Discovering the critical success factors needed when trading Forex
Chasing the elusive holy grail of trading is a thankless task. It doesn’t take too much time for novice traders to discover that there is no magic elixir, there’s no bullet proof trading strategy that delivers a 100% success rate. However, novice traders who are quick on the update, will quickly realize that there are some constant foundations, that can underpin our overall trading plan and method, and it’s these solid footings which in fact constitute our edge. These critical success factors are generally not what we originally imagined, when we set out on our trader journey of discovery. These foundations will include aspects such as; tight risk/money management and trader discipline, over and above any specific patterns, visible on certain time frames.
It’s a fascinating exercise, to pose the question; “what is your edge?” to a group of experienced (and by proxy), successful forex traders. The vast majority won’t offer up opinions on a technical indicator strategy, whereby they execute their trades if the: DMI, PASR, MACD and RSI all line up and chime on 4 hour time frame, not that there’s anything intrinsically wrong with such a strategy. They’ll tend to deliver a list of other, more intangible aspects of trading, which will define their edge in the markets, such as; the money management and discipline previously mentioned. Highlighting some of these other aspects helps to shine a light into the thinking of experienced traders, to enable us to concentrate our minds on what an edge is and where we may discover the ingredients to compile our edge.
Leverage, margin, position sizing
Many traders will cite, low Forex leverage and careful monitoring of both their margin and position sizing, as being (or forming part of) their edge. Not the most dynamic or glamorous of subjects, but experience teaches us that; unless we get these specific aspects of our trading right, then we can’t possibly experience success.
Understanding what risk is and the positive and negative impact it can have on your trading, is essential. We need to park our impatience and unrealistic trading ambitions ASAP. Accept that trading success won’t happen overnight, it might not happen in the first twelve months, our profession is a marathon not a sprint, therefore position yourself accordingly. Set a reasonable risk per trade, far less than 1%, perhaps 0.5% per trade when you’re a novice and build in a circuit breaker of a maximum loss per day, perhaps 1.5%. You can and will survive and won’t lose heart, by suffering an unusual loss of 3% over two days.
Novice traders are far too busy concentrating on their strategy/trading method and becoming excited with regards to the possibilities in forex trading, to fully understand the dramatic effect spreads can have on their bottom line profitability, particularly if they’re scalpers or day traders, taking multiple trades per day. Searching for that reliable forex broker, who provides an STP/ECN trading model, who offers the use of an independent trading platform, such as MetaTrader, as opposed to a proprietary trading platform, is an essential part of our approach to trading.
Trading with the trend
Identifying a daily trend is simple; above R1 the trend is bullish, below S1 the trend is bearish. Identifying a weekly or monthly trend can be more difficult, but not impossible. The vast majority of experienced traders will also cite trading with trend as an edge, or as forming part of their edge. In the exercise of probabilities that we engage in, trading with trend will increase our chances of success considerably. There are counter trend strategies that can and do work, but we’ll find little opposition to the belief that trading with trend will, when measured over a reasonable period of time, may improve our profitability.
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