By Sam Evans, Online Trading Academy E-mini Futures, Forex, and XLT – Forex Trading Instructor
As a member of Online Trading Academy's teaching roster, I have the privilege of working regularly with our growing community of graduates, some of whom I taught in one of their first classes. A high number of these students go on to enroll in the Extended Learning Track (XLT) program, where I watch their trading skills evolve with the markets on a daily basis. I find it easy to relate to the experiences my students have, as I can clearly remember the ups and downs I faced during my own journey through trading. Because of this, I can also recognize the mini breakthroughs that these students have, or as I like to call them, "light bulb" moments, which help me to track their progress. They discover the importance of controlling risk, adjusting position size, reading the market signals objectively and using technical analysis in the correct manner. The beauty of the XLT program is that I am able to continually monitor student progress. If they don't get it, then we can always review and revise as many times as it takes to get it! After all, the markets are not going anywhere, so it's always wise to take your time and learn the lessons at hand as thoroughly as possible.
Development of these skills is vital in the creation of any successful trader, yet the most fascinating aspect of all is that most novice traders know what it takes to be successful, yet they still fail to embrace these fundamental disciplines and never reach their goals. So here's the big question: If we know what we should do, then why do we still fail to do it? The answer itself is not as complicated as you think. Simply put, it's not enough to just know the rules which you should be following but rather to embrace the rules day to day and this comes from adjusting your own attitude towards trading itself. Too many novice traders treat their trading as a hobby and it sends a shiver down my spine when I hear the phrase, "I like to dabble in the markets!" What sets successful traders apart from the hobbyists is that they treat their trading like a business, enforcing a disciplined approach to their methods and techniques, with continued review and application. So let's make a quick comparison between a hobby and a business, in an attempt to shed a little light where some get it right and most get it wrong.
In essence, a hobby or pastime should be for fun and enjoyment. It's something we do to let off a little steam and is usually introduced to us by a colleague or friend. After a little research on the internet, we can find some free tips or tricks and learn about what we should be doing or need to get us started. Once we have a feel for what's required, we can head off to the nearest shop to spend our cash on the best equipment to get us started and throw ourselves fully into this new venture. Hobbies can also be expensive, as we always seek to acquire the next "must have" tools to help our game or give us an edge over the competition. Considering we have spent all this time and money getting started, we then expect to see some quick results to prove that our endeavors have not been wasted…until the frustration kicks in and we decide that this new adventure may take a little more time and effort than we first realized and put it to one side. But hey, at least we can come back to it now and then for a bit of fun when we get bored!
Now, with this in mind, imagine if you decided to set up a new business in this fashion…how long do you think it would last? After putting the time, money and effort into getting started, it would be a costly exercise to just put it to one side and come back to it later if it started to become a little frustrating wouldn't it? It's hardly something you would jump into with both feet for a bit of excitement. Rather, any serious business-minded individual would instead apply a model to their venture, maybe something along the lines of the following:
THE BUSINESS MODEL
- Requires a solid plan and a disciplined structure to the definition and execution of its day to day practices.
- Accepts and embraces the rules of Supply and Demand, looking to profit from sourcing its products or services at Wholesale prices, while offering these products or services to the market place at Retail values, for a solid return on investment.
- Fully understands all components of risk and looks to manage its bottom line, accepting that small losses will come and go on the journey to achieving higher overall returns.
- Allows time for growth and accumulation, focusing on better business practices and further expansion for the future.
This doesn't sound much like a hobby does it? Any serious-minded business owner would be looking to give their new venture every chance of working out and this comes from having a sound business plan. So why should trading be any different? If you are looking to be consistent in the Forex markets, then you simply need to enforce a solid set of rules to support your goals. By implementing some logical and structured practices into his or her trading plan, a trader then clearly understands the key governing factors that determine the line between success and failure. Let's take a look at the recent trading activities of one of my XLT students, David B. David emailed me after spotting and taking a low risk, high probability trade on the EURUSD currency pair. In his approach to the trade, you shouldn't be surprised to see that much of the technique echoes the points of our business model above…
Figure 1
Figure 1 shows David's setup on EURUSD, involving an objective analysis of the currency pair, paying attention to market conditions and the high probability, low risk entry points it had to offer. First, he planned and executed the trade on a 4 hour time frame chart, looking to set and forget the position and leave the rest to the market. We can see that David applied a basic 200 Period Moving Average as a gauge of trend. In this case it was sloping up, suggesting this market was in a preceding upwards trend, therefore it would enhance the odds to look for a long position to go with the trend. Next, he identified the key area of demand or support where he knew he would be one of the first to buy at around 1.4060. Then he looked to set his stop below the most recent pivot low of 1.4000. Finally, he looked for his final target on the trade at the key supply or resistance area at 1.4260, which offered a sound risk to reward ratio. The last step was to place the trade and orders in advance and allow the market to do the rest.
After David got filled on the trade, he emailed me a few days in with an update (note sections of the email have been blocked for privacy):
Figure 2
Note that David defined his risk and after hitting his first target, took profit and moved his stop to entry, allowing the rest of his trade to play out at absolutely no risk to his account. The following day I received an update of how the trade panned out in the end:
Figure 3
David states that he took just under 200 pips in the end on the EURUSD trade by allowing the market to do its work and his plan to play out unemotionally.
So after analyzing the success of this trade, let's draw a few comparisons of David's actions and our original business model, as stated previously in the article:
THE BUSINESS/TRADING MODEL
- Did David have a solid plan and a disciplined structure to the definition and execution of his day to day trading? Answer: Yes, he analyzed the market objectively and identified the highest probability, low risk turning points on EURUSD.
- Did David accept and embrace the rules of Supply and Demand, looking to profit from sourcing his buying opportunity at Wholesale prices, while offering this product to the market place at Retail value, for a solid return on investment? Answer: Yes, he bought EURUSD in an established area of demand and sold for profit at a clear level of supply.
- Did David fully understand all components of risk and look to manage his bottom line, accepting that small losses will come and go on the journey to achieving higher overall returns? Answer: Yes, he took the trade and limited his risk with a good stop loss. After hitting his first target, he took partial profits and allowed the rest of the position to run at no further risk to his account.
- Did David allow time for growth and accumulation, focusing on better business practices and further expansion for the future? Answer: Yes, he gave the market space to reach his final target which was identified well ahead of time. Note, he also mentions in the email that he is working on his trade management skills in an effort to further his abilities.
I try to drill into all students that it is essential to treat your trading like a business, simply because when your capital is at stake, all measures should be in place to protect that money and allow it to work for you in only a researched and structured environment. Without due diligence, planning and rules, trading becomes just another costly hobby where we jump in with both feet, focusing on the reward and excitement of the end result, rather than executing our trades objectively without attaching consequences to the outcome of the trade. If you are looking for a quick satisfying adrenaline rush, then try skydiving! Trading is not for you. However, if you respect your trading as you would any serious business venture, then don't be surprised if you start making progress quicker than you think.
Wishing you all safe trading…and take care.
Sam Evans sevans@tradingacademy.com
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