The M.r.s Trader - the Essentials of Successful Forex Trading

I've often wondered long and hard what it took to succeed when I first started out and had only a few clues as to how. I didn't quite understand then what the professionals meant when they said a successful trader has to have a certain psychology, rules on risk management and also knows their how-what-when-why-where concepts on entering and exiting a trade.

And it so happened that after trading for about 2 years, I begin to realize and know these concepts on many more levels and not just on the intellectual one. It's my desire to share these with both seasoned and new traders alike.

In what I term the M.R.S Trader, we will have an in-depth look at the mindset, risk management and also strategies that the trader has (in that sequence as well). They are the 3 pillars of success in trading.

(M)indset

Without a doubt, this is absolutely the most important element out of the 3 that we will cover (not belittling the other 2 in the process). Many processes in life require that we get our mindset/psychology on the right track and trading is not an exception.

As a start, we have to tackle the truth and you have to ask yourself this honest question .... "Why do I trade?"

It's amazing really but many people who trade are not really in for the profits (although they think they are). There's usually a myriad of reasons but one of the more common ones is that they're trading for the excitement of it.

I remember some time ago I was chatting with a friend and the conversation went like this:

me: I'll stay out for now. don't rush into a trade
friend: i know it
friend: i prefer trading when the situation is rushed, it blows up my adrenaline
me: not good.
me: are you trading for profit or for excitement?
me: Casinos provide more entertainment
someone: hehehe ...

My point is that if you are not trading primarily for monetary gains, then you shouldn't be trading at all.

Having said that, it's my opinion that we humans can be pretty irrational creatures (note: traders are humans too) and as such, we have to watch out for irrational behavior especially during trading as it can work against us pretty badly.

When you start out trading, you should never expect yourself to succeed in a short time (e.g. such as under 6 months). This is not only unrealistic but places totally unnecessary pressure and stress on you.

I like to quote what Gary Player (a golf legend) once said. He said "The harder you work, the luckier you get".

I interpreted that to mean that the odds of success increases in tandem with the amount of effort one puts in. But do not be mistaken here ... I do not think that hard work guarantees you being successful in trading as this is a totally different ball game altogether from most of the mainstream careers.

Still, one should persevere and keep the faith and commit to having success in whatever field he or she chooses (and in this case, trading).

At this juncture, I would also like to address an issue that concerns new traders and that is the idea of demo trading. Many would presumably start off (told or otherwise) demo or paper trading by using virtual / demo money and that is perfectly fine until you realize that most of us will never benefit fully from it because real money isn't involved and as such, there is no emotion at all. When that happens, it isn't real live TRAINING. In my view, it's simply a waste of time for the majority.

I can sense many people disagreeing at this point. However, I'm obliged to share with you what works and it is in my experience that I found what worked for me and what did not.

The question then to answer (if you choose to agree with me) is "How can one learn to trade without risking a great deal?" and what follows is simply my suggestion.

I would suggest using XXX amount of dollars where it wouldn't cost you to sacrifice the way you live (should you lose it all) yet large enough so that you can actually experience the emotions while trading and take it more seriously. What say you? You might as well consider that as paying for live training/tuition to the market.

With that said, once you start trading proper, you should never focus on how much you would make or what you could buy with the money you make. Instead, you should FOCUS solely on your profitable trade setups and trading them well. The profits are simply an afterthought, a given. It WILL come eventually so long as you trade well.

(R)isk Management

Now that we got mindset out of our way, let's talk about risk management. Some call it money management, others call it trade management. I choose to call it risk management because I see managing risk in trading as something very core and very essential.

First things first, traders have to decide how much risk or drawdown as a percentage of the entire equity they are willing to take in a given period (be it a day, a week or a month). As a guideline, it can range from 2% right up to 10% and more. I personally use 5% as my line in the sand.

Breaking it down further, you have to decide how much risk you are willing to take per trade (this relates back to max drawdown in a month and the typical number of trades taken in that time). Also, risk tolerance is dependant on the style of your trading. You have to discern if you are a positional trader or an intraday one. Positional traders will allow for a bigger move against his entry by trading a smaller size. Conversely, intraday traders can only afford a relatively smaller move against his position if the trade taken is a bigger one as compared to the one taken by the positional trader.

Another factor to take into account is the trader's typical setup. If his setup requires only a small stop, he can choose to put on a bigger trade as compared to another setup that requires twice the stop of the former setup.

So what can a proper and well thought out risk management plan achieve for the trader and his account?

For starters, the trader has a plan that he knows that if he breaks it, he will have a much harder time growing equity. Suppose a trader loses 50% of his account in a given month. Mathematically, he needs to make 100% on his remaining equity just to get back to where he started off in the month where he wiped 50% from his account. Does this make sense?

With proper risk management, an account can grow very quickly if the trader trades profitably. On the other hand, the balance on the account will dwindle more slowly if the trader experiences bad spells or streaks. This is true only and only if the trader trades in the size proportionate to the total equity or balance.

As a final point in risk management (and most would miss out on this I reckon), you should also think about the possibility that your internet connection might go down at any point in time while trading. And as such, I use 2 precautionary measures.

The first one would be to put in my profit target and stop loss per individual trade. And last but not least, to write down your broker's telephone number somewhere next to your trading desk so that you can call in to change your orders.

(S)trategy

Finally, we come to the last letter of M.R.S which incidentally stands for strategy. Strategy is all about finding your edge and applying it to the markets. It is about finding setups that create your buy/long/call bias and your sell/short/put bias.

It's a paradox really because most beginners focus way too much on strategies rather than having the right trading mindset and having a proper risk management plan. It's no wonder that in a recent trip to a major bookstore (if you need to know ... it's Borders), I couldn't help but notice that most books on trading are focused on technical analysis, strategies and trading setups rather than giving a balanced view and write-up on the 3 components that are very essential for successful trading. So much for giving these books with titles such as "How to be a profitable trader"!

Moving on ... let's discuss trade entries. Amateurs armed even with a profitable edge usually end up negative because more often than not, they tend to be wishy-washy with their entries (because of greed/fear).

Professionals on the other hand tend to be strict with their entries. They do not compromise with price. They essentially plan and wait for price levels to fall into their trap before entering into a trade. They aren't afraid of missing out on a trade as such because they know that another opportunity is just around the corner. May I remind you that patience is key!

As a natural sequence, we will now look at setting profit targets for trades. Primarily, there are 2 methods as I see it. You can either use a technical target (based off indicators, etc) or use an arbitrary number away from your entry as your target objective. Some would argue it doesn't make sense to use an arbitrary target because we would be limiting our gains but hey ... why do you care if you are consistently hitting your arbitrary targets every other day. In any case, it is horses for courses and as such, choose whatever works for you.

I remember the time when my trading improved dramatically and it basically boiled down to a routine I started practicing. And it's none other than trade journaling.

In trade journaling, one records details of a trade. In my case, I record the price at which I entered and exited, the date of the trade, size of trade, the net result, the session at which I enter and exit my trade and most importantly, the rationale behind the trade.

If you like and can afford more time (especially when you are just starting out), you can also grab a screenshot of your trade, record your stop loss point, etc. It's basically a case where you record details that are important to you when you refer back to your trades and learn from them

Hey, if you haven't been journaling your trades, I challenge and invite you now to start doing so. I promise it will improve your trading as a whole. Trade journaling will change you internally. It will propel you to new levels in your evolution as a trader. If you like to, you are welcome to email me and let me know how journaling has changed the way you traded before.

Summary

I'll like you to just bear in mind that successful trading is like the wheel with 3 spokes (think of Mercedes Benz). You simply cannot do with deficiency of development in any one of them.

Put it this way ... someone with the best strategies and setups in the world wouldn't make money if his emotions run him riot and if he over-leverages on his position. Prove me wrong if you can.

As I bring this article to a close, any wonder why female traders tend to trade better than their male counterparts. (Think M.R.S ...)

Till we meet again, stay healthy and pip-wealthy!