By Sam Evans, Online Trading Academy UK Forex, E-mini, and Power Trading Workshop Instructor
Before I get into the subject of this article, I would like you to sit back and have a good think about your trading: Ask yourself what kind of trader you want to be, how you envision your daily trading activities and what you feel it will take for you to become consistently profitable in this most challenging, yet rewarding of careers...
Yes, I agree this is a strange way for me to open my introduction of this article, but like I have said many times before, the majority of people attempting to be consistently profitable from their Forex trading have failed to truly think about these ideas and do so at their own peril. The majority of new traders I teach in class and during the ongoing Extended Learning Track (XLT) program at Online Trading Academy have big dreams of steady profits and a better quality of life through their trading and so they should. Everyone is entitled to their shot at success and I would never deny the opportunity to anyone. However, before any progress can be made in the right direction, each and every Forex novice needs to not only get the right education, but also strive to understand the real truths behind the markets. Any professional trader today knows that consistent profits are a result of consistent risk awareness first and foremost. Only by protecting our capital and controlling loss can we ever hope to truly realize profits in the long run, and we have all heard the importance of learning to "Win big and lose small." In the real world though, this is easier said than done. Let me explain.
Think back to the question I posed to you at the beginning of this article. You may have already answered these questions for yourself and typically, the answers are similar across the board. You see, the majority of newbie traders (myself included in the early days) think that Intraday Trading is the best way to make regular money. They see themselves dipping in and out of the market, taking regular profits time and time again over an hour or two a day. They think that they will load up their position sizing to max out the returns, maybe getting the odd trade wrong here and there, but hoping to have more winners than losers over the long run. In an ideal world, this sounds great but we all soon learn that the marketplace is far from an ideal world. If we fail to explore the psychology behind this thinking, recognize the fact that the true math of trading is against us and ignore how the professionals objectively take their positions, then there is simply very little room for success over time.
From a mental point of view, the novice Forex trader is doomed if they think it is easy to be consistently profitable through day trading alone. The Spot Forex market is not designed to be the best market for intraday trading due to the cost of doing business via the spreads, and the fact that it can be one of the more volatile arenas across the spectrum. I often hear the grumbles of students complaining about being stopped-out during a price spike, or taking multiple failed entries over and over again, only to watch the market go in their direction in the end after they decide to call it a day. Rather than attempting to fix this problem, they do the same thing over and over again, hoping that things will turn around in the end and it rarely does. The main reason for this repetition of errors is due to the fact that the novice has a belief system which suggests that if they don't make money everyday in the market, then they will never have the chance to make a decent living. While they recognize that Swing and Position trades can offer healthy rewards, they mistakenly think that there are not enough of such opportunities to be successful.
The reality, however, is that the smaller time frame charts may seem to offer more entries and trades, but they also pull the wool over the eyes of the novice because they create too much noise and numerous false signals. By stepping out and paying close attention to the bigger picture, a trader can vastly augment their probability for success and better returns because the generated signals are much clearer and the potential profit targets far greater. Take for example some recent price activity of EURUSD:
Figure 1 On this 1 hour chart, we can see a steady momentum downtrend on EURUSD. Anyone wishing to take a high probability, low risk trade would look to enter this market with a short position to re-engage the trend. As price rallied into a resistance/supply area of around 1.4660, we were given the ideal chance to go short with a stop loss for protection above the most recent technical highs of 1.4700. The first target would be support around 1.4580, giving a decent reward to risk ratio of about 2:1 for the first profit achievement. Now it is time to set and forget the position and allow the market to do its work.
On the other hand, we could have zoomed into a 2 minute chart to look for an even tighter entry:
Figure 2 Now the "perceived" benefits of going down to the smaller time frame are that a trader can execute the trade with a much tighter stop of around 10-15 pips as opposed to the stop loss of 40 pips on the 60 min chart. This, in turn, also provides the trader the ability to increase their position size by around 3 times; giving a much better return should the trade prove successful. In reality, though, this can actually prove to be far more costly for the novice than originally anticipated. Due to the fact that the 2 min chart creates so much noise and emotion for the trader, there is a temptation to quickly move the stop loss in fear of giving back any small gains. This often results in hugely premature exits and small winners which will never prove helpful in the event of a losing streak. The smaller chart can also tempt the newbie trader into taking trades too early, often at any glimpse of a red candle, providing a quick and painful stop out in the process more often than not.
The set and forget approach on the larger time frame is a far less emotional process and can often provide entries and exits while the trader is not even watching. If you are not visibly taking and managing the trade, you are allowing the market much more time to work in your favor, instead of chopping yourself to pieces by trying to be too precise. By stepping back and filtering out the noise, you will often see better results, like below where we see the EURUSD went on to drop a further 350 pips – not bad for a 40 pip risk, only if you would have given the trade some room to breathe.
Figure 3 One other major fact which we ignore is the cost of multiple failed trades. While it may seem that a 10 pip stop is disciplined and useful in the process of controlling risk, it can actually prove to be more damaging when the market is against you. If you are loading up with a bigger position size with a tight stop, then the reality is that each time you lose, you are not losing just 10 pips but multiples of 10 pips. Three 10 pip stop outs of 3 lots is a total loss of 90 pips; a quick way to drain an account in a heartbeat.
Slowing things down and taking your time is one of the best things you can do to give yourself a genuine chance at consistent trading success. Nearly all of the professional traders I meet and work with make their returns through swing trading and day trade for a little extra here and there, not the other way around. While it may seem enticing to use an extremely tight stop loss and a larger position size in the effort to make bigger profits throughout the day, in my experience, it is a far better practice to put the set and forget with a smaller size and let the trade run. Technical Analysis is not a fine art and never will be while price action is controlled by humans with emotions. You have to allow time to do its work and while you are in steady profit, you can afford to let it run. Aren't there better things you could be doing with your life, aside from sitting at your computer clicking in and out of the market for 10 hours a day and costing yourself money in the process? Remember why you wanted to trade in the first place and have the patience to get into your stride. Come on, it's Christmas; surely you would rather save yourself some extra cash for holidays, rather than paying another professional trader so they can have a better time than you! Try not to turn your Forex trading into the hardest, easy money you could ever make, and you may find Santa's a lot more generous next year!
Wishing you all a very Happy Christmas and Successful New Year!
Sam Evans sevans@tradingacademy.com
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