Most traders pick their one time-frame and then almost never leave it. They are so locked into their timeframe that they forget about the bigger picture.
The other extreme are traders that constantly jump from timeframe to timeframe without much of a plan. Those traders are mostly driven by emotions and trade very impulsively.
A better approach is the top-down multi timframe analysis where you start on the higher timeframe, look for the bigger picture perspective and then slowly build your trading plan by going lower.
Top-down vs. bottom-up – the biggest mistake of multi timeframe analysis
The biggest mistake traders make is that they typically start their analysis on the lowest of their time-frames and then work their way up to the higher time-frames.
Starting your analysis on your execution time-frame where you place your trades creates a very narrow and one-dimensional view and it misses the point of the multiple time frame analysis. Traders just adopt a specific market direction or opinion on their lower time-frames and are then just looking for ways to confirm their opinion. The top-down approach is a much more objective way of doing your analysis because you start with a broader view and then work your way down.
! Tip: Doing a multiple time frame analysis while you are in a trade can be a real challenge because of the trade-attachment. Once in a trade, the supposedly objective performance then turns into justifying your trade. Especially when you are in a losing trade, you have to be very aware of how you are doing your analysis; avoid justifying a (losing) trade based on the “bigger-picture” market view.
Multi timeframe analysis helps you stay open-minded
Obviously, the daily time-frame is less important if you are trading off the 1 hour time-frame. However, a trader who never leaves his execution time-frame has a very narrow view on the market and cannot put things into the right context.
Every trader, regardless of his main time-frame, should has to start his trading day looking at the higher time-frames to be able to put things into the right perspective. But looking is not enough because once you arrive at your lower time-frame and are in the midst of your trading session, you will have forgotten what you saw on the higher time-frames. There are two ways to deal with this problem:
1) Get a physical notepad
On your trading desk, place a physical notepad and for every market you trade, write down what you saw.
2) Annotate your charts
All charting platforms offer text objects and you can use them to directly write on your charts. It is also advisable to mark the areas on your chart that are your areas of interest. This way you are less likely to jump the gun and enter prematurely.
Multi timeframe analysis – step by step
When it comes to actually performing your multiple time frame analysis, you don’t have to get too fancy. But knowing what to do and how to approach it can help you build a time effective routine that guides you through your trading sessions.
Weekly / Monthly – Where are we?
If you mainly use the 4 hour or 1 hour time-frame to execute your trades, you don’t have to spend too much time here. Basically, you just want to get a feeling for the overall market direction and if there are any major price levels ahead. Especially long-term support and resistance or weekly or annual highs and lows should be marked on your charts
Daily – Strategic time-frame
On the daily time-frame, you have to spend a bit more time on. Here you analyze the potential market direction for the week ahead and also determine potential trade areas. Again, draw your support and resistance lines and mark swing highs and lows – even if you don’t use them in your trading, it is worth having them on your charts because they are so commonly used.
4H (1H) – Execution
Assuming that the 4 hour is your execution time-frame, this is where you map out your trades and specific trade scenarios. Take the levels and ideas you came up with on the daily time-frame and translate them into actionable trade scenarios on the 4 hour time-frame.
Ask yourself where you would like to see price going, what has to happen before you enter a trade and what are the signals you are still missing.
3 Pro Tips!
Always create long and short trade scenarios when doing your multiple time frame analysis. This will keep you open-minded and it avoids one-dimensional thinking. A trader who is only looking for short trades, will blank out all signals that point to a long trade. Or, a trader on a long trade will miss the signals that could signal a reversal.
Furthermore, separate your charting from your actual trading platform. If you can see your open orders on your screens during your analysis, you are much more likely to be biased during the analysis.
After 12 years as a trader, i not always do the top down approach anymore. Instead, I stay on my executional timeframe and just zoom out. By zooming out, you get to see the big picture too and you canidentify the chart context. This is a good practice and I regularly zoom out many times during the day.
How to perform a top-down analysis in Forex - YouTube
I have a small notebook in which, over the years, I wrote down every time I heard something about trading that just made a lot of sense to me, or that enlightened me, or when I myself had a lightbulb moment. Today I want to share some of these wisdoms with you, unfiltered and raw. They are from my fundus of nearly a decade of gambling and trading, but as always should be taken with a grain of salt – after all, we all see the world with a different perception, and thus, acquire different truths (and trading styles). And if you want to know even more from me, take a look at our new Forex trading course. So without philosophizing too much, let’s go!
If you target less than 5 pips regularly, commissions and spread will eat your account balance.
You absolutely have to find a vent to release pressure and adrenaline – sports, drinking, painting, anything that helps.
If you can manage to find a mentor in which you believe, you will make it much faster.
Your trading style has to fit your personality and your lifestyle, or cognitive dissonance will get the better of you.
Meditation sucks, doesn’t work for me.
Don’t trade more than 4 hours per day, but those 4 hours with all the focus you can bring to the table.
Overtrading is your death.
Once you are comfortable missing a move, you will be able to trade profitably.
Not trading the news does not make sense at all – during news there is real liquidity and a real interest to push prices in one way or another. Let the market show its hand, then get in.
Let it turn, let price create structure, THEN get in, with the structure as protection in your back.
Don’t system hop, but adapt the system of your choosing to your needs.
Don’t trade overleveraged.
Yes, it is possible to turn a small account into a huge account, but don’t expect it to happen overnight, and don’t expect to be able to do it before your fifth (or so) year of trading.
Some are faster, some are slower, some will never get it.
Risk per trade is a function of the volatility of your strategy and your psychological ability to deal with swings in your equity.
Know exactly why you are trading, and what you want to achieve – which career path will be yours?
Daytrading is not easier than swingtrading or vice versa. They both simply require different skillsets, different abilities (yes, some people are just too slow for daytrading) and different preparation routines.
Trust your gut. Absolutely love the trade? Get in. Don’t love it? Just stay out.
No pain, no gain. Demo trading is ok, but don’t do it for too long. Risk micro amounts of money, get used to losing money. Because you will lose for the rest of your life if you want to be a trader. It’s part of the game. You “just” need to win more than you lose.
Listening to music while trading can be a good thing – just know yourself. If I listen to aggressive music in the car, I will push the pedal to the metal. The same happens when trading.
Have a trading journal and review, review, review.
Work on your psychology, but don’t underestimate the power of knowledge. Fear stems from not knowing. Work hard, know more, be more confident. Most psychological issues will dissolve into thin air.
Yes, I said: don’t system hop. But for the first year or two, try out everything you can. Every market, every strategy, every trading style. How can you know what fits your personality if you don’t know what’s out there? Finally, decide and take the leap of faith.
Screen time alone won’t help you. Again: review. REVIEW! You need an effective feedback loop or you will repeat the same mistakes again, and again, and again. There is no learning by doing in trading.
You don’t need to be hyper intelligent to be a trader. The best traders I know are “simple” minds. They do what works, they have no ego, and they disregard what does not make sense to them.
Do not have monetary goals. Have process-oriented goals.
Do not look at your P&L during your trading session or you WILL trade your P&L. Before and after a trading session, the money in your account is money, yes. During the session, however, the money in your account is ammunition that has to be spent in order to acquire more ammunition, if that makes sense.
If you read only two books about trading, these should be Pitbull by Marty Schwartz and Diary Of A Professional Commodity Trader by Peter Brandt.
Trading with the trend is not easier than trading against the trend. Trading with the trend is the last thing I learned and every single trader I know seems to have the hardest time following a trend.
If you want to pay for education, do your research. It is very possible to differentiate the scammers from the real traders. If something sounds too good to be true, run as fast as you can.
Never forget to be grateful at the end of the day. You are given the chance to make money by clicking a mouse from the comfort of your home. How many people on earth can say the same?
Trading fulltime is often romanticized but can quickly turn into a social nightmare. Keep up that work-life-balance.
Find other mental challenges for your brain than trading. Feeding your body McDonalds everyday will, and nothing else, will kill you. Trading every day without reading a good novel once in a while will make you braindead.
Twitter is actually a really good place to learn trading and to connect to great minds, unlike most forums, where 95% of posts are rubbish.
Likewise, there are lots of videos on Youtube with quite good content. You need to find a way to distinguish the goodies from the baddies.
Don’t be mistaken, trading is gambling. You want to be a professional gambler? Make up your mind.
A structured pre-trading routine is one of the best things you will ever do in your career as a trader. Take your time to create and establish it.
Learn your basic and classic price patterns such as Head & Shoulders, Wedges, Triangles, etc. It takes a week to get them all into your head and you will profit from that knowledge for years to come.
Never pick tops and bottoms. Take the middle of the moves and your results will improve.
Believe in your abilities and trust your strategy or you will be destroyed.
That’s it for now. I have plenty more of these in my tattered and very, very old notebook. Which do you agree with, which not? Do you want more of my wartime wisdoms? Let me know in the comments below!
When people get interested in trading, there is usually only one reason behind it: money. And there is nothing wrong with that! Trading is a great opportunity to generate an income where you are not paid by the hour but by your performance. And as a swing trader, trading can even become an almost passive income where you only need to put in a few hours every week.
Being motivated by money can be a great driver. However, this can also quickly change into the contrary when a trader approaches his monetary goals from a wrong perspective and forgets about the whole picture.
In this article, we want to highlight some research findings that show that when people view money in the wrong context it can actually harm their trading and, then, we want to help you adopt a healthier relationship with it to set yourself up for success.
If you need money, you won’t get it – research confirmed
When it comes to being driven by money, there are usually two things that happen when a trader has a wrong perception:
#1 Unrealistic expectations
We are all guilty of that to some degree: when starting out as new traders, we projected that it would only take a few years to turn a few hundred or thousand Dollars into a huge pile of cash and quit our day jobs. Having unrealistic goals quickly leads to frustration when those expectations aren’t met. The quitting rate for new traders is astronomical (40% quit within 1 month) and one of the main reasons are probably wrong ideas and expectations.
Once a trader sees that trading isn’t going to be the easy and fast way out, there are usually three things that happen: he either quits, he takes a riskier approach to trading (larger positions, more trades, gambling mentality), or he starts system-hopping if he still believes that there must be a trading method out there that can generate those returns.
“Investors with a large differential between their existing economic conditions and their aspiration levels hold riskier stocks in their portfolios.”
– Kumar: Who Gambles In The Stock Market? – Accessed through: econ.yale.edu
#2 The need to trade
High expectations, as we said, can lead to taking more trades and increased risk-taking to meet one’s return goals.
Especially traders with small accounts struggle with that because they soon realize that a small account will not get them to where they want to be. Although you can read that trading a small account is no different, it’s just not true. Trading with less capital is definitely harder – much harder. With a small trading account, your wins are often close to meaningless which then creates the need to trade more and introduce more risk in your trading.
“High net worth investors are likely to have lower turnover.”
– Anderson, Stranaham: Account Turnover and Demographic Profiles: Which Investors Trade Too Much? – Accessed through: Bradley.edu
What not do when it comes to trading goals
When it comes to setting goals, there are a few don’ts and I will explain why you have to avoid them at all costs if you want to become a better trader.
#1 Daily/weekly return goals
I see so many traders say that they want to generate 3%, 4% or 5% per week because they have calculated that this will help them achieve their goals in a certain amount of time.
Monetary goals are the worst of all because it creates the need to trade and it puts the traders in a constant state of hunting for signals. 99% of the time, such traders will never meet their goals and they end up losing money because they take mediocre trades, hoping to realize their target.
You can’t control how much you can take out of the market. The only thing you can control is the risk of your trade and the types of trades you take. The outcome is not in your hands. Some weeks, you will get more and better trades and sometimes you just have to sit it out. You have to eliminate the need to trade as much as you can.
#2 Capturing x points per week
Go to any trading forum and you’ll see people looking for methods that give them 20 pips per day or 100 pips per week. Again, those traders tackle the problem from the wrong side and measuring performance in pips is meaningless because you neglect the risk-aspect of your trades.
Traders who set themselves points/pips related goals are more likely to close winning trades too early when they hit their goal and rob themselves of making larger gains. Or, they desperately try to ride trades too long and then end up with nothing. Always stay open-minded and take what is available.
Characteristics of good goals
When it comes to goal-setting, whether it’s trading-related or in your regular life, you have to set goals that can be achieved through your own actions. Often, people set goals that they have no control over and then they are frustrated when they don’t reach them.
This becomes obvious when we come back to our two anti-examples. Setting yourself the goal of achieving a certain amount of %-return is not going to work because you have no control over it and no matter how hard you try, your actions don’t control the outcome. You can’t control if the market gives you enough signals, if the signals lead into profitable trades and how long you can ride your trades.
The graphic below compares the things that we as traders can’t control and the things we can control in our trading. At first glance, it is obvious that 90% of all traders focus exclusively on the left side and they try to control the uncontrollable. They are even often completely blind to the fact that as traders we have so many things we can influence and then see themselves as victims.
Now let’s explore how goal setting is really done in trading and what you should be focusing on if you want to become a better trader. Here are 4 things that will almost guarantee trading success:
This is also the so-called process-oriented mindset where you detach yourself from the outcome of a trade and only focus on making the best trades possible and follow your rules as closely as possible. It sounds cliché, but it’s the so important if you want to improve as a trader.
Even with a good system, you will often have losing trades and there is nothing wrong with that. You only have to control your reaction to those losses. Thus, you should accept that as long as you follow your rules, you have done your job as a trader and that it’s not your job to force trades into winners.
Many (or most) losing traders don’t follow a routine and their trading is all over the place. A good routine will help improve your trading A LOT because it adds structure and a new level of professionalism. I love and honor my routine and it gives me structure and certainty. I know that as long as I follow my routine and do my work, I have done everything I was supposed to do.
My edge is directly related to the quality of the work I put into my trading.
#3 Habits to form a routine
This ties in with the previous point. We have all heard the quote below so many times that it has lost its meaning, but it so true. A professional trader is a structured and organized trader who has adopted good and helpful habits.
We are what we repeatedly do. Excellence, then, is not an act, but a habit. Aristotle
Here are some of my personal habits that I connect with successful trading:
Setting a few hours aside every Sunday to recap my last trading week and create extensive trading plans for the upcoming week.
Using a physical checklist before entering trades to make sure I avoid unnecessary mistakes.
Journaling all my trades after I have taken them.
Performing a detailed performance review each Saturday and going over all my past trades once again to find weaknesses and analyze trading behavior.
You can see, there is no secret or something earthshattering new here. Successful trading is the sum of repeating good habits that form your routine.
A personal tip: create an environment where you enjoy the process. Each Sunday, I start with a gym workout, I go for a swim and have a good breakfast at my favorite restaurant. Then, I head to my favorite coffee shop and do my Sunday prep for the next 4/5 hours while enjoying amazing coffee, nice company, and some good music. I wouldn’t miss this routine for the world and for me this does not have anything to do with work.
#4 Recognize and focus on progress
This is especially important for new traders or people who trade with small trading accounts. It’s very easy to get demotivated and frustrated if you are not seeing the level of success you were hoping for. However, to make sure that you are growing, focus on how far you have come already. Remind yourself of where you are coming from and how you started and how much progress you have made already. It’s unrealistic to believe that you can become a professional trader within 1 or 2 years, but by making constant improvements week after week, succeeding is not an accident but it’s plannable.
“You don’t try to build a wall. You don’t set out to build a wall. You don’t say ‘I’m going to build the biggest, worst, greatest wall that’s ever been built.’ You don’t start there. You say ‘I’m gonna lay this brick as perfectly as a brick can be laid,’ and you do that every single day, and soon you have a wall.” – Will Smith
If you ask people why they are trading, 90% will answer because of the freedom, independence and the possibility of generating massive amounts of money by working from home. But does this really reflect the reality of professional, full-time trading and what are the things a trader has to consider when replacing his day-job with trading?
There are a few little known and rarely discussed points which pose great challenges on full-time traders. It is important for you not to romanticize full-time trading and to have a realistic view. Furthermore, by being aware of what it takes to be a full-time trader you can effectively prepare yourself for the journey.
5 questions you need to ask yourself before quitting your job to become a full-time trader1 – Are you a risk taker?
First things first; are you really made to be a full-time trader? Dealing with drawdowns and not generating income for weeks is common and regardless of how good you are as a trader, you will experience such periods.
Trading can be compared to entrepreneurship where you can’t predict your next month’s sales and how much money will end up in your pocket. Not everyone can deal with such uncertainty and as a trader, you have to be self-aware and audit yourself. Don’t worry, if you are not a pure risk-taker, read on – we provide more tips on how to still make trading work for you.
2 – Is your trading account large enough?
Only if your trading account is large enough, you will be able to make the transition to full-time trading. Here it is also important to know your historical performance; how much return can you generate per year with your trading? After knowing the numbers, you can reverse-engineer how big your trading account needs to be in order to achieve a certain annual income.
As we have said in the previous point, trading is dealing with the unknown and although you can have a proven track record and a large trading account, you will experience months where you just can’t create any income. Having separate accounts for your trading, savings, and spending is highly recommended.
In this video, Moritz explains how to scale up even small trading accounts FAST.
DTR #27: How To Scale Up Your Trading FAST - YouTube
3 – Do you need to withdraw every month?
click to enlarge
How do you structure your trading account, your personal spending, and your savings? How often you withdraw from your trading account limits the growth of your trading account. If you are making $4,000 per months with your trading, but need to withdraw $3,500 monthly, there is not a lot of wiggle-room for future growth.
The more you need to withdraw and the less you can keep in your trading account, the harder it will be to break out and scale out the size. This means that progress will be very hard to achieve and you might still end up in a “rat race” as a trader.
4 – What is your motivation?
Why do you trade and what are your goals? Do you think that trading is an easier way to generate a six-figure income, while you can sit at home and work 4 hours a day?
Professional tradingm means 12 hours work days and working on the weekends is a big part of trading as well. At the same time, you are alone most the time, tied to your screen with very little human interactions. The people who are in it for the wrong reasons often receive a painful wakeup call and do not have the stamina to push through when the going gets tough. And if you are generally a social person, trading might be the completely wrong choice.
The research found that people who are just in it for the money are more likely to lose more money in trading. To make sure you don’t fall into this category, be clear about what it means to trade full-time.
5 – How long have you been trading?
If this all doesn’t bother you and you are determined to make it, great! But there is one more thing we need to address: the amount of experience you have as a trader plays a critical role. Financial markets move in cycles and most new traders have never experienced a full market cycle. If you have only been exposed to a bullish market period, a market sell-off and prolonged bearish market moves can easily ruin your game and prove that your system does not work under all conditions.
The graphs below show the EUR/USD and the S&P500. Both graphs show that individual bullish and bearish market cycles can last for months and even years. It is important to understand the environment you are trading in to make educated decisions. If you haven’t experienced a full bearish cycle yet, prepping yourself for changing market conditions and having a plan B is of utmost importance.
A better approach to full-time trading. How to make this work for you
Don’t worry, even if the previous 5 questions signal that you are not ready to make the step towards full-time trading yet, you can still make this work for you. There is nothing wrong with treating trading as a side-business and I have met many traders who have been succesful trading part-time and spending the other half of their time on passion projects and making money with things they love.
1 – Add to your trading account
click to enlarge
Instead of withdrawing to put food on your table, add to your account with the income from your regular day job and grow your account much faster. As mentioned above, withdrawing money is a big performance killer and significantly reduces the way compounding interests work. Adding to your trading account can make a big difference and increases the speed of how fast your capital can growth.
Therefore, do not quit your full-time job too early and use this advantage to keep growing the trading funds.
2 – Cut down living expenses
Being able to live from your trading is a two-way street. Being financially independent can be achieved two ways: First, you make more money than what you spend. And second, you spend less, cut your living expenses and bring down the amount of money you need to make.
If you are really determined to make it as a full-time trader but you are still far away from making $5,000 per month (if that is what you need), take a look at your spending habits. Where can you cut back? You don’t have to start living like a monk and you can always increase your spending later, but if you want to really quit your job sooner and start living off your trading, you should audit your spending behavior.
3 – Trading as a second income stream
Seeing trading as a complementary income stream is often the best choice. If you love your job, you love the personal contact with other humans and can’t see yourself tied to a screen 12 hours a day, pursuing the full-time trading lifestyle is going to end in a catastrophe.
Trading can be a great second stream of income and mix things up. There is nothing wrong with “trading on the side” and often, people who keep a balanced life can see improvements in their trading as well. If you don’t have the pressure of having to make money with your trading to pay the rent, you can trade much more freely.
Today we are going to talk about a topic many traders will deny and it’s important for you to keep on reading, especially if you feel offended or think that this article isn’t about you. This article has the goal to raise awareness of negative behavioral and thought patterns. The concepts highlighted can help you identify patterns that might be holding you back from achieving success in trading.
Many people who call themselves “traders” are operating in a gambling mindset. In the following article we condensed research findings of what defines a gambler and what it means to act in a gambling mindset.
The 4 types of gamblers
Psychology and psychological research distinguish between 4 different types of gamblers:
1) Social gambling occurs when you occasionally meet friends for a limited amount of time. Often, the gambling aspect is not as important as the social component and the bet sizes are limited.
2) In professional gambling, the gamblers limit their bets and discipline plays a very important role.
3) Problem gambling is characterized by pre-occupation (the activity takes up a lot of time), other interests become unimportant, people continue to gamble despite negative experiences, accompanied by a variety of other factors as we will see shortly.
4) Pathological gamblers deny their circumstances, they are over-confident and believe that they are in control; they believe that money will solve all their problems; they are very competitive, restless and get bored easily. Pathological gamblers are often workaholics or binge workers.
The definitions have been borrowed from Psychcentral.com. In the following article, we will focus on the problem and pathological gamblers and highlight the difference between social and professional gambling.
Gambling refers to engaging in an activity where the outcome is uncertain and where the protagonist is betting money on specific outcomes.
The problem-gambler checklist
Gamblers get excited by risking (substantial amounts of) money. Money is not as important anymore, but they are after the excitement and the thrill.1
Gamblers steadily increase the amount they are willing to risk. 1
Gambling and the gambling activity take up a lot of time and become an important role in the life of a gambler (gambling instead of spending time with family, friends and hobbies). 1
Casual-gamblers often set a loss limit that signals to stop playing. Problem-gamblers do not stop when they lose money, but they try to recover their losses. 1
Problem-gamblers increase the bet size to recover from losses faster. A behavior called “chasing”. 2
Bragging about wins, but not talking about losses. 2
Experience mood swings – problem-gamblers feel good when winning and down when losing. 2
Lying or secretive behavior to cover up their gambling and the amount of their gambling. 2
Gambling with money they can’t afford to lose. 3
People have problems focusing on anything else, but gambling. 3
Denying that they are problem or pathologic-gamblers. 3
It becomes obvious very fast why problem-gamblers should stay away from taking risks or work on their mental game – preferably by consulting professional help. If you find yourself among the descriptions above, we urge you to take a break from trading and re-think what you are doing.
Traits of a professional gambler/trader/ risk-taker
There are a few character traits and mindset-qualities that stand out for the professional gambler 3:
The act of gambling and when to bet money is planned and based on methodical principles
A high level of discipline and the absence of impulsive decision-making
Does not chase losses
Professional gamblers can evolve into problem or pathological gamblers
Further reading: In an earlier article we talked about the broker and other related research findings which observed the trading behavior of different segments of traders. The researchers identified the traders who are most likely to lose all their money and also uncovered some of the reasons behind acting within a gambling mindset.
I am a systematic discretionary trader. If I had to make an estimate of how much is systematic and how much is discretion, I would go for 70/30. Maybe even 80/20. But those 20% make all the difference.
While my system is very straight forward and based on classic price action principles, I could never translate it into an algorithm. It simply wouldn’t work. Believe me, very talented coders have tried, including myself. While certain principles can be taken from it and used as filters in fully automated trading strategies, what makes my system so profitable and adaptable to different market environments is my brain, the best trading algorithm on earth and probably the universe.
So, how can you start listening, trusting and acting on your gut feeling, which is so important for systematic discretionary traders? It takes a lot of effort and screentime. Here are 3 little but powerful helpers.
Backtesting. Experience translates into instinct or gut feeling. Backtesting gives you tons, literally years of experience in a short amount of time. This gives you confidence and trains your spidey senses. If everything looks great about a trade but something just doesn’t feel right, get your ass out of there.
Journaling. Again, journaling translates into experience and confidence that what you are doing works. What helped me immensely was to set up a custom stat in Edgewonk which tracks two things: one, the grade of the trade on a scale from 1 to 5, and my gut feeling on a scale from 1 to 5. Then, whenever there is a discrepancy, check out how the trade would have worked out. This will do wonders. For me, if both the technical level and my gut feeling tell me it’s a 5 (best level), I make by far the most money. One, because my gut instinct was trained over the years, and 2, I trust the trade more and make much less trade management mistakes. I feel comfortable. You will also learn whether you can trust your gut or whether it needs more training.
Extract as much value as you can from talking to yourself. You can record this on video, or audio, or write down your feelings before, during, and after a trade. Then compare your emotions to the actual outcome of the trade. How reliable is your gut? I can tell you, it is much more reliable BEFORE entering a trade than after entering it. I listen a lot to my gut before entering a trade. After, I have to force it to shut up and stick to my rules. The last objective moment is before entering a trade – that is true for both your consciousness and subconscious!
I have just revealed to you one of the biggest secrets of my trading performance, which is tracking gut feeling versus trade quality. This is one of the most reliable indicators I have in my trading. If everything about a trade looks great, but I just don’t like it, I stay out, and my data tells me this saves me money!
On the other hand, if a trade entry is more discretionary / does not tick all the boxes it should, but my gut tells me there is great reward to be had, I get in by bending the rules. This is something I don’t recommend if you are new to trading with your system. Master it first, then you can do some fancy plays.
Also, very important to note is that your subconscious is very susceptible to stress. If outside stressors are messing with your mindset, you will go completely out of sync with the markets and lose your superpower. At least, I do. On these days or weeks, I just don’t trade. Additionally, if the markets didn’t present a good trade opportunity for a while, you might become more and more willing to play “deaf” and override your instinct. Don’t. It will only cost you money and make you very angry because you KNEW it wasn’t a good trade. This will tilt me the most.
When is the best time to listen to your instinct? Just before you get into a trade. For example, you see a trade that ticks all the boxes. You haven’t been in the market for a while because it only presented mediocre setups. You can feel the pressure building. Then, that setup…before you click buy or sell, stop. Wait for 10 seconds. How do you feel about the trade? If you don’t feel good about it, don’t take it. Period. Wait for a trade to come around that you absolutely love.
Guess, which saying in trading I absolutely do NOT agree with? Yeah. “The hardest trades are the most profitable ones”, or some crap like that. Bullshit! The easiest trades are the most profitable ones. When we love a trade, we are much less prone to making mistakes. Fewer mistakes translate directly to more money.
When I filter for technical grade 5 and gut feeling 5 trades in my journal, the equity curve becomes a missile to mars without a return ticket. It’s my personal ATM, printing money 24/7. I call these trades pocket rockets, as no-limit poker players like to call their starting hand of Aces. Of course, I also take trades with less than optimal conditions, simply because I am human and because they still make money. Just not as reliably and consistently as my pocket rockets. I also bet more money on pocket rockets. A lot more.
So, train your instinct. This is why you are a systematic DISCRETIONARY trader. If you want to be a systematic trader, learn to code and stop trading manually! That doesn’t make any sense. I also have quite a few fully automated strategies running, as I enjoy the process of creating and discovering new strategies, so it is absolutely possible to be both a systematic discretionary and fully automated systematic trader at the same time. A hybrid, so to speak. The best of both worlds. And double the fun.
Start training your instinct today. Your trading account will thank you. Also, this is another argument to stop system hopping. You will never cultivate a reliable gut feeling if you haven’t traded a system over a few hundred or thousand trades. Be consistent if you want consistent results.
What is the best Forex trading strategy? This is, of course, a question I get asked many times a day and it is a very important one. When you start trading, you need to commit to one particular trading strategy and then focus all your attention and energy on making it work. Most traders never do that and then fall victim to system-hopping.
In this guide, I will explain the differences between the various strategy types, what their premise is, when they work best and what you have to know when choosing a particular forex trading strategy.
We will cover the following trading strategies:
As you will see, each trading strategy and style try to capture a different market behavior. This is also going to be one of the main takeaway points because I am a huge believer in specialization. Instead of trying to trade all the time, you should pick a specific market behavior and then try to become the best at it.
Trend-following is the approach that most traders experience first and sayings like “the trend is your friend” has been around for decades.
Trend-following, as the name suggests, is a trading style where the trader has to wait for an established trend before he/she can jump into the market. Thus, trend-following traders will have to wait patiently until a real trend is obvious.
The screenshot below shows the portion of a market move that is typically captured by trend-following traders. The red areas highlight the market turning points and the blue areas are the trend-following phases.
Many amateurs make the mistake that they want to predict a new trend before it exists and enter way too early. Those traders, although they believe that they are trend traders, are actually reversal traders.
Then, there is also a difference between early and late trend following.
Since the trend following traders need to wait until a trend has been confirmed, the question that comes up is: when is a trend confirmed?
Early trend following traders try to get into a new trend as early as possible which can result in being too early and running into a false signal. The advantage is that the potential reward/risk ratio is much higher.
Late trend traders wait for more confirmation. It can, of course, happen that they are too late, but their signals are often stronger. The trade-off is that the reward/risk ratio is not as high whereas the winrate is higher.
When it comes to trading tools, a trend following trader can choose from a wide variety. Momentum indicators like the MACD, RSI or STOCHASTIC are often popular.
In the screenshot below, the STOCHASTIC is plotted and one way to get into trend following trades is to wait until the STOCHASTIC has reached the lower or upper area. Many traders make the mistake and believe that this can signal a reversal which is absolutely wrong. A very high or very low STOCHASTIC indicates a strong trend.
Of course, moving averages are another popular trend following tool. Two moving averages work perfectly as a cross-over signal in the screenshot below. Each time the moving averages cross, a new trend is initiated. The great thing about such a cross-over system is that traders automatically stay away from picking tops and bottoms because the moving averages need some time to cross.
The Ichimoku indicator is another trend following tool. It is similar to a moving average cross-over system but the premises are different. The classic Ichimoku entry is given when the price breaks out of the “cloud” while the two Ichimoku lines are moving into the same direction.
Pullbacks are a different type of trend following trading. Pullback traders look for an established trend and trade the so-called correction phases. Corrections are price movements into the direction opposite to the underlying trend.
In the screenshot below, the market was in an uptrend and pullbacks (corrections) are the short periods where the price moved sideways or against the trend direction.
The price usually moves in those up and down waves and a pullback trader uses this characteristic to time his/her trades.
A pullback trader either waits for the price to continue into the direction of a trend or even gets into trades when the market moves lower. The danger of the second approach is that the pullback will not turn around. But the upside is that the reward/risk ratio might be greater.
Not always does a market provide a pullback. The example on the left shows a market where the price just went down but never made a pullback. The second and third phase had multiple pullbacks and offered good entry opportunities for pullback traders.
As you can see already, pullback and trend following trading have a lot of overlap and trend following trader often also trade pullbacks as a natural progression.
There are, of course, many different ways how pullbacks can form on your charts. In the screenshot below, there are 3 examples.
Double pullback The price came back into the level 2 times before it continued the trend.
Dirty pullback The price overshot the previous high point and made a deeper correction.
Immediate pullback The price stalled at the breakout level and moved sideways for a while before continuing the trend direction.
Moving averages are a popular tool for pullbacks as well. When the price is in a trending market and then comes back into the moving average, a pullback can be traded. Either, the trader trades the price when it hits the moving average or he/she waits until the price is resuming the trend direction.
As we will see when we talk about breakout trading, we can also trade so-called price formations as pullbacks. In the screenshot below, the price was in a clear downtrend when a head and shoulders formation formed. In such a context, the head and shoulders formation becomes a trend-following pattern and can be regarded as a pullback. The lines between pullbacks and trend-following are blurry here.
Reversals are turning points and a reversal marks the true origin of a new trend.
Therefore, reversal trading can be considered very early trend following trading too. However, it is usually more effective to choose between classic trend following and reversals because each trading approach has its own unique characteristics.
The screenshot below shows a chart with different market phases and trend stages. Trend following traders will usually go for the early or mature trend. A reversal trader starts paying attention to a market once a market is entering the mature trend stage. This usually happens once at least 2 or 3 trend waves have formed.
The dangers of being a reversal trader are being too early and constantly acting in a contrarian mindset. Many failed reversal traders are trying to predict a market turn way before it happens. The greed is driving the traders here because they believe that the earlier they are, the closer they can enter to the absolute top/bottom and, therefore, get a much bigger reward/risk ratio.
When it comes to reversal tools, divergences are the classic confirmation. The RSI divergence shows exhausted trends where the trend power is fading. When a mature trend gives you an RSI divergence, a reversal can often happen.
The RSI is usually a trend indicator, but when the RSI shows that a trend is losing strength, it can work very well as a reversal tool too. The MACD or the STOCHASTIC can be used as reversal tools as well.
I view myself as a classic reversal or very early trend-following trader too. I was never comfortable chasing the trends as a trend-follower and once I understood that reversals don’t mean predicting turns before they happen, reversal trading became a “fun” way to trade.
Breakouts can happen during trend following and also during reversal trading. Breakout periods are often the link between two trending phases.
A breakout describes the move away from a consolidation pattern. Consolidation patterns, as the screenshot below shows, can happen at market turning points (tops and bottoms for reversals) or during established trends.
The screenshot below illustrates how consolidations and breakouts are the links between two market phases. A consolidation can happen at market turning points and breakouts are then trend reversal signals. If a consolidation happens during an established trend, a breakout comes a trend following signal.
This screenshot below highlights this characteristic once again and it becomes obvious how breakouts connect the different market phases. As a trader, it is usually best to choose one specific type of breakout. Trying to trade all breakouts can lead to bad results and confusion because each market phase behaves differently and, thus, requires a different set of tools, signals and understanding.
Breakout traders are pattern traders and breakout traders typically look for sideways consolidations, head and shoulders, wedges, and any other consolidation formation. The scenario below shows a wedge, which is a so-called consolidation pattern. The characteristics of a wedge show that the previous uptrend is slowing down because the price cannot push higher as easily. A breakout trader then waits for the market to make a significant move into the opposite direction and break out of the pattern.
Breakout trading is very versatile which is why it is so important to define if you want to be a trend, reversal or pullback breakout trader. Each market phase follows its own unique rhythm and needs to be approached differently.
As I said, although I see myself as a reversal / early-trend following trader, I also say that I trade breakouts. It helps me define my trading persona even further. I want to see clear patterns with a well-defined breakout point at a market turning point.
Most traders are never sure about what it is that defines them and knowing about the differences and the overlap can be helpful in determining your trading business plan.
I trade many different reversal and breakout patterns, but one is the classic Head and Shoulders. The Head and Shoulders pattern describes market turning points nicely, it provides a clear breakout point and also does not try to predict an absolute top or bottom.
Fakeouts can be viewed as some type of reversals, but I personally see fakeouts as failed setups.
For example, in the screenshot below the market tried to break out of the low and the high and got rejected each time. Fakeouts happen around very prominent highs and lows and often act as a “stop hunting” tool by the smart money and the institutional players.
If you contemplate quitting university or college because you want to become a trader, this is for you!
I can relate to this question a lot because I was in the same situation 10 years ago. I was completely absorbed by the trading bug and ready to quit my university because I wanted to “focus on my trading” and become a millionaire, instead of studying theoretical things that I probably were not going to use anyway.
However, I believe it is a very bad idea to quit university for various reasons. If I hadn’t completed my studies, I would not be where I am today. I can say that university, even though I never really used the things I learned, helped me become successful.
If you want to know the full story, make sure to watch the video below:
It does not matter whether you are reading sophisticated trading books or just browse around online trading forums, almost every trader seems to be aware of the fact that psychology has a big impact on trading performance.
Most traders just talk about fear and greed, but emotions go much deeper than that in trading. At the same time, it is not practical to stop at fear and greed. We need to identify the situations in which emotions take over and then develop action plans to conquer the emotional responses.
Identifying emotional impulses
The goal is that we become so self-aware that, at the moment the emotions are about to take over, we can identify this exact moment and counter our response. In the beginning, this won’t be possible but the more practice we have, the faster we will recognize that we are becoming emotional and we can avoid further damage sooner and sooner.
For that, we need to understand HOW emotions manifest in our trading. For me, it helped going through past trades (regularly) and to try to understand what caused the loss. I’d often find out that the same triggers and impulses were the root causes. Then, with time, I was able to catch myself sooner and sooner whenever the impulse came up. Of course, every now and then I still slip up, but perfection is not the end goal.
In the following, we take a look at things traders say, think or do and what it means for their emotional impulses.
“I missed the trade although it had all the entry criteria.”
If you notice that you constantly miss trades, although they meet all your entry criteria, you should decrease your risk. Eliminating the possibility to risk a substantial amount of money will usually help decrease the impact of fear-based trading errors.
Then, it is about building confidence in yourself and in your trading strategy. Journaling and backtesting are great activities here. After you have gained confidence and trust your trading strategy you can slowly increase trade size until you find your threshold.
Printing out your trading rules and checking them off one by one can also help with eliminating the fear of entering trades.
“How could I have lost so much on this trade? It looked so good.”
Traders with small trading accounts will often risk too much on a single trade. Often, such traders don’t even have rules for their position sizing, to begin with. But also traders in a winning streak will often increase their risk and become reckless. Adding to a losing trade, trying to avert the loss is also a big issue.
What is it for you? If you experience disproportionally large losses, you need to take a close look at your risk management. In professional trading, no single trade should stand out.
The best thing you can do is to reduce trade size and also to establish a default position size to avoid large drawdowns and account swings. You should set an absolute maximum risk level that you will not cross – no matter how good you think a setup is.
“I think it’s going to turn around. I just widened my stop loss order a bit. It is a good setup.”
This sentence is a continuation of the previous case. When traders believe that a setup is too good to fail, they are more likely to find reasons to avoid realizing losses by widening stop loss orders, adding to losers or completely taking off stops.
“Too good to fail” is a belief that manifests because traders are inexperienced, trade too much size or just do not understand the role of losses in trading.
When you find yourself in a similar position, you are trading based on hope and ignorance.
I recommend using trading plans for every trade. In a trading plan you write the reasons for your trade entry and you also define when the time to exit is. This way, you can become more objective and you are more likely to stick to the rules.
“The trade looked so good. I thought it would move further and not turn around that quickly.”
A sure sign that greed is influencing your trading decisions is when you do not take profits, even though the price has already reached your take profit level. Although you might be able to get a bigger winner every now and then, what usually happens is that you will constantly give back profits and cut your winners short. Over the long, term this can even turn a good trading system into a losing one.
Always stick to the plan you made before you entered the trade. Don’t listen to the greedy voice in your head that pops up once you are in a trade.
If you really want to find out if you can use a wider profit target, start tracking it in your journal and you will get a definite answer.
“The trade has already made some good profits. Maybe I better close it before it turns around again.”
This is the opposite scenario. Whereas greedy traders will not realize profits because they hope to get more, fearful traders close trades too soon because they fear that markets can turn any second.
This behavior is usually caused by trading too big when a single tick has a disproportionate impact on the account balance or a lack of confidence.
The set-and-forget approach, where you close your chart after you opened the trade and set stop loss and take profit order might work well for some trading strategies. Don’t watch your P&L during trades because you will start worrying about every down-tick. Gain trust in your trading strategy over time and accept the fact that price moves in waves – retracements are, therefore, normal and should not be mistaken with reversals.
Taking screenshots of every trade is also helpful when you can observe over time how price REALLY behaves. Uncertainty is a big driver of fear.
“It is not the best trade yet, but I will not miss this opportunity.”
Entering trades too early because you worry that you could miss a trade is another sign that greed is messing around with you. At the same time, uncertainty and a lack of understanding the strategy can also cause such emotional responses.
Having clearly established trading rules is the best way to go here. The more you can remove uncertainty, the more confidence you can have in your trades and the less likely you are going to mess it up.
“I exited too early and should have let it run – next time I will set my take profit further away.”
If you see that, after you closed your trade, price would have further moved in your favor, you are more likely to set wider take profit orders on the next trade. Setting wider take profit orders, without statistically validating that it will have a positive effect on your trading performance, can be a very dangerous thing to do. Usually, just randomly using wider take profit orders will only result in a lower winrate because price will turn ahead of your take profit order.
“I knew it! I felt it was going up, even without meeting all my entry criteria. I should be more aggressive.”
Another problem that arises from hindsight knowledge is when traders see that a trade would have worked out even though not all entry criteria had been met, they are more likely to violate trading rules on their next trades.
How To Deal With Hindsight Knowledge
Hindsight knowledge is a very important thing in trading, especially when it comes to making improvements to your trading strategy and tweaking your edge, but the way traders use hindsight is completely wrong. Here are a few tips how to use hindsight to your advantage:
Evaluate whether you can improve take profit or stop loss placement looking back at trades after you have closed them
Analyze trades that you have missed and evaluate whether some of your entry criteria keep you out of profitable trades
If you have followed your rules, but see that a trade would have moved further, or entering a trade early would have made you more money, do not punish yourself. Instead, pride yourself for following your trading plan – religiously following your trading plan is a key attribute of a professional trader
Do not let the potential outcome of a single trade affect your trading decisions on your next trade
Think big! Collect hindsight-data and only alternate your trading strategy after you have a big enough sample size that will provide you with statistically significant information.