Approaching Forex Trading
Before you trade, recognize the value of proper preparation. It’s important to align your personal goals and temperament with relatable instruments and markets. For example, if you understand retail markets, then it makes sense to trade retail stocks rather than oil futures, about which you may know nothing.
Time Frame
The time frame indicates the type of trading that is appropriate for your temperament. Trading off a five-minute chart suggests that you are more comfortable taking a position without exposure to overnight risk. On the other hand, choosing weekly charts indicates comfort with overnight risk and a willingness to see some days go contrary to your position. In addition, decide if you have the time and willingness to sit in front of a screen all day or if you prefer to do your research over the weekend and then make a trading decision for the week ahead based on your analysis. Remember that the opportunity to make substantial money in the Forex markets requires time. Short-term scalping, by definition, means small profits or losses. In this case, you will have to trade more frequently.
Methodology
Once you choose a time frame, find a consistent methodology. For example, some traders like to buy support and sell resistance. Others prefer buying or selling breakouts. Some like to trade using indicators, such as MACD (moving average convergence divergence) and crossovers. Once you choose a system or methodology, test it to see if it works on a consistent basis and provides an edge. If your system is reliable more than 50% of the time, you should consider that an edge, even if it’s a small one. Test a few strategies, and when you find one that delivers a consistently positive outcome, stay with it and test it with a variety of instruments and various time frames.
Your Forex Trading Attitude
Behavior is an integral part of the trading process, and thus your attitude and mindset should reflect the following attributes:
Patience
Once you know what to expect from your system, have the patience to wait for the price to reach the levels that your system indicates for either the point of entry or exit. If your system indicates an entry at a certain level but the market never reaches it, then move on to the next opportunity. There will always be another trade.
Discipline
Discipline is the ability to be patient – to sit on your hands until your system triggers an action point. Sometimes, the price action won’t reach your anticipated price point. At this time, you must have the discipline to believe in your system and not to second-guess it. Discipline is also the ability to pull the trigger when your system indicates to do so. This is especially true for stop losses
Realistic Expectations
Even though the market can sometimes make a much bigger move than you anticipate, being realistic means that you cannot expect to invest $250 in your trading account and make $1,000 each trade. Although there is no such thing as a “safe” trading time frame, a short-term mindset may involve smaller risks if the trader exercises discipline in picking trades. This is also known as the trade-off between risk and reward.
Trading is nuanced and requires as much art as science to execute successfully, which means that there is only a profit-making trade or a loss-making trade. Warren Buffet said that there are two rules in trading: Rule 1: Never lose money. Rule 2: Remember Rule 1.1 Stick a note on your computer that will remind you to take small losses often and quickly rather than wait for the big losses.