless it’s part of a
long-term diversified investment strategy. If you do see a good reason to trade
multiple Forex pairs at the same time, make sure you divide up your risk
amongst them so that your pre-defined risk tolerance is always maintained.
• Measure risk and reward
in dollars, not pips or percentages – If you are still calculating your
risk and reward by percentages or pips, you need to stop. Think about it for a
minute; if you risk 100 pips on a trade that doesn’t really mean anything
because you can trade many different position sizes for that amount of pips.
One trader might have $10 at risk on 100 pips and another trader might have
$1,000 at risk on 100 pips. Thus, through position sizing, a trader can risk
different dollar amounts than another for the same stop distance. So, the point
is that you calculate your risk and your reward in terms of “R”, R is the
dollar amount you risk per trade. Check out this article later on how to measure
your trades in dollars not pips or percentages to learn more.
Finally, as you progress
from the early stages of learning your trading strategy, building a trading
plan, and demo trading, you will move to the “big leagues” of real money
trading. I hope that the points discussed in today’s lesson provided you with
some insight to get you ready. In the end, no amount of advice or insight can
substitute for real trading experience, but it can help you to accept the
realities of trading and let you know what to expect.
Step 9: Finding a price
action signal
If you’ve completed all the
previous steps in this mini-series, you will be ready to take the next step
which is to actually look for a price action signal to trade on your real-money
account. This is where your Forex trading plan comes in; it will give
you a checklist to guide you through the process of finding a valid price
action signal. It is not a concrete rule-set, but rather a guide or an outline
that you follow to make sure any potential setup that you find meets certain
criteria. Here’s an example:
• What time frame am I
looking at? The daily chart time frame is best.
• What market am I trading?
Is it a major Forex pair or a more volatile exotic pair?
• What condition is the
market in? Trending, consolidating?
• Where are the obvious key
support / resistance levels in the market? Have I drawn them in?
• What are the 8 and 21
daily EMAs doing? Where is price in relation to them?
• Is there an obvious price
action signal on the chart?
• If there is an obvious
signal, does it have confluence?
• What confluence does it
have? Trend, static support / resistance, dynamic support / resistance, 50%
retrace level? Event area? The more the better…
• Is the signal showing
rejection of a key market level?
• Is the signal showing a
false-break of a key market level?
These are just some of the
things you would want to look for as you analyze the market and try to find a
high-probability price action setup; it’s not a ‘complete’ trading plan or
checklist. A professional Forex trader will have gone through the
process of making sure any potential trade setup meets his or her checklist so
many times that it turns into a habit and gets ingrained into their mind.
Trading success is all about developing and maintaining the proper trading
habits.
Step 10: Calculating the
risk to reward ratio of the trade
After a professional Forex
trader finds a valid signal to trade, the next thing they will do is
concentrate on the risk. That’s right; the RISK is the first thing a pro trader
concentrates on…not the reward, like most amateurs.
Depending on the particular
setup you are trading and were the nearby key support or resistance levels are,
a pro trader will place their stop loss at the most logical place that gives
the trade room to breathe. Logical stop placement is a crucial difference between
winning and losing Forex traders. Winning traders will take the time to focus
on finding the “safest” place to put their stop, while beginners usually place
too tight of a stop just because they want to trade a bigger position size…or
they place no stop at all, which is just insane.
Professional Forex traders
calculate their risk reward ratio in terms of dollars at risk. So, if
you have 100 dollars at risk, 1R (1 times risk) for you is $100, 2R is $200,
and so on. Most pro traders are not very concerned with percentages or pips,
because at the end of the year all that matters is how much money you lost
relative to how much money you won. That’s why I measure my risk and
reward in dollars, not percentages or pips.
Step 11: Managing the trade
after it’s live
Managing trades after they
are live is perhaps the part of trading that gives traders the most trouble.
The reason why traders have difficulty managing their trades is primarily
because they over-complicate the process. I am a strong believer in “set and
forget Forex trading”, and indeed this is a core part of my overall trading
philosophy. Meddling in your trades after they are live and second-guessing
your trade setups are things amateur traders do. Professional traders only take
trades they are 100% OK in risking their hard-earned money on, thus they don’t
second-guess themselves usually, and they rarely meddle in their trades. If you
have a Forex trading plan and actually follow it, there should be no reason to
mess around with your trades a lot after they are live. I personally have found
that just letting the market run its course is usually the most lucrative forex
trade management technique out there.
Step 12: Controlling
yourself after a trade
Finally, we come to the
last step of this mini-series on becoming a professional trader, and it is
perhaps the most important one:
I know that most of you
have had some good trades and made some money in the markets. But, what did you
do after your trade? The honest answer to that question is truly what
defines a professional trader. Your mindset right after a trade is at its most
fragile, because you are likely either feeling a bit euphoric over your
winnings or angry and frustrated over your losses. Granted, you should not
experience these emotions too intensely if you’ve manage your risk properly,
but you will likely still feel them to some degree no matter what, after all,
you are risking your hard-earned money.
Whether you win or lose on
a trade, you are at the greatest risk to make an emotional trading decision
immediately after a trade closes. While there is no miracle-formula for making
sure you avoid these emotional trading errors, if you understand and accept the
following points you will be far less likely to make them:
• If you have just lost on
a trade, remember that jumping in the market again to try and “make back” what
you lost is an emotional reason for trading, not a logical one. Do not enter
another trade right away unless there is a valid price action trade setup that
meets the criteria in your trading plan.
• If you have just won on a
trade, remember that you are not some “perfect” trader who can do no wrong in
the markets. Beginning traders tend to get over-confident after a winner or a
string of winners, this can cause them to veer of course and “run and gun”
rather than trading Forex like a sniper.
• Remember, your trading
success is not defined by your last trade; rather it is defined by the result
of a large series of your trades. To become emotional and react defensively to
any one trade is to say that you think your success as a trader hinges on one
trade, and it simply does not. You have to learn to take your losses as just a
part of doing business in the Forex market.
• In regards to taking
losses, it will be a lot easier to swallow the inevitable losses if you are
only risking an amount per trade that you are truly OK with losing. When you
start trading with money that you need for other life expenses, or risking too
much per trade, you put yourself at a very great risk for wanting to enter a
“revenge” trade after you lose.
• Perhaps the best way to
control yourself after any one trade is to simply take some time away from
trading. Rarely are you going to exit a trade and then get another
high-probability opportunity immediately after that. It usually pays to
separate yourself from your charts for at least 24 hours after you exit a
trade, whether it was a winner or loser. This will give your emotions time to
die down and cool off before you begin analyzing the charts gain.
