The Most Overlooked Aspect of Trading Forex
06/17/2010 12:01 am EST
There are many factors that determine the overall success rate for a trader. It is easy to see the vast differences between the novice and professional speculators, but as the beginner starts to make progress, it comes down to the more subtle factors which greatly distinguish the level of their consistency. We all know that the majority of novice forex traders fail to protect their capital efficiently enough, resulting in early account retirements and huge losses; plus, they typically do not work from a detailed trading plan to help them recognize the highest-probability opportunities in the market with the least risk. On the other hand, the professional traders are skilled in their approach to risk management and only take the setups that respect the rules of their disciplined strategy. However, as I mentioned before, when the novice does make the crossover to consistency in their trading, they then need to focus on the dynamics that will ultimately shape their results over time.
During my ongoing Extended Learning Track (XLT) forex program, I work with the Online Trading Academy graduates a number of times a week, and as well as scanning the market in real-time looking for low-risk trades, we also cover and stick to a strict set of guidelines which are covered and taught over a 12-week curriculum. We pay attention to the powerful laws of supply and demand, using this to discover the best trades available, as well as paying attention to the fundamental principles of multiple time frame analysis and logical risk control. Interestingly enough, we also spend a whole lesson day on a personal favorite subject of mine, and a topic that, in my opinion, is rarely discussed in any technical analysis literature: Trade management. Let me explain.
After going through my own transition from novice to professional trader, I discovered many truths about trading and recognized the things that all traders need in their arsenal in order to tackle the markets. Consistent traders share the common ground that we all need to use stops to protect our capital, and we all need to show discipline by following our trade plan. However, once the plan has been written and we get into a rhythm of consistency in our trade execution, there comes a point in any trader's development where they have to take ownership of their performance, and this lies in the actual management approach to each and every trade that is taken. There is often a distinct danger that as trader's strive for overall consistency in their results, they overlook the results that they are hoping to actually achieve with the trades themselves. Obvious as it may seem when reading this article, the only way we can ever actually hope to become profitable in the markets is by taking profits on a trade at some point. With the bias generally resting on finding a trade strategy that will nail a high success rate, little attention is then paid to the overall returns which are generated from each individual position.
Trade management can be a tricky dilemma for even the most skilled market speculator, and it is critical not to ignore its importance in the grander scheme. From working in both the XLT and classroom environments, I have witnessed just how many times this factor has played a vital role in the fortunes of my students. I remember a particular occasion during a trading and analysis session of XLT where we spotted a high-probability trade on the EUR/USD during the intraday time period. The risk was around 25 pips and the objective reward was pointing to 90 pips for a final target. Sometime during the session, the pair rallied to our entry point, and some 25 minutes later, dropped as we anticipated to the final profit area. After seeing the trade happen live at the market, I went on to review the results from the students in the room who took the opportunity. It turned out that around 30 students actually took the trade, but more interesting were the results. You see, around a quarter of the class managed to exit for the full 90-pip profit, another quarter made about 50 to 70 pips, with a mixed bag of others gaining anywhere between 30 to 50 pips. There were even a couple of individuals who actually came out flat on the trade, believe it or not (which is always better than a loss, in my opinion).
From observing these results, we can begin to see just how individual trading can actually become. While the whole group of students may have been all looking at exactly the same trading opportunity, the final results were so very different in nature. This may surprise some people reading this, but to me, it makes perfect sense. As I have often stated in previous newsletters, emotion will always play its part in the outcome of your trading; only, however, if you let it do so. When real money is on the line, logic and objective analysis can often disappear, forcing a trader into making bad decisions and deviating from the plan. I asked the students who took the trade to tell me why some took profits earlier than others and how the few who hit the final targets managed to let the trade run. The people who did get the most from the trade simply said that they followed their plan, while on average, the others came back with something along the lines of "I wanted to see how the trade panned out." Take it from me, this is not the best approach for consistency in trading because it lacks structure and can give you mixed results. We need to gather as much consistency in trading as possible, and this will only ever be achieved by logging results, managing trades with pre-defined rules, and not changing the tactics half way through the trade. Sure, a set of trade management rules may not be the right ones, but if we can at least stick to doing the same thing over a period of time, we can then see this for ourselves and make the necessary adjustments where needed.
I encourage every trader I work with to take the time to go through this exploratory process within their trade management for themselves, because at the end of the day, we all have our own goals and criteria for success. Some are looking to take more trades, while others less, and profit targets will always differ among individuals. My personal attitude to trade management is that it should be planned before the trade is taken. Once a trading opportunity is present in the market, I know where I am getting in and where my stop loss will be placed. I also have identified my profit objectives and know exactly how I will manage my risk and targets every step of the way. The last thing I want once I am in the trade is to be second guessing myself and moving my targets and stops too soon. All potential emotion should be removed both before the trade is taken, and throughout the time it is active, no matter the outcome. If it helps, think of this process like a road trip. If you have packed your things, filled up your car, and set off on your journey without even identifying beforehand where you were heading to, it would become a pretty pointless endeavor. On the other hand, if you did the same, but also set your final destination and checked the map before leaving, you would at least now have a reason to get in the car and start the engine in the first place. You may need to refill your tank from time to time or wind up breaking down along the route, but you will always know where you are going and may still get there in the end. Much like trading, your journey may end up smoother or a little more complicated than you first expected, but the effort you make to get there eventually will typically be the final factor in whether you manage to get there at all.By Sam Evans, instructor, Online Trading Academy