Day Trading Forex Live was founded by the two traders, Sterling and Chad, with the aim of informing traders about the forex market and its internal workings. Through this site, you will able to learn some strategies and gain specific knowledge that will serve as your ideal foundation in forex trading and help you how to trade well.
Today’s Forex Beginners Guide breaks down the 4 most important aspects to becoming a profitable forex trader. Over the last 13 years of trading, I’ve run had the opportunity to talk to well over 15,000 traders, 5,000 members of DTFL alone. Through the years I’ve also met many profitable traders, most of which traded different strategies. What I always found interesting is that while they all traded different strategies, they all stuck to these 4 rules.
Enjoy and please leave any questions or comments you have below.
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Video Transcription Below:
Hello, everyone, it is Sterling here from Day Trading Forex Live and in this video, I’m going to show you what I believe to be the four most pivotal aspects to becoming a profitable trader. Now I term this as a Forex beginners guide. I started trading at 17 I’ll be 31 shortly, so a little over 13 years. If I could take all that information and boil it down to the most important aspects, what would I teach myself at the beginning? What would I teach myself to help me expedite the learning process? Because for me, it took me about three and a half years before I was consistently profitable, and it wasn’t until my mentor personally taught me these four aspects and really ingrained into my mind the importance of these aspects.
What has been unique over the last 13 years of my trading, is that after I implemented these in my trading, that was literally the turning point for me in my trading, and it had nothing to do with strategy, that’s the other aspect. What was unique about it is that every single profitable trader I have met in that period of time has followed these four rules to a tee. I mean they might make slight variations to it, but they follow the sentiment of these four rules.
So what I’m telling you is if you are struggling right now, you’re new to the market, or maybe you’ve been around the market for multiple years. It’s not just a beginner’s guide for those that are new to the market, but also a beginner’s guide for anyone that’s not yet profitable. If you’re not profitable, then the fact is you have to make some changes. If you want different results, you have to perform different actions. What I’m going to show you today is the four crucial rules to turning your trading around. Before we get into that, let me just state that I worked on shortening this video, but the fact is guys, I don’t want to shorten this video just to appease those that don’t have an attention span. So what I’ve decided to do is to make it as long as I need to, and quite frankly if somebody doesn’t have the time to stick around you’re probably not going to have the patience to be a profitable trader.
The first thing I want to cover is why mindset is so important, because these four rules, although not strictly mindset related, they go back to mindset. The reason they’re so important is really illustrated in a guy named Roger Bannister. It’s probably a guy that many of you have never heard of, but he was the first guy to run the four-minute mile. Now you might be thinking, what does the four-minute mile have to do with learning to trade Forex? Well, what’s interesting about the four-minute mile is that up until Roger Bannister ran the four-minute mile in I believe 1956 or 1953. Up to that point, no one had successfully run a sub 4: 00-minute mile. What’s unique about that, is that within the same year he ran the 4-minute mile, some 16 or 17 other runners were also able to break the 4:00-minute mile barrier.
So what was it about him running the four-minute mile that suddenly allowed all these other runners to do it as well? The point I’m making is that it wasn’t their training or anything else that changed, it was the simple fact that they now believed with 100% confidence that their goal was achievable because they saw somebody do it. They saw Roger run that four-minute mile so they knew for a fact it was possible. Because they knew it was possible in their mind, that was what facilitated the physical action. Now I’m not telling you that positive mental attitude is the key to trading success and anybody that’s telling you that is just blatantly lying to you as that’s not the case. What I can tell you is a negative mental attitude, whether knowingly or unknowingly can hurt you. I’m also going to explain how it can be that you have this negative attitude affecting your trading unknowingly.
Whether you know it or not, a negative mental attitude has a dramatic impact on your trading. To illustrate, I want you to think about any time you’ve achieved some level of success in trading. Maybe that’s a couple weeks of profitable trading, or maybe that’s five, six, or seven trades in a row that were profitable. What inevitably creeps into the back of your mind? Now I’m no different than you, so if this crept into my mind at that time then I know it did yours as well as human nature rarely deviates. What crept into my mind was, “I wonder when this winning streak is going to come to an end?” Or, “I wonder when I’m going to blow up this account?” You could have also just had an uneasy feeling about those five profitable trades, or about that two weeks of profitable trading, or whatever it may be.
You had an uneasy feeling because you have a history of failing prior to that success. The subconscious mind has seen this numerous other times, and the longer you’ve been trading the more baggage there is. So what the subconscious mind is seeing, is limited periods of success and then a blow-up, success and then a blow-up. So what happens when you have that success? Inevitably your mind goes, “I’ve seen this before, and I’ve also seen what comes next!” That’s when those negative trades start coming in. That’s when you start revenge trading, overtrading, and all the other aspects that come along with a mental failure or a mental breakdown.
What I want to do is to change what you perceive to be the keys to success, as the longer you’ve been trading the more baggage you have, and thus the more important this is for you. Changing that perception of success gives your mind a new goal. If your mind has a new goal of what it takes to be successful you don’t have all the other mental baggage. At the very least it’s pushed off to the side in the most effective way we can. Changing your perception of success is what I’m going to show you today. I’m also going to show you the four keys to successful trading. When you see them, you’re going think that they are much lower than what you would have shot for prior to seeing this video. Because they’re much lower than what you shoot for right now your mind is automatically going to put you in a state where you think, “yeah I believe that’s possible!” The importance of that positive belief is going to make sense shortly. Having said that, just because you believe something’s possible you have to also know that it’s extremely profitable as well. Otherwise, as far as trading is concerned, what’s the point?
I’m also going to show you the four rules that you should use to guide your trading. Because you’re gonna think these are much lower than average I’m going to run the numbers on exactly how it would grow an account. Let’s get right into it!
What are the four aspects of turning around your trading? Number one is the win-loss ratio. I’m going to break all these down one at a time, and then I’m going to run through the numbers. Anyway, the first point is win-loss ratios. I want you to change what that perception of success is or what you perceive to be the key win-loss ratio to success, and I want you to change it to a 50/50 hit rate. Again, I don’t claim to know what’s in your mind, but over the last decade of educating traders on the way that I trade, 80-90 percent of them shoot for a number higher than this. I’m not saying that they are wrong or right, I’m just saying they do, and that’s having spoken to 15 or 20,000 traders over the last decade, 5000 of which are members of Day Trading Forex Live alone. A 50/50 win/loss ratio is statistically way on the low side, as most people are shooting for a number much higher than that.
The 2nd rule of the 4 pivotal rules to trading successes is the only number of the four that is going to be statistically higher than what most traders aim for, and that is a two-to-one reward to risk ratio. All that means is that if you’re risking 20 pips, you’re looking to gain 40. If you’re risking a hundred pips, you’re looking to gain 200 at least. We’re talking about a 2 to 1 reward to risk ratios, or you could think about that in terms of percentage gain or loss which I will explain in a second. So if you’re risking 2% of your account value, then you would be looking to gain 4% as your take profit. A positive reward to risk ratio allows for a 50/50 win/loss ratio. A 50/50 hit rate is extremely important, let me illustrate. If I went to you and I said: “your life depends on you winning 70% of your trades this month and you have to take at least 12 trades.” So imagine that your life literally depends on you winning 70% of your trades. Now I go to you, and I say, “option number two requires you
to win 50% of your trades.” Which one are you going to take? Obviously, you’re going to choose option #1. That is a very simple way of illustrating that your mind instantly believes option #1 is much more achievable.
What this exercise should do is change your mindset going into the trading day. Now that you believe it is possible to win 50% of your trades, you have to also see how profitable it is once you achieve a 50/50 hit rate. Then you’re gonna go into the day with not only the belief that it’s possible to hit your goal of winning 50% of your trades, but also the knowledge that it’s hugely profitable.
Number 3, limit the number of trades you have per week to 3 trades. You can increase this number down the road, but in the beginning stick with 3 trades as your max number of trades in a given week. There is an inverse correlation for certain between the number of trades somebody takes and their probability of success. The more trades somebody takes, the lower the probability they are a successful trader. Again you may be the anomaly, but I can tell you that after dealing with close to 20,000 traders over the last decade that is a statistical fact which consistently holds true. I know a lot of people that own brokerages, as well as those that are major parts in brokerages. Speaking with them this number is consistent among many more than just the 20,000 traders I’ve spoken to over the years.
Number four is risk per trade. Again these two numbers are going to be lower than what most people shoot for. Two percent risk per trade means if you have a thousand dollar account you’re going to risk no more than $20 per trade. If you have a ten thousand dollar account, which is what I’m going to run all the figures on here in a second, you would risk no more than $200 on any one given trade. So these are the four pivotal rules to trading success. Now, this might seem overblown or overstated, but let me show you what this does over the course of time, and you can decide how powerful it is for yourself. Now I’m starting with a $10,000 account balance here, and we’ll get to that in a second. First I’m going to illustrate how you can get to the point where you have an account balance that you have the ability to grow. In other words, if you don’t have any money how do you get money? I’m gonna cover that as well here in a second. To begin with, let’s go over those numbers I just showed you, those four crucial aspects to success and illustrate what it would produce in a month. We have to know what they produce in a month to then compound it month after month for one year two year three years.
Three trades per week equals twelve trades in a month, right? If you win 50% of them and you lose 50% of them, you’re gonna lose fifty-six year twelve trades, and you’re gonna win six of your twelve trades. We’re risking 2% per trade, so six losers times negative 2% equals negative 12 percent. You’re gonna lose 12% on the six losing trades out of the twelve. On the six winning trades out of the twelve trades total, you’re going to make plus four percent on each trade. Remember two to one reward to risk ratio, so if you’re risking 2%, then you’re looking to gain four percent. Four percent times six trades equals plus 24 percent. Plus 24 percent on your winners, minus negative twelve percent on your losers results in a plus twelve percent monthly gain. On those figures, I just showed you it’s a plus twelve percent monthly gain. Now what I’m going to do is I’m even going to shoot lower because I’m gonna walk through three different examples of compounding over the course of time using even lower numbers. What I did on this slide here is break down what the results would be if you won only five out of your twelve trades. That means you lose seven trades and you win five out of the twelve. That’s a win-loss ratio just a little bit under 42%. In that case, you’re not much over a 40% win-loss ratio! Let’s do the math and see the results! Again, seven losing trades at two percent risk per trade equals negative 14 percent (7 Trades X -2% P/Trade = -14%) on your on your seven losing trades. On your five winning trades, you’re making four percent each trade. Four percent profit per trade times five trades equals plus twenty percent (5 Trades X +4% P/Trade = +20%). Plus twenty percent minus negative 14 percent from your losers results in a combined total of plus six percent that month.
Now I ran the numbers on plus twelve percent, plus nine percent, and +6%. You’ve seen the numbers on +12% and +6%, but a way you could get to +9% using this exact figure here, is if you just changed the risk from two percent per trade to 3 percent per trade. I don’t highly recommend that but if somebody were to do that using a 41.6% hit rate as I’ve Illustrated here, this would be the result. Seven trades at 3% risk would instead be a 21 percent loss. Then five trades times +6% would equal +30%. Plus thirty percent minus negative twenty-one percent would come out to plus nine percent monthly profit. This is just another figure you could run with a slight variation of the numbers that I’m illustrating. That’s why I said at the beginning, ‘while every profitable trader I know follows these rules, they don’t follow these rules to an exact tee.’ They may make slight variations, normally even more conservative through the numbers I showed you, not more aggressive.
Now I’m going to change over to the next slide here, and this is where I’ve actually broken down the numbers. This is where again, it’s important to understand why all those other rules are in place. For example, it’s important to understand the win-loss ratio we Illustrated and why that affects your mindset going into the day. Next, the reward to risk is really the key to profitability as a 50/50 hit rate and a one to one reward to risk ratio is break-even at best. Likely you’re actually losing money because of the spread. Therefore, your two to one is is to offset your lower win-loss ratio. Then you have the two percent risk per trade rule. That’s there so that you’re not so mentally tied to any one trade. You can be disciplined you can be patient, all things many retail traders lack. Finally, limiting yourself to 3 trades is crucial as it reduces the chances of you revenge trading, over trading or boredom trading. If you know you only have a limited amount of trades per week you’re going to be more disciplined and patient as you wait for those correct setups.
We then did the math on those numbers, and we found out that on a fifty-fifty hit rate with a two-to-one reward to risk ratio, taking only twelve trades per month, and risking 2% on each and every individual trade, it would result in a twelve percent growth per month. Now we’re going to take twelve percent per month, and we’re going to compound that month after month after month to see what it would equal after one year, two years, and three years. We’re also going to do that on the twelve percent per month figure, the nine percent per month figure, and the six percent per month figure on a 10k starting balance.
I’m gonna start off by saying that might look at that 10K starting balance and say, “well I don’t have a hundred dollars!” Use whatever number you have in these calculations. Maybe it’s a hundred thousand; maybe it’s a hundred dollars. The other point that I would make is that everybody looks at this as an insurmountable number, meaning getting a starting balance to trade with. I can promise you that learning to trade profitably is the much more difficult part. If you are a profitable trader and you just don’t have the money to start trading just shoot me an email, and we will get that taken care of! Getting money to trade with is the easy part. Quite frankly, getting you money to trade is not even a small problem, the problem is becoming profitable!
Going back to our compounding example, how much does the account grow over the course of a year if you compound a $10,000 account by +12 percent per month. For 12 months and it would come out to over $38,000. If you compound it over the course of two years at 12 percent per month, it will grow to over a hundred and fifty-one thousand dollars. At the end of the third year, it compounds to just shy of $600,000. Now think about that for a second, what does the thirty-seventh month produce? Well, at ten percent growth it would be fifty-nine thousand dollars, so twelve percent would be at least 10 to 12 grand on top of that! So seventy one thousand or seventy thousand, somewhere in that region. The point is that it’s a huge monthly number! Once you’re crossing six figures, you’re probably going to be dropping your percentage risk down lower to one and a half percent or one percent risk per trade. Even on half of that monthly profit, you can see what I’m talking about with compounding an account over the course of time. That’s why Albert Einstein called ‘compound interest eight to wonder of the world.’
You can’t make the type of money for your account that steady consistent compounded growth can make you. What I mean by that is you can’t take a hundred thousand dollar account and just start making fifty, sixty, or seventy percent per month. You might be able to do that for a month, but you’re not gonna do it for a year. The best traders in the world and the best hedge funds in the world don’t run those type of numbers. Nobody does, and again anybody that’s selling those type of numbers is being naive at best and more likely deceitful. You probably bought into a few of them as I did myself. It shouldn’t be a shock to you that every single time they come up short!
We also did the figures on nine percent. It’s important to remember this was with a 42 percent hit rate with everything the same except for three percent risk per trade. At the end of three years, that equals two hundred and four thousand. No one should think I’m saying that this is easy as that’s not what I’m trying to illustrate. I’m not trying to illustrate that you should expect this either. I’m not trying to illustrate that anybody can do this, but what I’m saying is that your best chance of success is following the four rules I Illustrated at the beginning and then concentrating on steady compounding over time.
Using the final numbers let’s see what six percent per month grows to at the end of three years. Again using a $10,000 account balance, if you compounded it by six percent every month for three years, it comes out to eighty-one thousand. So what would your thirty-seventh month look like? We’re dealing with six percent growth which would result in a monthly profit just over $4,800.
It’s important to put this timeline in perspective because the comment I always get and what you’re probably thinking as is, “Well god, I had a much much shorter time horizon when I came into this market. I thought I could take my hundred dollars or my thousand dollars and turn it into a hundred thousand in a matter of weeks or in a matter of months. But a matter of years, that wasn’t what I was after!” It probably wasn’t what you’re after, but up to this point you’ve probably seen that the get-rich-quick idea is just not working! The fact is, 36 months is going to come whether you like it or not. If you’re anywhere above the age of 30 you probably understand how fast time accelerates. I’m only thirty years old, and it amazes me how fast time accelerates the older I get. So the time is going to pass, it’s just a matter of where you’re at once this time passes. If you continue down the same path you’re on then it’s going to lead to the same results.
My recommendation is that you sit down with a pen, a piece of paper, a calculator you write out your starting balance. Then you write down month by month growth, all the way through five years. In doing so, you’ll see just how quickly an account grows.
So what are the four points I want you to take away from this video? Again, I don’t care what strategy what time frame you trade. Your trading strategy does play a small part which I’ll talk about shortly, but let’s first cover the four main points and then I’ll detail number five.
#1 – Accept a 50/50 hit rate. It is far easier to have a low win/loss high risk/reward strategy, versus a higher win/loss lower reward/risk strategy, and my opinion it is also more profitable! If you want to prove this to yourself, do the math on a 70% win-loss ratio and a one to one reward to risk ratio compared to a 50/50 win-loss ratio and a two to one reward to risk. What you’ll find is that the 50/50 hit rate with a two-to-one reward to risk, is far more profitable than the trader that won 70% of their trades on a one-to-one reward to risk ratio.
After hearing that, the initial thought for many of you will be, ‘what about winning seventy percent of your trades and having a two-to-one reward risk ratio?’ To that, I say good luck! I would love to have a trading strategy with a reward to risk and win/loss ratio that high, but the fact is it doesn’t work out that way! When you increase one, you will minimize the other. By increasing the reward to risk ratio you’re going to decrease your win/loss ratio, that’s just the way it works. What I want you to shoot for is a 50/50 win/loss ratio because it’s far easier to be a successful trader that way.
#2 – Number two is a positive reward to risk ratio of two to one as a minimum.
#3 – Limit the number of trades you’re going to take a month to 12. There is an inverse correlation between the number of trades you take and your probability of being a successful trader. That is a statistical fact that I have found true over the last decade of educating traders, dealing with at least 15,000
and probably closer to 20,000 traders.
#4 – The fourth point that I covered was using a safe risk per trade of 2% of your total account balance. If you want to go a touch higher to around..
In this video, I break down all of our trades from February 2017. Any members of DTFL, you are welcome to go through the daily market previews if you would like current month results. For all those on the free side of the site. I should be getting caught up with the month end reviews by the end of the year. I’m in the process of re-designing the course to make it more user-friendly and that is taking all of my free time.
I was recently asked by the 52 Traders Podcast to come on their show. I have embedded the podcast below and its over an hour of content. In this podcast I share more information about my start in trading, but more importantly I give a ton of actionable tips I wish I would have known when I first started trading. Additionally, I break down the core ideas behind our bank trading strategy, and how you can start putting those tips to use in your own trading today.
Learn the bank trading strategy, join our live training room, access live member chat, as well as lifetime support? Click Here
It is an undeniable fact that the vast majority of traders reading this are not consistently profitable. Some last a few months in the market, while others last a few years or more before finally throwing in the towel. In fact, just last week I had a trader email me saying that she had been trading forex unsuccessfully for over 8 years before joining our service! While I admire that type of determination, the fact is it shouldn’t take that long to become a successful trader! If you have been learning to trade for months or years, if you have tried all the trading strategies, indicators, and EA’s then this article is for you. Over the past 7 years of running DTFL, I have had the opportunity to interact with over 10,000 forex traders in some way, shape, or form. Having had so much interaction with retail traders gives me quite a unique position to see the most common points of failure. Over those years, and having dealt with so many aspiring traders I have seen 3 traits that are a plague, literal gangrene that eats away at the possibility of becoming a full time trader.
Cognitive Dissonance Among Traders
First, we have to understand what cognitive dissonance is to understand how it relates to trading. Wikipedia defined cognitive dissonance as, “the mental stress of discomfort experienced by an individual who holds two or more contradictory beliefs, ideas, or values at the same time, performs an action that is contradictory to one or more beliefs, ideas, or values, or is confronted by new information that conflicts with existing beliefs, ideas, or values.“
What is a good example of cognitive dissonance you might ask? Think about someone you know who smokes. In their mind they know for sure that continuing to smoke cigarettes can shorten their life span, but on the other hand they love to smoke. There is a constant rationalization in their mind which allows them to continue the action that conflicts with the information they know to be true about the effects of smoking on their health.
How does the theory of cognitive dissonance affect retail traders? As it relates to trading we are going to focus on the part of the definition that I have underlined above. This part points to an individual being “confronted by new information that conflicts with existing beliefs, ideas, of values“. To some extent or another, what do the vast majority of forex traders believe or hold to as core ideas? After dealing with close to 10,000 traders, what I say next is not opinion, but rather a very common observation. The vast majority have spent months or years searching for the magic indicator, the simple system that “even your grama can learn in 1 hour or less”, or the EA that “makes money while you sleep guaranteed”. After getting burned enough times people eventually come to realize there is no 1 minute fix to becoming a profitable trader. Even still the vast majority will continue to buy the same get rich quick junk over and over. This is a great example of a belief being opposite to the action.
Why would someone continuing doing something that they know on some level won’t work? If someone in that situation stops the hunt to make an easy buck then they have to come to the realization that they had been wasting both their time and money. There is a lot of “hope” and “dreaming” that comes with searching for the holy grail. Giving up the idea of overnight Ferrari’s and private jets isn’t something people tend to do without a struggle.
Solution: The key point to this topic is quit system jumping in search of a holy grail or magic bullet! You must come to the realization that trading success can only be found in the same manner you find gold….at the end of a shovel and ton of hard work. Find something that you believe in and trust, and then stick to it. Maybe you take bits a pieces of different strategies to make your own, or maybe you follow a mentor’s strategy 100%. Regardless of what you do, if you invest less than 3 months learning something creditable before quitting on it, then you are doing yourself a disservice.
What Fat People And Forex Traders Have In Common
I already told you I was going to offend some people, so if you’re still reading and you’re offended then you have no one else to blame but yourself. I had an epiphany a few days ago and it started when I noticed a commercial for “P90X”. Have you heard of it? I’ve read it is the greatest selling weight loss/workout program in history, having sold over 4.5 million copies through 2013. There is literally NO DOUBT, that if someone follows through on the entire program they will certainly be in much better shape by the end of the 90 days. Hell, even if they did 50% of the recommended work and diet they would see tremendous results! Let me ask you this though, how many people actually follow through with the entire program? In researching the answer to that question I found out that at BEST only 10% of people will follow through with a workout or weight loss plan. Sound familiar to the forex market? Here comes the unpleasant truth many will not want to hear.
You see, like those who are looking to lose weight, most forex traders want the results but don’t want to put in the effort. If you sit around all day and eat donuts you’ll get fat, and if you go after the same hype driven get rich quick schemes you will keep losing money. There is no magic bullet, there is no easy fix to trading! That is worth repeating! There is no easy solution to, or magic bullet to becoming a profitable forex trader. It took me close to 4 years before I was profitable! I’m not saying its going to take you that long to be profitable but I can speak from experience having been actively trading for close to 13 years. In my 13+ years of experience I have never met a profitable trader that was consistently successful before 6 months of hard work with most taking longer. I’m absolutely certain that statements like this turn many people away from DTFL and to be honest that is just a side benefit to me saying that. The fact is if someone isn’t willing to make the commitment then they aren’t going to make a very good student and therefore probably shouldn’t become a member.
Solution: We all know its human nature to want the easy solution to life’s problems. You wouldn’t have things called “get rich quick schemes” if the desire to get rich quick didn’t exist. In fact the reason I think it took me so long to be profitable is because I spent two years trying to find the easy fix to trading. Its human nature, but in trading its also the thing that will bury you! A few months back I wrote an article about 3 keys to becoming a profitable trader. In that article I list 3 specific points that can really help any struggling trader get on the right track and I would encourage you to read that after finishing this post. All the points I list in that article share one core belief which is that trading is a long term process, and success only comes after months or years of hard work and dedication. The bottom line is if you’re not committing days rather than months to learn a strategy, you should wonder why “none of them are working”.
The Dreaded Drawdown!
Have you ever had a drawdown? If you have been trading for more than a few weeks then the answer to that question is a resounding yes! This is one major reason that trading is such a difficult game to master or become successful at. Why? What happens to you when you are in the middle of a series of losses? Emotion begins to take over and mistake begin to happen. Below is a list of 3 very common mistakes new traders begin to make as they start to experience multiple losing trades in a row. Obviously this list could be much longer but here are 3 of the most common and often most detrimental.
1.) You start to question your entire strategy, even if you have seen it work for months or years.
2.) The urge to use higher leverage to ‘make back’ your losses even faster becomes incredibly strong.
3.) Looking for random setups that have nothing to do with the strategy you are trading is common place.
The trouble with these 3 points is that it only compounds the original problem, as it will often lead to more losses of even greater size due to the increase in leverage. This downward spiral will many times result in the trader blowing up his or her trading account. “Obviously” once the account is blown up they “have to” look for a new strategy as the blame couldn’t possibly be their fault (sarcasm included). Dealing with drawdowns is tough, but they are often NOT the main reason someone blows up their account. If you reflect back on any time you have blown up your account it often starts with a few losses. After a couple losses human emotion begins to push you into 1 of, if not all of the 3 common mistakes addressed above.
Solution: Understand that losses are part of the business! The greatest traders in the world have losses, and the greatest traders in the world have drawdowns. The only difference is the great traders learn to handle drawdowns. That is not my opinion, it is a fact. There is no way around this, and the only true solution is accepting it as part of the business. Many times in trading, the solution to one problem will help solve another. In the article I linked to above, I address the importance of having a long term plan for growing your account. I would encourage everyone to write out a month by month account growth chart using a reasonable monthly growth percentage. Did you know that a $5,000 account compounded at 10% per month would be worth over $1,000,000 in less than 5 years? Having an account growth chart written out that you can refer back to will help you avoid the mental pitfalls discussed above, as it will allow you to focus on your long term goals. Focusing on long term goals helps to put a series of losing trades in perspective, thus giving you a better chance to weather the storm of learning to trade forex.
January 2017 Trading Results - Becoming A Patient Trader - YouTube
Mastering the discipline of patience is key to becoming a successful forex trader. In trading there is never an even distribution of losing or profitable trades. For example, a strategy with a high win/loss ratio of 80% is still capable of having 5, 6, 7 or more losing trades in a row. Because an even distribution of winning or losing trades is never certain, you must have the patience to continue waiting for the correct setup. If a trader lacks patience they will often find themselves making common mental errors such as over-trading, revenge trading, “doubling down”, or many of the other common errors often made. The month of January illustrates this principal very clearly. What can you do to start developing the trait of patience in your trading? Below is 3 points that will help any struggling trader.
1.) Have A Clear Goal In Mind: Depending on the statistic that you want to use, those that have physically written down their goals are at least 5 times more likely to achieve them. Additionally, it has been proven that in addition to writing down you goals, having specific dates for completion as well as telling others your goals will help you actually achieve them. If I were to ask the average retail trader who is still in the learning phase what their trading goals are I would get very generic answer. It has been proven that specificity in goal setting is essential to actually achieving it. This point also ties into point #2.
2.) Chart Your Account Growth: Did you know that a $5,000 account compounded at 10% per month over a 5 year period of time comes out to over 1.5 million dollars? Most will look at that number and think 5 years is way to long to become a millionaire but that is seriously flawed thinking. How many people go to school for 4 years only to come out with 50-100K in debt!?!? The fact is trading success will not come over night. This is an unfortunate fact most in the retail word fail to realize. They think there is some easy path to huge trading profits. The truth is there is only one path which comes from reasonable and consistent profit month after month. Having a long term goal as well as month growth figures will help you put together your goals from point #1.
3.) Have A Specific Trading Strategy: If you are anything like I was when I first started trading, then you have taken your fair share of random trades that “looked good” at the time. If you do not have a clear well defined trading strategy with specific rules for entry, exit, and trade management then you will not produce consistent profits. One of most important aspects to the DTFL Bank Trading Strategy is the mechanical nature of the entry. Having an exact rule set for entry helps provide a solid structure from which you can judge each trade setup. By sticking to that rule set, you will not only develop patience but also the discipline to wait for the correct setup. If you are still looking for a trading strategy with specific rules for entry then I would recommend checking out our forex day trading course on tracking market manipulation and smart money.
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One of the most difficult obstacles all traders must learn to overcome is the dreaded drawdown. More often than not one or two losses spiral into revenge trading, over trading, “doubling down”, and many other mental errors struggling traders make. I’m a firm believer that a forex trading strategies profit potential is far outweighed by the likely max drawdown a strategy may have. Have you every known someone who makes a lot of money but they are constantly broke? Its really no different in trading. Just like in life, in trading its not about what you make, but rather, what you don’t lose/spend. Having a strategy that has relatively small drawdowns, as well as the ability to quickly recover from those drawdowns, is critical to becoming a successful forex trader! During the months of November and December 2016 we had a -8% draw down. This was the worst draw down we have had since December of 2014.
I started these month end reviews in May of 2015 and including November and December we now have 20 month end reviews. Out of those 20 months, we have had 16 profitable months, 1 break even month, and 3 losing months. Even with a consistently profitable track record we still see draw downs from time to time. I’m a firm believer that reward to risk ratios are the way to deal with the drawdowns all traders will have from time to time. By having a proper R/R ratio you are able to recover much more quickly. This also is a huge benefit to the psychological aspects of learning forex. Often traders make mental errors when the hole seems to deep to dig themselves out of. Knowing that 1 winning trade can erase two losses makes any drawdown look less daunting and helps reduce the urge to try to ‘make back’ a series of losses with over leverage revenge trading. In the video I discuss this point further, along with what you can do to analyze your own trading.
Total Compounded Gain: +320% Through December 2016
Live Trade Results For November & December 2016 - Day Trading Forex Live - YouTube
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