Designing a trading strategy is one of the most important things you will do as you trying to get your career as a traitor off the ground. Much like determining your goals, if you do not have a trading strategy you are simply swinging wildly and a market that is dominated by professional traders who have access to an almost unlimited amount of knowledge and capital. After all, some of the people in this market to you are jumping into are trading for large banks and hedge funds, and therefore have massive amounts of support, well beyond what the individual trader will have. With that being the case, it’s very important that you decide how you want to trade by developing a strategy BEFORE you start trading with real money. In other words, you are going to need a demo account, which is easily found at most brokerages. You need to figure out what indicators, position size, trend following mechanisms, or anything else that you feel comfortable with in order to make money. While there are a multitude of trading strategies freely available on the Internet, the most important thing is to be able to trust your strategy. The only way you can do that is if you will build up some type of history with that particular strategy, via the demo account. For example, you can have a strategy that’s proven to work overtime, but if you are not comfortable trading it, you WILL mess it up. But by having a history with this particular strategy, you know that over the longer term you were going to make money all things being equal. Most strategies can work overtime, it really comes down to the trader and whether or not they have the ability to follow that strategy. Most do not, and that is one of the biggest reasons why people lose money in the markets. If you have a strategy that averages a 15% return every year, you truly can make money like that, but you have to be able to trust and follow your trading strategy. By far, that is the biggest challenge the traders tend to face.
One of the most important things you can do as a trader is to determine your goals. Quite frankly, if you do not have some type of idea of what you are trying to accomplish, you will simply find yourself trading blindly, and probably impulsive. Simply put, the easiest goal to come up with is to be profitable. Obviously, you are not looking to lose money, but there are many nuances about trading that you need to think about before throwing money into the market. One of the biggest mistakes traders make is that they come up with unrealistic goals. For example, there are a lot of products out there that will tout the idea of making a ridiculous amount of money. Recently, I have seen a black box system suggests that 50% returns per week were common. If you do the math, a 50% return is absolutely outrageous, as the compounding interest will turn $100 into over $1 million in just 23 weeks. This is not realistic, and anybody telling you anything different is obviously trying to sell you something. Not all goals have to be based on returns. After all, you want to perhaps have a goal of sticking to your trading strategy. Or perhaps you have a goal of being able to trade just one particular hour out of the day. You can also find yourself trying to trade only long-term trades, more or less like an investor and as a passive type of business. There is a multitude of different things that you can think of in order to determine goals, as some people will simply do it for entertainment, while others will try to make a living off of a larger account. Other people will use the account to grow money while adding money into it every paycheck, so that they can speed up the rate of compounding. Either way, you need to know where you’re going first in order to have some of the most important things that a professional trader can have: a trading strategy, a risk management system, a set of rules from which to operate, and quite frankly some organization to your trading day.
In this video, I discussed designing a risk management system. While there are literally hundreds of articles and books written on this very topic, the one thing the most traders don’t understand is that it is the most important aspect of trading and the main reason why traders are either successful or not. Most traders can come across systems on the Internet that says risk a certain percentage, and then the following “hard numbers” a peer in the statistics. The biggest problem with that is that you don’t know how many wins or losses you will have in a row. Because of this, I am going to address something that’s much more important than the hard numbers: a risk management system that you can actually use.
Systematic trading involves a trading system that says wind certain conditions are met, you place a trade in one direction or the other. It leaves very little to the imagination, and simply gives you a “buy, hold, or sell signal.” Most traders use some type of system, as it gives them a framework from which to trade the markets. By contrast, discretionary trading involves simply making a decision on a spur of the moment type of calculation. An example of systematic trading might be using something like a moving average crossover system. In this chart, I use a classic 10/20 moving average crossover system. You can see on the chart that it worked really well on one particular trade, but on the other hand you get quite a bit of chopped that would’ve cost you a few pips here and there. Ultimately, we are in a move now that looks proper one the opposite direction. That’s an example of how a system works, you get the signal and you simply do what it tells you. Discretionary trading could keep you out of this trade because it involves your best educated guess in a sense. For example, there might have been an economic announcement coming out that might have kept you out of all of the choppiness. On the other hand, when you look at the weekly chart of the AUD/JPY pair in this chart, you can see that we have been in a downtrend for some time. Discretionary trader may just simply sell this market occasionally, expecting to eventually make money based upon the overall trend. The reality is that most traders use discretion even if they are systematic trader, simply because it involves a lot of common sense. For example, Nonfarm Payroll numbers could be coming out shortly, and if you get a signal to start buying or selling, you may stay out of the market simply because you know how volatile that can be. With fact, you are using discretion along with a system. Truthfully, it’s very rare to be a systematic trader with no discretion, which in a sense tends to lend itself to people who use expert advisors, or what are known as trading robots. Most traders will try to be a systematic as possible, but you have to use some discretion so that you don’t make really dumb choices. As an example, entering a CFD market for the S&P 500 right before the Nonfarm Payroll announcement is simply gambling, and as a result you would more than likely step away. Discretionary trading can involve simply selling in a downtrend in stepping away. They may not even have put on a stop loss at that point in time, which could be very dangerous. Having said that, some traders will buy options to offer put any significant moves while they sleep. Truthfully though, most people, and most successful traders I know, will use a little bit of discretion with their systems.
There are a multitude of places to find trading robots. Not only is there the MetaTrader terminal, but there’s the mql4 page, as well as the mql5 page online. These are the “official” marketplaces, but keep in mind that these expert advisors are not written by anybody special. Quite frankly, the gist traders around the world that have the ability to code. Being a good programmer doesn’t necessarily make you a good trader. As I record this, there are over 240 pages of robots that you can choose from, varying drastically and cost. Ratings of course are all over the place as well, as some will have performed better than others at certain points in the market. But that’s the biggest problem, most algorithms can only perform in the market conditions that they are optimize for. Because of this, most automated traders will use several different strategies. Of interest is that some of the larger firms in the United States are now starting to push robots, including Ally. They are known more for retirement accounts, but they are starting to offer currencies as well, and have an entire section devoted to robots. There are also firms around the world that specialize in automated trading, such as the Forex broker RoboForex in Singapore, where automated trading seems to be a bit more popular. Quite frankly, one of the things that you should keep in mind is that large banks such as Goldman Sachs spend millions of dollars on algorithms. It is very unlikely that you are going to find one for $50 that can match that type of performance. Remember, they are trading with large and real size, meaning that it is actually crucial that their algorithms make money. While many of these robots can make money from time to time, in the end it is essentially putting your finances in the hands of someone else that you don’t even know. If you are going to do that, you will probably be better off trying to find a financial fiduciary it to trade your money for you. If you do choose to go the automated row, you can write your own script. The MQL4 programming language is rather simple, being a derivative of C++. There is a complete and thorough set of documents online, and plenty of examples. However, one of the benefits of being a retail trader is that you can simply follow the market. You’re not trying to move it, you’re not trying to outsmart it. If something is rising in value, you buy it. It’s really that simple.
There are several ways to copy other traders, and as a result I can only give you a general overview as to how this works. You can get trades via SMS, expert advisors in your MT4 trading station, websites, newsletters, videos, and even social trading sites. Because of this, there is a plethora of ways to copy other traders around the world. The biggest problem of course is that not everybody is profitable over the longer term. After all, most retail traders lose money over the longer term, so you have to be careful about who you are copying. One of the easiest ways to get into this is that you simply do not make money on your own, so therefore you are looking for somebody who is better at trading than yourself. However, you have to make sure that the trading record is verifiable. There will be plenty of people willing to sell you their trading signals around the world, but the problem is that most of them don’t make money over the longer term. With that being the case, make sure that there is some type of verifiable trading record before you give anyone money. Typically, any trade copying system or signal service is charged monthly, as it’s difficult to pay a person is like you do with managed Forex or futures. After all, they do not have access to the money in your account, they just simply give you the trades that they are taking. This can come in the form of an expert advisor that automatically trades for you, or one that sends the signal and you decide whether or not to follow. All of the other methods of course have no way of placing trades for you, so for the most part you do have the ability to override the decision. One of the biggest problems with these services is that typically they are smaller traders. When you look at big firms, they have risk managers who control the traders and allow them only a certain percentage of money to trade. The smaller trader doesn’t necessarily have that luxury so you do have to keep that in mind. Quite frankly, I’m an average in of learning how to trade first and then deciding whether or not somebody else should make your decision. Having said that, there is the possibility of making profits this way.
One of the things that you have to keep in mind when becoming a trader is that no 2 people are alike. In other words, you will trade quite differently than I do, and as a result we can trade the exact same type of systems, but have wildly different results. A lot of this comes down to your trading personality, and of course psychology. Some traders are going to be more risk adverse than others, and therefore they will need to understand this going into a trade. This is where position sizing comes in, because not only do you have the statistical analysis of what works and what doesn’t, you also have the psychological analysis of what you are comfortable with. If you are not comfortable with the size of the position, you will more than likely do something to cause problems in your results. In order to understand what your trading personality is like, you should keep a journal of all of the trades that you take. For example, you may buy the EUR/USD pair, keep the date and time handy, as well as the price and all of the other parameters such as why you got involved. Another thing you should keep track of is how you felt about the trade. The more comfortable you are, the better off you are going to do. You can evaluate not only the comfort level of your trading, but the trades that you seem to do better at. Oddly enough, some traders simply do better at particular pairs over other ones. There’s no real logic to it, it just seems to be something that’s embedded in that particular trader. By keeping meticulous notes, you can evaluate how your trading personality of facts your decision-making. Some people prefer short-term charts, while other people prefer to trade weekly or even monthly candles. They are more passive. If they’re passive trader, there’s absolutely no reason that they should be even looking at 5 minute charts for example. Everybody is going to be different, and there is no correct way to trade the markets. You need to figure out what works for you, and incorporated into your trading strategy and your trading plans. Without doing so, you are likely to struggle going forward.
Paper trading, or using a demo account, is the first step in learning how to trade. After all, you have to be able to know whether or not your even capable of making money in the markets before you can risk any significant amount. By using the demo account, you have the ability to take risk without actually risking any money. This of course is a big deal, as it gives you the opportunity to trade various systems or methodologies and see how they work out. Most professional traders have paper trading accounts most of their lives. They are constantly looking to improve their returns, and as a result they are normally trying new methodologies for indicators or other such things. A demo account is the perfect place to do this because you have absolutely no real risk. Most brokerages offer demo accounts, and it’s very rare that you will find one who doesn’t. In fact, as a general rule you should probably avoid the shops, as it’s a very basic thing to ask. Quite often, traders will use a live account simultaneously to trading a demo account, as the one great thing about trading is you will never know everything. There is always something new to learn.
Traders can enter the market in several different ways, and contingent orders tend to be one of the favorite. The contention order is simply in order that is triggered if certain amount of conditions is met. For example, you may send an order into your broker to buy the Euro if the EUR/USD pair reaches the 1.12 handle. This is the essence of a contingent order. There are several different types of contingent orders, but the most common are the following 6: the buy limit order, the sell limit order, the buy stop order, the sell stop order, the buy stop limit, and the sell stop limit. Because of this, the average trader has several different opportunities to enter the market in various conditions. These are the trading orders available in the Metatrader platform, the most common one out there. There are other less common contingent orders that you can run across, but these are by far the ones you will use the most. A buy limit order allows traders to specify the price that they are willing to pay for security, and the broker guarantees to honor that price or even better when it becomes available. The sell limit order simply does the same thing, but from the sell side. A buy stop order is an order that you give the broker to buy a security at a price above the current price, and is triggered when the market touches her goes through the buy stop price. Quite often this is used in order to take advantage of momentum building up. A sell stop order is often referred to as the stop loss order, it’s in order to close a position once the security reaches a specific price. This is a way to protect yourself from losses. The buy stop limit is executed when a specific price reached, as it becomes a limit order to start buying the asset at a specific price or better. The sell stop limit is a sell order that is triggered once we reach a specific price, and is guaranteed to be the price you ask or better. This is a great way to enter the marketplace while stepping away. In other words, if the move happens in the middle the night you can know how you’re going to enter the market. Obviously, stop loss orders are crucial, so you need to protect your trading accounts while you are not at your desk. At the very least, you should have a stop loss order to protect yourself from disaster. However, contingent orders to offer you an incredible amount of flexibility.
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