Day Trading & Forex Forum

Inexperience: No matter how many times you read that trading manual nothing can prepare you for live trade. As all of your indicators begin to line up you get confused, miss signals and react too quickly or too late. After your first hectic day you realise that your strategy was OK and you can attribute your loss to your lack of experience.

Greed: Buying a strategy almost inevitably comes with a statement telling you how you can make a boatload of money with relatively little work. When designing your own strategy you will automatically look for the highest winning ratio rather than best risk/ reward. This will lead to classic over trading (if you are destined to win why not increase your earnings by trading more), inability to cut losses (your strategy predicts market direction so all you have to do is wait and this loss will turn into a profit) and believing the market will move further in your direction than it actually does (setting a target that gives you as much profit as you want rather than as much profit as the market can give you).

Fear: After being burned a few times by the greed and inexperienced stage you will have probably changed strategies at least once. After all it isn’t your fault it must just be a dodgy strategy. Now it is time to hit the books and find another combination of indicators to use. The more you learn the more indicators you can find that help you make money. Or if you prefer to buy another ‘Grail’ system it must be more complicated like something the professionals use. Unfortunately all of the extra knowledge, indicators and complication leave you almost paralysed when it comes to entering a trade. Coupled with the losses you incurred during your ‘greed phase’ entering a trade becomes scary. That moment of doubt where you question your indicators or the market’s recent behaviour causes you to miss your entry and forget about the trade altogether. As you know only too well this trade was the best of the day or possibly even the whole week!

Another common mistake associated with fear is late entry. All of the characteristics of complete failure to enter are there but rather than miss the trade completely you enter late. This completely destroys your risk reward and an unsuccessful trade costs you much more than it would if you had entered at the correct time.

Just when you thought fear could only influence your entries it turns around and has a bite at your exits too. Exiting too early can cause you to take an unnecessary loss. Picture the trade: you enter correctly and the market moves a little way in your direction. All of a sudden the market turns around hard and your position starts to represent a loss. Rather than sticking to your stop loss (your defined risk) you exit early and think that you have saves yourself some financial pain. Just as you exit or just before your stop loss is triggered the market turns on its heels and ends up reaching your initial target.

Scenario two causes you to take your profit too early. The market approaches your target and goes through a natural correction. As you see the market eat into your profit you decide enough is enough and you get out while you are still in the black. Of course the market resumes its initial direction and hits your original target.

Fear will cause you to develop a lack of faith in your chosen method. Depending on how many times this has happened before you will either go back to the drawing board with your method or lose faith in your ability to trade at all. You start to believe that surely nobody makes money from trading.

This is the point at which many traders have what they call the ‘aha moment’. All of a sudden it becomes clear that successful trading isn’t down to the system at all it is down to the person using the system. This is the moment when each trader realises where the Grail can be found.

Finding The Grail:
Do we need a system at all?

If the secret to the market Holy Grail lies within each trader then what is the point of a system at all? Simply put a system represents a reason to enter the market. If you don’t have a system then you have no reason to enter the market at all.

The Basis of a System:
Every system should be comprised of the following:

Trading science: Whether you use technical indicators or fundamental analysis this is your science. It doesn’t have to be complicated; in fact simple is often much more effective. This will generate your buy or sell signal.

Money Management: Arguably more important than your signal is how to manage the resultant trade. You have to set strictly governed rules that determine how much of your trading capital you will risk per trade. Part of money management is your risk: reward ratio. If you have a risk: reward ratio of 1:4 then a profit factor of 0.5 (50%) you will be banking a very handsome profit indeed!

Discipline: If you don’t have the discipline to stick to your trading science or your money management then your system may as well never have existed. Being disciplined will help eradicate late entries and early exits. In short it is the most important factor in every system.

It is very hard to apply discipline to something you have no confidence in. Therefore we recommend starting from scratch with a new strategy, something simple. This does not mean you should fork out hundreds of Dollars on a new system. Our Scalping For Forex ebook outlines a proven, simple approach that is an ideal tool to help you on your path to the Market Grail.

There is No Substitute For Experience No matter which strategy you use to help build your discipline and money management there is no substitute for experience of the market you are involved with. This experience includes knowledge of price action, chart patterns and momentum cycles to name but a few. For example, if you are trading using a momentum breakout strategy there is no point in trading during a slow, choppy market. This is something that you can only learn from experience of price action and you shouldn’t hope to grasp it over night. Once again, trading isn’t easy and it certainly is not a get rich quick scheme.