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FX Trading: 5 years, 9 lessons learned…

Lesson 1: Learn how to read charts

Cynicism aside, if you’ve been around long enough to realise that if you want something done properly then you’re probably going to have to do it yourself, I fancy the best chance you have of profiting from the forex market long-term is to actually take the time to learn how to read the charts. This really isn’t rocket science but this does require some effort. If you take a look at any 1 hour EURUSD chart, it shouldn’t take long to notice that there is considerably more movement in the chart between 7am and 9pm (UK time) than there is between 9pm and 7am, and it should take even less time to figure out why this happens. I’m convinced that the massive failure rate in the retail forex market is largely down to a lack of putting the required effort into reading charts and spotting patterns, in favour of copying others or just generally having a punt. I view learning how to read the FX charts no differently from learning how to read a new language and, believe me, the FX language is elementary stuff compared to some languages out there!

Lesson 2: Stick to your own niche

All you need is one niche. It might even be just one currency pair at a set time of the day. I personally trade no more than four currency pairs at a time and, more often than not, I’m in and out within a four hour window. That’s no more than twenty hours screen time per week, and any necessary trade research or trade admin falls within this screen time. I looked at what felt like everything (and burned some good money on a lot of it) before I settled upon my current trading style and, after a couple years of rewarded loyalty to it, I can’t see this style changing. I wouldn’t have any confidence position-trading FX and I barely know what a bond is (let alone being able to trade one) but, fortunately, it’s not something I lose sleep over because I’ve found my niche in day-trading. It is incredibly difficult to avoid being distracted by all of the noise out there when you’re on your mission to find a niche that works for you but once you find something that feels like the right fit, stick to it.

Lesson 3: The overnight consolidation is a gold mine

Despite having just preached the necessity of finding your own niche, my top tip for a place to start reading charts is the overnight consolidation in the forex market. Take a good look at the charts and you’ll see that the same patterns repeat themselves over and over again.

Lesson 4: Do trade, don’t gamble

If you don’t know where you’re getting out before you’re getting in, you’re not trading but you’re gambling. System trading is the way forward, despite the monumental number of naysayers who believe systems are great until they stop working, which is ultimately a view formed on the back of either not persevering through a drawdown of a working system or by trading a system that just didn’t work in the first place. I struggle to grasp how it’s possible to have any confidence trading without sitting on a wealth of systematic trade history that puts the probabilities in your favour. Profit is ultimately all about playing the probabilities effectively with patience.

Lesson 5: Get stop-losses right

I realise it’s possible for the rare maverick to trade successfully without stops but it’s vital for the everyday nibbler to trade with stops and to take the time to get these stops right. After you’ve learned how to read charts and you’ve devised a particular system with entry and exit triggers, you should have a feel for where the right stop is. Whether it’s a fixed stop or a variable stop according to some form of support or resistance, testing out different stops to get the right one is just as important as determining the right entries and exits.

Lesson 6: Get money-management right

The easiest one of these ten lessons to nail… figure out how much you’re willing to lose (probably around 2.5% of your trading pot per trade with an absolute maximum of 5% per trade) then raise your trade stake on the back of winning sessions and reduce your trade stake on the back of losing sessions… NOT the other way around.

Lesson 7: Thorough backtesting is make or break

In a previous post, I referred to the Holy Grail as “backtesting and patience”. This might be a little excessive but I stand by my position that the single most important factor in determining the success or failure of your trading career is the quality of your backtesting. If you’ve done it properly and you’ve confirmation that the probabilities remain clearly in your favour during various market cycles, it’s really only a lack of patience that can ruin it for you.

Lesson 8: Don’t let a lack of patience ruin it for you

The beauty about system trading is that it shouldn’t test your patience. You’ll either close a trade when your exit is triggered or when you’re stopped out, whichever comes first. If only it was that simple. Although I’m confident and patient with my own trading style now, I’m still riddled with self-doubt on a regular basis in general life as much as the next guy and it’s only natural that the everyday people finding their trading feet will experience those issues of self-doubt and self-entitlement highlighted in the Holy Grail post. Just remember to take a step back from time to time to get a good view and never deviate from a working system.

Lesson 9: Everyone makes mistakes

Sometimes they aren’t even your mistakes, which can be particularly frustrating! Your broker might experience platform issues or you might have trades rejected, both of which you have no control over but inevitably you’ll find go against you instead of for you for the most part. In a game of often very small margins, however, it’s vital that you limit your own mistakes by staying switched on and executing accurately. Of course, you are bound to make the odd mistake from time to time, and you might miss out on a fraction of a pip here and there if you’re trading manually, but the biggest mistake of them all is if you don’t factor these mistakes appropriately into your backtesting.

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