The two critically overlooked aspects of FX Trading

May 29 • Forex Trading Articles • 1520 Views • Comments Off on The two critically overlooked aspects of FX Trading

The longer you’re involved in our fascinating world of forex trading, the more you realize that what you thought you knew at the outset, is now mostly irrelevant. In the exciting early years, shortly after you discover forex trading as a career, you tend to be misguided by many influences and influencers. Eventually we discard many of our initial preconceptions and replace them with efficient trading ideas and concepts that enhance our overall profitability.

Irrespective of the peace of mind we eventually develop on our journey towards expertise, we also begin to calmly accept that the skills we now use to profit from the market, do not involve having some form of predictive brilliance regarding what will happen next on our charts. In our early years we believe naively there’s some form of divine mysticism regarding trading; if we stare at our charts for thousands of hours, we’ll eventually figure out a unique, identifiable pattern to the behavior of price, that’ll open up an opportunity to turn on a continuous tap of money.

Realizing that many of the markets we trade (forex, commodities and indices) are random and react more to fundamental, economic, high impact and breaking news events, is one of the most critical lessons we learn. As a consequence of this lesson, we also learn we have no control of events, or price, we can only control our risk and therefore we can only trade the possibilities and the probabilities.

Taking control over your trades

Taking on board the main control we have over our trading relates more to our money management and risk control, over and above any trading method/technique we may employ, is a huge challenge to our psyche. In our early trading days we become hypnotized by the technical aspects of trading, convinced that a combination of indicators will somehow reveal the holy grail of trading. Surrendering to the notion that risk and probability effect our trading profits, is an extremely difficult concept for novice traders to accept. However, until we accept these influences on our trading, then our chances of trading success will be significantly reduced.

Risk is a simple ideal to understand; we risk a small percentage of our account size on each trade, whilst ensuring that we have a limit to our overall exposure, nothing could be simpler. Whereas probability is an altogether far more difficult issue for us to contend with, as we’ll initially question how markets cannot be incredibly efficient?

The importance of having trade discipline

Let’s accept that if we’re day trading we’ll increase our success rates if we always trade with trend, and if we’re a day trader we only need to identify the daily trend, within the clearly identified trading sessions of the day. So how do we identify the daily trend? If we accept that the daily pivot point is the starting point of price for the day, then if we witness price suddenly develop price action causing it to breach R1 or S2, are we witnessing a short term daily trend develop? Probably, especially when we consider that price historically either breaks in one direction, or other each day. There are days when price oscillates and fluctuates widely, however, it becomes evident if you subject daily charts to thorough back testing, we’ll discover that most days price (if it breaks above or below the first lines of resistance, or support) then it (on average) doesn’t revert to the mean, or reverse direction sharply.

 

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Avoiding common mistakes of placing stops

It’s difficult to place an exact statistic on this phenomena working, however, it’s our intention to alert readers to the possibility of using probabilities in our favor. Having the discipline to trade when price action and market information is in your favor and ensuring your risk parameters are maintained with a highly disciplined approach, should probably increase your chance of trading success.

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