A disciplined approach to trading Forex may eliminate the short-term risk

Sep 16 • Forex Trading Articles • 1400 Views • Comments Off on A disciplined approach to trading Forex may eliminate the short-term risk

I’m sure many of our readers and clients had to read this title twice, in order to check if it actually made any sense. It’s a deliberate reference to how counter intuitive Forex trading can be at times. We pride ourselves on creating a bullet proof trading plan that (at its beating heart) has strict money management/risk control and discipline. And yet, the suggestion from the title, is that there are times when we watch profit escape us, we knowingly let it happen, without trying to capture that extra profit.

Prime alpha mandate. It’s such a sexy phrase, conjuring up images of a prime alpha male who has the permission to trample through his domain in order to flourish. The phrase originates from the financial investment industry, suggesting that the client hands over complete faith to his or her money manager, to use their ultimate discretion, to invest whenever and wherever they see fit, without any restrictions. However, the phrase is generally misinterpreted, as none of us would either trust ourselves, or a money manager, who’d risk everything on one roll of the dice, or one spin of the roulette wheel, even if it’s a fifty-fifty bet, on red or black.

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The prime alpha mandate operator still has restrictions to operate within, they’re not about to recklessly gamble with their clients’ assets. They’ll still be operating under strict, highly disciplined rules and an agreed mandate, but will perhaps push the boundaries of their firm’s trading plan, to squeeze the maximum profit out of their trading strategies. This overall description should also apply to our own personal retail trading which is why (on occasion), we’ll witness profit left on the table and need to quickly adapt and learn as to why that escaped profit should never be mourned.

Those who ruminate over missed profit are generally novice traders, who still haven’t come to terms with the fact that the market will always be there, there’ll always be another opportunity to trade and profit. However, if your trading strategy is to flourish, over the medium to long term, then you must accept that not only do you may opt not to use stops, you need to utilize take profit limit orders and by their very nature and description, they’ll limit your profit.

Limiting your profit is also a counter intuitive phrase and concept, why would we limit our profit, why can’t it be limitless? We limit our profit because we very quickly learn that whilst longer term trends may be determined by key micro and macro-economic factors, the intraday movements, occasionally the random noise, can drastically impact on our bottom line and potential profit per trade. Therefore, we may trade with aggression, but conservatively; we aim for win loss ratios of perhaps 2:1 and we risk perhaps 0.5% of our account, to gain 1%. We do this because history teaches us that outrageous ambitions will very quickly kill your account, your career and your enthusiasm stone dead. Not only can you never (over a longer term period) beat the market, you have to work with the market and find methods to adjust your perceptions, to what the market offers up.

There’s also another simple mental exercise that is worth considering when you witness a currency pair trade you predicted the right direction of, you took your profit due to your take profit limit, but the trajectory continues with sudden momentum, leaving substantial profit which you could have captured.

Remind yourself firstly; that you were right and you were right to bank the profit as part of your comprehensive trading plan. Secondly; recognize that spikes are rare in the industry. Thirdly; that there will, as night follows day, be a retracement (the timing of which will be difficult to predict). And lastly; you’re now possibly done for the day; you’ve perhaps set up your platform to take the trade, it’s worked, you’ve banked your profit, and you’re in a good situation to trade again the next day. You’ve acted like a complete professional, having maintained your highly disciplined approach to forex trading, refusing to corrupt your trading plan, for a short term risk.

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