By Sam Evans, Online Trading Academy UK Forex, E-mini, and Power Trading Workshop Instructor
It has been a busy couple of weeks for me and I don't mind one bit. I think it is healthy to start a New Year in the way that you plan to go on and 2010 is no exception. With my teaching in class for Online Trading Academy and my ongoing Extended Learning Track (XLT) class commitments, I am always on the move; but one of the best things about trading is that you can fit it around your life so I never feel like I am missing out. In fact, having distractions aside from my own trading is a huge benefit to my personal speculative performance as it forces me to "set and forget" my swing trades, taking out the emotions which we can all be victims of, and allowing them time to do their work.
Sure, I like to day trade a few times a week, but there is nothing more economical than spending a few hours a week doing some analysis on the markets, placing my orders and getting on with life. As I have mentioned before, the Forex market is perfect for this style of trading and provides many opportunities for speculative trading across the whole week. Another benefit of this asset class is that anyone can start with a modest-sized trading account and still achieve impressive returns with limited risks. This week I would like to share some statistics with you from one of my ongoing XLT students to show you the ideal model for consistent, profitable trading.
Many novice traders focus on making quick, easy money early in their careers and some find frustration when this leads to losses. As we all know, one of the most common issues among green traders is their inability to keep losses to a minimum and allow the winners to run. Is this hard to do? Well, when dealing with the common problems of fear and greed, the answer is simply, yes. You see, in the desperate need to make money consistently, the typical novice trader fails to understand that it is vital to control losses at all times and make the most of things when the trade is acting as expected. So many times they place a trade and watch it take off in the right direction, only to pause and give some profit back. Usually this forces the newbie to exit early and take a small profit only to watch the market take off again in their direction with potential profits left on the table. The fear of loss also plays a huge part in the process of excessive draw downs. It is common to see a trader hold on to a big loser in the hope that the market will bounce back and get them to break-even once again. Sometimes this happens, but many times the margin call follows and yet another account balance is ebbed away. So how does the complete Forex trader deal with these particular banes? Simple: They follow a well-structured trading plan, built upon solid rules, risk management techniques and constant discipline. They plan the trade and trade the plan, nothing more, nothing less. Let's see the result of this action put into real practice.
In our ongoing XLT sessions, I focus my students' attentions to the key principles of successful speculation. We analyze the markets for only the highest probability trades which offer the lowest possible risk exposure and the greatest potential rewards. We allow the market to present us with the trades, rather than try to force a position recklessly and always know our exact entry prices, our stop losses and targets. Each and every facet of the trade is planned out, well in advance, to allow us to free-up our time and be unemotional. If a possible opportunity does arise, we grade it, score it and if it passes the criteria checks, then place the order. If it doesn't, then we pass. Trading consistently is simple by nature but just not easy to do because none of us were really designed to be traders. We can all be victims of our psychology but when controlled, the results can be plentiful. If we follow our rules and plan, we become consistent and when we become consistent, we become profitable in turn. As promised, here are the results of a well-defined trading plan in action:
Figure 1 Above is a monthly performance summary of my aforementioned XLT student who, in this instance, will be called "Dave." These are figures from a live account and I have blacked out the account number at the top of the report for security. Dave has been meticulously following the rules of a defined trading strategy since his enrollment in the XLT program and after a nice start to the year, decided to send me a copy of his monthly trading statement and performance record. Dave follows a technique of analyzing the market for only the highest probability, low risk turning points and always employs detailed risk and money management techniques. Draw your attention to his figures: These are the results of his trading taken from January 1 to the January 31, 2010. As we can see, his net profit for the month was $1250.03 and this was using only Mini Lot position sizing. The gross loss for the month was just $138.53. In terms of pips, this gives a gross loss of just 138 pips and a gross gain of 1380 pips. While Dave also enjoyed a 67% win to loss ratio, we have to say that a high hit rate like this is not always going to be achievable and is not enough to rely on for consistent success. However, my concerns were put to rest when I noticed that his average winner was $73.08 and his average loser was just $15.39, giving a true risk to reward ratio of 1:5. With a ratio like this, even on a lower percentage hit rate, he can still maintain profitability. Is Dave sitting in front of his PC for hours every day to achieve this? Not at all, as all of these trades were swing positions and Dave has a full-time career which he enjoys and is trading part-time for now; but with results like this, he can always consider stepping up at any time and making a full career of Forex trading in the future.
Anyone can achieve results like this, only if they follow a plan and get the right education from the very start. Remember trading is simple...only if you let it be.
Until next time,
Sam Evans sevans@tradingacademy.com
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