Hello traders! Welcome to my first newsletter of the New Year! How are your resolutions holding up? After less than a week, hopefully they are still intact! As most of you know, New Year’s resolutions seem to have a habit of being “adjusted” or even thrown out the window completely by the second week of January; even more of them don’t make it to the first of February. This newsletter will suggest a few forex trading resolutions to help with your trading in 2016.
Before we get to some suggested resolutions, I’d like to offer my point of view on trading motivation. In my humble opinion, keeping motivated is one of the most important psychological things in trading. Many new and old traders seem to lose focus, almost forgetting “why” they are trading in the first place. In fact, when asked why traders trade, many will say “to make money.” As has been discussed in previous newsletters, this “why” is usually incorrect. (Yes, there a few out there who are only in it for the money, thinking this is a way to keep “score” in life. The more money you have, the more you are winning, right? I disagree.) Our real reasons for trading usually include things like: freedom to do what I want when I want; the ability to get paid what I am worth instead of what someone else says I am worth (a job); travel; philanthropy; toys, be it nice cars, houses, watches, whatever; the list is as varied as the traders out there! Making a list of your own reasons for trading will help hold you accountable to those reasons. I don’t mean just have them in your head. Actually write them out, or even better, find pictures of your reasons and post them near your trading computer. This is one of the most important psychological things that successful people do to achieve their goals, and I don’t think it can be overestimated.
One thing that I have found to help with this aspect of your trading life is to read books on motivation. Try to read a new one every month! I’ve been asked why you should keep trying to motivate yourself, and the answer is always the same. Why do people find it necessary to exercise every day or two? Why do you brush your teeth every day? Because it works is the easy answer. Too many new traders “lose their way” after a few weeks or months of trading. My personal belief is that their motivations have been pushed to the side by “real life.” They say they don’t have enough time, enough this, enough that. Your real reasons for wanting to trade will overcome these problems. Believe me, there is enough time in the day to become a successful trader, you just need to find the motivation to find the time!
So what resolutions should we have for our trading this year? If you took my suggestion two weeks ago and know what your strengths and weaknesses are, this list should be relatively easy. I will offer a few more suggestions this week. For the experienced traders out there, this list may seem too simple. However, the experienced traders often break some of these rules occasionally, which will negatively affect their annual rate of return which is what we are all trying to improve, isn’t it?
- I will never move my stop loss the “wrong way.” Your plan for any individual trade should have a location on the chart where you believe the trade isn’t going to work out. Your stop goes there, period. If the price action approaches your stop loss, the profitable trader leaves the stop where it is. Many traders will move the stop further away from their entry, thereby making their reward to risk ratio worse. Now, occasionally this “technique” will work and keep you in trades that may become profitable. However, breaking nearly any rule in life will sometimes work! As a trader since 1997, I’ve seen too many new traders come and go, and this is one of the primary reasons. You have your stop there for a reason-leave it there! Small losses are the key here-moving your stop to take big losses will keep you from achieving your above mentioned goals.
- Let your winners run. The vast majority of the most successful traders that I know do NOT trade with an all-in then all-out strategy. (This means buying, for example, 6 lots at one price and then exiting all 6 lots at a predefined profit target. And then looking around for another trade.) Most use a scaling out strategy. There are numerous ways to scale out. Some traders will exit half their position at a 3:1 reward to risk ratio then manage their remaining trade using whatever trend following technique they prefer. Often they will not have a hard profit target, they just let it go until it reverses. Another technique is to break your trade into thirds, for example exit one third of the trade at a 3:1, another third at (for example) 6:1, and then let the last third run as previously mentioned. In Online Trading Academy’s on-location classes and also our online Extended Learning Track classes, the pros and cons of these (and other) techniques are discussed much more fully.
- Keep a trading journal. The above mentioned newsletter from two weeks ago should help with this one! If you aren’t keeping track of your strengths and weaknesses in trading, you are doing it wrong!
- Add simplicity. When a trader chooses to add a new indicator, or an additional time frame, or a new Odds Enhancer, this trader must keep track of the performance of this new item. If the performance suffers, remove this new item from your plan. Over time, we expect the trader to have a few supply and demand zones on their charts (our core strategy!) and little else. Invariably, when I have an “experienced” trader in one of my classes, I will ask what indicators they are using. (To put in bluntly, they are in class because they aren’t making money in trading. You can know everything about trading and charting that exists, but that doesn’t mean you are profitable.) Usually their list includes 4-10 different things they’ve added to their charts which only make things more complicated. Add simplicity by removing some indicators that aren’t helping your profitability and the only way to know this is by your trading journal!
There you have it traders! A few New Year’s resolutions to help you on your way to making 2016 your best trading year ever! Until next time,