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Thursday 20 June 2013

Top 10 Biggest Forex Trading Mistakes & Misconceptions

All Forex traders tend to commit similar mistakes when interacting with the market. They also tend to harbor similar misconceptions about trading and what successful Forex trading is all about. This week’s article can be thought of as a guide to what the biggest trading mistakes and misconceptions are and what you can do to put an end to them. You should refer back to this article often to help you stay on the path to becoming a profitable trader. This article will give you some valuable insight and direct you to other relevant articles so that you can stop making the same trading mistakes and let go of any misconceptions you hold about Forex trading.

1. Trading with indicators and fancy tools –

Many Forex traders, especially beginners, tend to erroneously believe that they need to use indicators to fully understand Forex price movement, or that indicators will help them in some way become more profitable. This leads many traders to concentrate solely on reading and trading from indicators, instead of the actual price action that these indicators are derived from. The bottom line is that indicators provide no real advantage over simply learning to read a “naked” price chart, and they actually inhibit your progress as a trader because they distract you from learning to read the pure price dynamics that occur on the charts every day. Price action tells you what is most likely to happen next in the market, you just have to know how to interpret it. After learning to trade with price action you will soon learn why trading with indicators destroys Forex trading success.

2. Not fully understanding and implementing risk / reward –

If there is one thing that all professional traders have in common it is that they fully understand the power of risk reward and how to implement it on every single trade they take. Beginning traders obviously know the importance of making sure their winners are larger than their losing trades, but they often do not understand how this translates into real world trading and what it really means. Every single trade you consider taking should be viewed in terms of risk to reward. You have to consider not only if your trading edge is present, but if the realistic potential of the risk reward on the trade makes it worth taking.

We typically want to make at least two times our risk on any one trade, doing so gives us an excellent shot at making consistent money over the long-run. Many traders get caught up on losing 2 or 3 trades in a row because they fail to understand the full implications and practical application of risk reward ratios that take time to play out. Check out the following articles to learn why risk reward in Forex is the true Holy Grail, and to learn how Forex risk reward and price action trading can make you a consistently profitable trader.

3. Not understanding position sizing –

Many traders come into the Forex market and they do not understand that just because you put a wider stop loss on a trade does not mean you have to risk more money or that just because you put a smaller stop loss on a trade does not mean you automatically risk less. A very common mistake that traders often make is that they adjust their stop loss to meet the number of lots they want to trade, instead of adjusting their position size to meet the most logical and realistic stop loss distance. A thorough understanding of position sizing is very important to your overall money management plan and to correct implementation of risk reward on every single trade.

4. Not having a Forex trading plan –

Most beginning traders make the mistake of not having a functional trading plan, and they also harbor the misconception that they don’t really need one. Forex trading needs to be treated as a business, and just like having a business plan is necessary for the growth and prosperity of any business, having a Forex trading plan is necessary for the growth and prosperity of any trader. A trading plan helps to keep you accountable in a world that allows you to do an unlimited amount of damage to yourself; the world of Forex trading. Most traders seem to get fixated on how much money they can make and thus lose focus of the real risk involved in Forex trading, aForex trading plan that you read every single day can help to keep you focused and on track, so that you don’t fall off the wagon and begin trading in a delusional manner.

5. Gambling instead of trading –

A question that every trader who has been trading for any period of time needs to stop and ask their self is; “Am I gambling or am I trading responsibly?”. Almost every trader falls into some sort of cycle where they are simply gambling instead of trading at some point in their trading career. The quicker you can recognize this and pull yourself out of this deadly cycle the quicker you will become consistent and profitable. Trading should really be viewed as “risk managing”, and not necessarily as “trading”, the traders who manage their risk the best are the ones who make the most money; take care of your risk and the market will take care of the rest; that is a very general anecdote, but it is also true, you have to control your risk very consistently if you don’t want to end up gambling in the market, when you put your focus on risk control instead of on how much money you can make the money will seem to come naturally. So, are you a Forex trader or a gambler?

6. Allowing emotions to cloud judgment / giving into emotions –

There are many factors that can contribute to and induce emotional trading, and emotional trading is the reason why so many traders lose money in the markets. Emotional trading is the end of result of not doing other things right, like anything or everything else listed in this article. Any one of the trading mistakes listed in this article can induce emotional trading, and once you begin trading emotionally it is extremely difficult to pull yourself out of its grips because it is a psychologically reinforcing problem that traders simply cannot shake unless they totally stop trading for a period of time and take a step back to think logically about what they are doing.

The Forex market can be an excellent arena for self-improvement and mastery of one’s own impulses and mind, or it can be an arena for total financial destruction and loss, which arena you ultimately create depends on whether or not you can master your primitive emotional brain structures with your more advanced logically thinking and planning brain structures. Read about how price action will help cure emotional trading problems.

7. Not having patience –

Patience is scare among amateur Forex traders. The reason it is scarce is because most new traders approach the market from the complete wrong perspective. Most people are attracted to trading because they think it will “fix” their life in some way, whether through freeing them from a job they hate or by providing them with extra money. While these are by no means bad or inappropriate goals to have, when you approach your trading from a feeling of “needing” it to work because you have no other options, you are almost certainly doomed to fail as a trader.

You have to be completely fine with whatever happens to your trades, and this means not trading with money you can’t afford to lose. Once you start approaching the market from a perspective of not feeling like it “has to” work out for you to be happy in life, you will begin to exercise more patience in the Forex market and this will drastically improve your overall winning percentage and will actually make you more profitable faster.

8. Not trading higher time frames –

I have been trading for nearly 10 years now and I still almost solely look at the daily and 4 hour charts. It amazes me to no end how many beginning traders that I encounter who want to trade shorter time frames. I get emails almost every day from traders asking me questions about trading the 15 minute charts, or even lower time frames. The simple fact of higher time frames that makes me concentrate most of my trading efforts on them instead of their lower time frame counterparts is that they act as natural filters of price movement, filtering out the price action that is not useful and leaving with you with a much clearer picture of what price is likely to do. This is why when you trade higher time frames in Forex combined with price action you have an extremely potent trading strategy at your finger tips.

9. Over-trading / being too involved

The quickest way to becoming a full-fledged emotional trader right behind over-leveraging, is over-trading. I find that traders are often guilty of over-trading and don’t even realize it. Most traders that I encounter do not spend long enough demo trading; this means they jump into live-market trading too soon and as a result of this they begin over-trading because they have not spent enough time on the demo charts perfecting their Forex trading strategy. Over-trading is most tempting after a trade, whether it is a loser OR a winner. Traders need to be especially aware of their state of mind immediately after exiting a trade, because this is when emotions like revenge and euphoria hit their peak, making it very likely the trader will dive back in the market with no real sound reasoning behind their action. Forex trading can be addictive and you certainly should trade less to profit more.

10. Not taking profits –

Yet another area where Forex trading is a paradox is profit taking. While hope is a great feeling to have in almost every other endeavor in life, in the financial markets hope is often the downfall of traders. They hope for larger profits, or they hope the next trade will allow them to make back all the money they lost. Most retail traders simply do not fully realize or understand the implications of the fact that the Forex market ebbs and flows, it never moves in a straight line for every long. So, when trying to build up a relatively small trading account it is essential to your equity curve and to your emotional sanity that you take profits as they come, instead of constantly hoping and holding out futilely for ever larger profits.

This is why I teach that traders should often take profits of 2 or 3 times risk, because generally speaking if you hope for more than this once you are up 2 to 3 times risk, the market is going to reverse and move back towards your entry. These reversals are what shake out most amateur traders, so it is crucial that you take profits when you have them, otherwise they are likely to disappear very quickly. As the Kenny Rogers song goes: “You’ve got to know when to hold em and know when to fold em”.

Learn To Trade Price Action with Nial Fuller – If you want to get a comprehensive price action trading education on the exact same strategies that I use to trade the market with, check out my Forex trading course and Members’ price action trading community. You will get life-time access to all my premium services for a low one-time fee. Included in your membership is my Professional price action trading courses, members’ daily trade setups commentary, price action traders’ discussion forum, members’ only videos and articles, 24/7 email support, and more. To Find out More Visit the Forex Trading Course Page Here.

The Truth about Forex Fundamentals and Trading the News

Today’s Lesson Is Very Good. This is Probably One of the Most Crucial Aspects of Trading. ” To trade the news or to trade the price action ?”. Today I share my views on this interesting topic which can often be the main reason a trader fails. I am not a fan of trading the news or fundamentals, and this article explains why.

When You Finish Reading This Article, Please Remember To Click the Facebook Like Button Below & Make a Nice Comment Below or Post it To Twitter. Thanks and enjoy Today’s Lesson. Nial.

Forex news and Forex fundamental variables are topics that many traders email me about each week. They usually want to know if they should pay attention to the news as it relates to their trading and (or) how to incorporate fundamental economic news variables into their trading.

The fact of the matter is that as a price action trader I believe that all fundamental variables are reflected in the price action on a plain vanilla price chart. The primary reason that I believe this is because price action is the final result of all catalysts and participants in any financial market. Forex news and other fundamental variables are simply catalysts that cause markets to move, and sinceprice action trading involves analyzing price bars on a “naked” price chart, I am primarily concerned with analyzing the end result of the news: price movement.

Now, there may be some diehard economists and fundamental traders who will disagree with what I am saying here. So, let me make myself clear, I am not saying that news cannot be used or that fundamental traders can’t make money in the markets. What I AM saying, is that the effectiveness and relevance of price action trading cannot be disputed. As price action traders we want to make our trading simple, and in order to simplify we remove the news, economists, and so-called market gurus. Let’s dissect this issue further…

Over-analyzing Forex fundamental variables…
Many traders over analyze the news and this ends up confusing them and causing them to second guess themselves. There are just too many variables each day as far as news and fundamentals are concerned for any individual trader to have enough time to make effective use out of them. You will literally burn your eyes out trying to read all the economic news that can influence the Forex market each day. The point being; you can bypass all of this unnecessary over-analyzing by learning to read a plain vanilla price chart. You see, fundamental news is simply a catalyst for price movement, so, it only makes sense that we trade based off the final result of all Forex and economic news; price action. We will discuss this more in-depth in the last part of this article.

Also, most retail traders do not have access to the type of “in-depth” and “inside” information that would allow them to take advantage of an impending news event. Furthermore, paying to get access to “up to the minute” economic news is basically a huge waste of money. It’s only going to introduce more variables for you to over-analyze and take your focus off the price action of the market.

Why trying to predict price movement based on the news is like gambling…

You cannot predict what the market will do based on the news. The market often reacts counter to what you would expect based on a particular news release because of the issue of “buying the rumor selling the fact”. Markets operate on traders’ / investors’ expectations of the future, so when a news event actually happens, price will often move in the opposite direction to what the implication of the news event might be. This is because traders have traded their expectations already, and so once the news is out there is nothing left to expect from that particular piece of news. The bottom line is that you never really know how the market will react to any particular news event, and trying to guess what the market will do based on some economic news release is not a definable or effective edge, it’s basically a blind gamble.

Once you learn how to identify and trade a handful of simple yet high-probabilityprice action trading strategies, you will have an effective trading edge that you can use to achieve success in the markets over a period of time.

What you DO need to know about Forex news…

While we do not need to know everything about all the fundamental forces that cause price to move, it is good to know what the most volatile economic news releases are and when they are released. This is because if you are in a profitable trade, you do not want to lose that profit or have it turn into a loss because the market became “spooked” or surprised about a particular piece of news. We call this a “knee-jerk” reaction, and sometimes these reactions can be very quick and very significant. So, it’s good to know when the most volatile news releases are coming out so that if you are up with a risk reward of over 1:2, you can lock in that profit or you may simply want to move to breakeven. This is part of Forex trade management, and we need to be good managers of our trades because our number one goal is to protect our capital, and we don’t want winners turning into losers.

• What news events are most volatile?

The following economic news releases are generally the most important for any country. Depending on the current state of the economy, the relative importance of these releases may change; therefore, they are not in order of significance here (they are actually in alphabetical order). For example, unemployment may be more important this month than inflation or interest rate decisions.

1. Business sentiment surveys
2. Consumer confidence surveys
3. Gross Domestic Product (GDP)
4. Industrial production
5. Inflation (consumer price or producer price)
6. Interest rate decision
7. Manufacturing sector surveys
8. Retail sales
9. Trade balance
10. Employment / Unemployment (Non-Farm Payrolls)

As price action traders we only want to know that there is volatility coming, we don’t ever want or need to “guess” what will happen based on some piece of economic news. To learn more about these economic news events check out this article: Major Economics Events in Forex Trading, and to see the upcoming volatile news events for the next 24 hours, you can always check out my daily Forex market commentary, just scroll down to the bottom where it says “upcoming important economic announcements”.

My final thoughts on Forex news and fundamental variables…

Global economic variables are the catalysts that cause all financial markets to move. However, it is not the actual news events themselves that we should be concerned with, instead we need to be concerned with the final result of economic news events; price movement. The easiest and most effective way to trade the Forex market is by learning to take advantage of simple, effective, and repetitive price action patterns that form in the markets as the end result of these global economic price catalysts.

To become too concerned with Forex news and fundamental variables is not being able to see the forest for the trees. The “forest” of the Forex market can be seen by looking at a daily price chart; this shows you the most up to date and relevant picture of the market. You can easily get lost in this forest by spending too much time analyzing the “trees”, such as all the different news events that come out each day. If you want to learn how to profit consistently in the market, you need to know what you are looking for. Learning to trade with price action strategies can give you the edge you need, so that you know what you are looking for every single time you check your charts. Forex news has its place as a catalyst that causes price to move. But, if you don’t understand how to read the natural price action on a plain vanilla price chart, all the time-consuming fundamental analysis in the world will not mean a thing.

Why Do Most Forex Traders Lose Money?

Note: If You Really Enjoy My Forex Lessons, Could you please do me a ‘Huge favor’ after you have finished reading today’s forex lesson. Please click the Facebook Like button below this article, then click the twitter button / post it to twitter and facebook etc. You can even email it to a trading friend. Most importantly, make sure you make a nice comment with your feedback at the bottom. As I always say, If you get value from these lessons, all I ask is that you share it around with friends and other traders who will benefit from it. I appreciate your support and will talk soon. Enjoy this lesson.

Nial.

Statistically speaking, trading the Forex market with a 1:1 risk reward ratio and no strategy or trading edge has a 50% chance of success (minus fees) over a long series of trades. Thus, most traders should approximately breakeven over the long run because trading with a (truly) random entry and a 1:1 risk reward is analogous to a random coin toss.

Why do most Forex traders lose money then? What human variables contribute to the success rate being much lower than breakeven for most traders?

Perhaps the main reason most traders lose money is because the majority of people have little self-control and cannot resist the temptation to over-trade and over-leverage when there is no one to be accountable to. Another main reason most traders lose money is because they try to buck the trend for some reason, even though they KNOW they have a statistically higher chance of winning by sticking with the trend until it is clearly finished. In this article I will share with you my thoughts on why otherwise totally rational and successful people fall apart when it comes to trading the Forex market.

• Not accepting responsibility for losses and mistakes

As human beings we all have a tendency to pass the blame and find fault elsewhere. However, when you are trading badly, it is your fault and no one else’s. If you find you are losing money in the markets it is not your broker’s fault, nor is it the result of a bad quote, a bad tip, or a hardware failure. There is no mysterious “They” out to get you or steal your money from you. Everything that happens to you in the market, good or bad, is ultimately your fault; blaming anyone else or thing is not going to help you become a successful trader.

Accepting responsibility for your losses and trading mistakes is paramount to turning your trading around. If you use a “tip” or a piece of advice from a broker or from someone else, and you lose money as a result, it’s your fault for listening to them; at least the second time around. The first step in any self-help group like Alcoholics Anonymous is admitting you are the problem and that you have a problem. If you continually blame other people or things for your trading losses, you will never improve your trading because you won’t feel any need to correct your weaknesses if you don’t believe you have any. So, a big reason many traders fail to make money is because they won’t admit they are to blame for their losses. If you want to improve your trading you need to take full responsibility and go into Forex traders’ rehab.

• Over-trading and not trading higher time frames

One thing that definitely prevents most traders from making money in the market is over-trading. Traders who just jump in and out of the market on emotion and greed, will not only suffer many more losing trades, but they will also rack up a lot more fees via spreads and (or) commissions over the course of a year than traders who stick to the higher time frames and understand the value of self discipline and having patience. Trading lower time frames causes many traders to over-trade because they end up thinking they see many more trading signals worth trading, when in reality there is just a lot more “junk” signals and “noise” on lower time frames.

So, if you are currently losing money on a consistent basis and you are trading lower time frames, you will definitely benefit by switching to higher time frame Forex trading.

• Risking too much

How many times have you won a few trades in a row, made some money, and then given it all back quicker than you made it? This happens all too often for traders who have not yet learned to risk the same amount every trade or who have not yet learned to manage their emotions effectively. Trading should not be viewed or treated as gambling, you don’t want to “double down” just because you are up some money. That is not how it works. You have to stop and ask yourself, “Are you a Forex Trader or Gambler?”

As price action traders, our aim is to “master” our trading strategy to the point of knowing exactly what we are looking for in the market every time we sit down behind our computer screen. However, just because you know exactly WHAT you are looking for in the market, this does NOT mean that it WILL work out. Price action trading gives you an “edge”, just like any other method does (although price action is clearly the best way to trade), and what you need to understand is that no matter what your edge is, it’s not going to work out in your favor EVERY time, and you don’t know for sure if any single edge-event will work out.

So, if you are equally confident in every trade you take, because you have mastered price action trading, there really is no reason to risk substantially more or less on any single trade. You want to keep your risk amount approximately constant relative to your total account value. The only time you should increase your risk per trade is if your account value increases, never increase risk per trade just because you feel “totally certain” that THIS trade will work out, because as we discussed above, YOU DON’T KNOW if it will or not.

• Poor Forex trade management / no trade management

If there is one single thing that most traders do wrong who lose money on a consistent basis, it is poor trade management. Every trader knows after a little practice and education on a high-probability trading method like price action, they can pick near-term market direction with pretty good accuracy, at least enough to get into open profit. This is not the hard part of trading. The hard part comes after you enter a trade. Most traders have no forex trade management plan, either because they don’t understand trade management, or don’t think they need to do it. What these traders don’t understand is that they are sabotaging their own effort and potential skill as a trader by thinking they will somehow behave more logically and effectively AFTER entering a trade than BEFORE. This is just ridiculous. No human being on Earth will be more objective or less emotional than they will be when there money is NOT on the line. It’s a fact of human psychology that when something you care about (money, relationship, etc) is at risk, you become more emotional. Everyone knows this. So, if you are guilty of not managing your trades BEFORE entering them, accept responsibility right now and start changing it.

A related topic here is having a Forex trading plan. Your trade management plan should just be one part of your overall Forex trading plan. If you don’t have a written down plan of attack on how you will trade the markets, you are probably going to go nowhere fast. Your trading plan should also include a Forex trading journal.

• Entering randomly / not mastering a proven method

Traders who don’t have a definable and “mastered” trading method are hurting themselves because they essentially have no trading edge and are just shooting in the dark, so to speak. When you learn one effective trading strategy like price action, and truly master one Forex trading strategy at a time, you will largely eliminate the problem of fear and second guessing your own trades. The key here is that you REALLY NEED TO MASTER an effective trading strategy, like price action. Most aspiring traders just jump around from one trading strategy or system to the next, never really giving one enough time to truly master it. So, the first thing is that you need a truly effective trading strategy, and then you have to give it enough time to truly master it.

Human beings have a tendency to see patterns that don’t really mean anything. This is especially true in trading; if you stare at a chart long enough you can make up all kinds of things that “should” happen based on what you “see”. The bottom line is that price action strategies really do give you the edge you need, so that you aren’t guilty of “manifesting” irrelevant patters in the market, but you HAVE to put in the time and get the education required to master them.

• Unrealistic expectations

Finally, one thing that is definitely common to all traders who are losing money in the markets is that they have unrealistic expectations. If you have $500 to trade with, there is no way on Earth you are going to be able to live off your trading. You have to take into consideration what you can REALISTICALLY expect to make each month or week, given the amount of money you have to trade with. This is assuming you will commit to effective Forex money management, because if you are properly managing your risk on every single trade, there is just no way you can make enough money to live on if you don’t already have a lot of money to trade with.

This doesn’t mean you can’t be a successful trader however. Being a successful trader means you are consistently making money in the markets. If you have a small trading account but are making consistent profits that are in-line with your small account, then you ARE a successful trader. The same habits that make a trader successful on a small account are the SAME habits of successful traders of large accounts. Remember that. Forex trading success is not measured by whether or not you get-rich-quick, it is measured by your consistency, and the only way you can become consistent is if your expectations are in-line with the reality of your current financial situation and the reality of the markets.

Risk Reward & Position Sizing in Forex Trading

Where beginning traders run into trouble is becoming “convinced” that THIS setup is a winner; it just looks SO solid to them that they don’t see how it could possibly not work out. They then proceed to over-leverage because they are so convinced of the trade setup, and the stage is now set for an account blow-out.

The setup may indeed workout and the trader may clean up, but you can be assured it only takes ONE episode like this to lose a huge chunk of your trading account and kick off a cascade of emotional trading mistakes. This is how losing traders think about the market; they forget that each trade setup is simply another execution with about the same probability as any other similar setup; they do not have a thorough understanding of risk to reward scenarios or position sizing. This article will hopefully give you that understanding.

Thinking in Probabilities

Aspiring forex traders often spend countless hours searching for that perfect trading system which they think will make them rich by following a particular set of trading rules in a robotic manner. Unfortunately, most traders fail to realize that the real “secret” tosuccessful forex trading lies in a thorough understanding and implementation of risk reward scenarios and position sizing. Forex trading is at its very core a game of probabilities, to become a consistently successful forex trader you will need to view each trade setup as a probability. When you learn to think in probabilities you will be on the path towards trading success, because you will be viewing the market from an objective and mathematical mindset instead of an emotional and illogical mindset.

What ultimately separates winning traders from losing traders is how they think about the market. Winning traders view each trade setup as just another execution of their trading edge, they then think about how to minimize their risk on the trade while simultaneously maximizing their reward. Through the power of risk to reward scenarios and position sizing, professional traders know how to effectively manage their risk on each trade and as a side-effect of this knowledge they also manage their emotions. When you begin to view each trade setup as just another execution of your trading edge and effectively implement position sizing and risk to reward scenarios, you will also be managing your emotions because you know your possible risk and possible reward BEFORE you enter the trade, you then set and forget the trade and therefore there is nothing to become emotional about.

The Not SO Secret, Secret.

Anyone who has studied forex trading for any period of time has undoubtedly heard the old axiom “Cut your losers short and let your profits run”. The funny thing about this saying is that no one ever really expands on it by telling you HOW it is actually done or how it can be applied to today’s forex markets. Most traders hear this and they begin by setting really small stop losses with unrealistically huge targets on each trade. The problem with this is that the forex market does not move in a straight line, it ebbs and flows, sometimes having a large move and then an even larger correction before swinging back in the original direction. If you do not properly understand the power of risk to reward scenarios and position sizing, this volatility will end up killing you sooner rather than later.

Risk to Reward Scenarios

Let’s get right to the meat of this issue now, risk to reward scenarios are what you should be thinking about every time you find a trade setup. If you are trading price action strategies for example, you might find a really good looking pin bar formation on the daily chart…the first thing you want to do is define your risk on the trade. Risk management should be your main concern as a forex trader, most traders take the other route; worrying mainly about rewards and not actively managing their risk. Get that idea out of your head. From now on you are to think of yourself as an aspiring professional risk manager, get the whole idea of becoming a professional trader out of your head. Once you learn that risk management is the most important aspect of trading you will become a professional trader as a result, so concentrate on effective risk management and the reward aspect will take care of itself.

Back to our example…you have found a great looking pin bar strategy on the daily chart, now you must find the safest place to put your stop loss so that the probability of it getting hit is as low as possible, you want to give the trade as much room as possible to work out while still maximizing your risk to reward scenario.

In this daily gold chart we can see a pin bar has formed in the context of an uptrend. Your stop loss is placed just below the low of the pin, if you enter at the pin bar closing near $1175.00 your stop loss will be about $20/oz because it would be near the low of $1156.35, we will say $1155.00 to make it an even $20. Now, how do you figure your reward now that you have properly defined your risk?

It depends on the condition of the market you are trading. For this example of gold, it was in a very strong uptrend at the time, in this case it is acceptable to expect a reward of at least triple the amount you have risked or more. In this particular example we exited near $1215.00 for a risk to reward of 1:3, meaning we made 3 times our risk on this trade setup.

This is but one example of the many risk to reward scenarios that setup themselves up each day in the markets. When you have a strong entry method, like price action setups, combined with an understanding of risk to reward scenarios you begin to think in probabilities. This is how professional traders think about the market. For example, if this same pin bar setup above occurred in a range-bound market or in the course of a downtrend, you would not likely set a target of 1 to 3; therefore the trade would be a lower probability setup. This is what is meant by thinking in probabilities. You must learn to take into consideration the strength of the price action signal in question but also the context it is occurring in. Many traders simply set unrealistically large profit targets for their trades with no rational behind them besides greed. I can promise you that you will blow out many trading accounts if you don’t learn to take profits by setting logical reward scenarios of 2, 3, or 4 times your risk, if you trail your stop you can sometimes pick up 5 times your risk or higher, it all depends on market conditions and whether or not you can deal with letting a 1 to 2 or larger winner turn around and move against you because you were hoping for a bigger reward.

Position Sizing

Position sizing is the glue that holds risk to reward scenarios together. Where most traders mess up in position sizing is in fitting their stop loss to their desired position size instead of fitting their position size to their desired stop loss. For example, say you are risking $100 per trade and you see a really good trade setup. The only problem is that the most logical spot to place your stop loss is 200 pips away. This is a critical juncture where many traders make a mistake; if you need to place your stop 200 pips away to give your trade the best shot at working out, than you simply reduce your position size down to meet this stop loss size. So if you were trading 1$ a pip before, now you will trade .50 cents a pip, .50 x 200 = $100.

To illustrate the example of adjusting your position size to fit the necessary stop loss let’s look at a daily chart of AUDUSD currency pair. Notice in this example our desired risk amount is $100, but our necessary stop loss distance is 109 pips, because the safest spot for our stop loss in this example is just below the low of the pin bar. So, after dividing the risk amount by the stop loss distance (1oo / 109), we get .917. Now, some forex brokers allow you to trade micro-lots, this basically means you have the flexibility to trade a position size as small as 1 penny per pip, in this case you could trade 9.1 micro lots (.91 cents per pip), you would not want to go up to 9.2 micro-lots because your risk would then be over $100: (.92 x 109 = 100.28$), at .91 your risk will be just under $100: (.91 x 109 = $99.19). If you use a broker that does not allow micro-lot trading than mini-lots are your next option, typically these are flexible up to .10 cent increments, this means you can trade .10 cents per pip at the smallest position size. In this case you would just trade .90 lots which would be (.90 x 109) $98.10 risked. This is how you should view position sizing; always adjust the number of lots you trade (position size) to meet the stop loss distance that gives your trade the best chance of profiting. NEVER adjust your stop loss to meet a desired position size, this is GREED.

It really is as simple as that. Most traders end up doing the opposite of the above example however. They end up arbitrarily placing their stop loss just so they can trade a larger position size, this is a mistake born out of greed and will end up killing your trading account in the end. Proper usage of position sizing not only means you will have more winning trades, but it also means you will trade more objectively, because you are placing your stop loss at logical points above or below support or resistance levels, instead of randomly placing it a set amount of pips away from entry. When you combine position sizing with risk to reward scenarios you truly have a “set and forget” trading method which will put you in the proper trading mindset; calm, confident, and objective. There is simply no need to risk more than you should on any one trade when each trade is simply another execution of your edge. This edge may take 100 trades to play out and bring you consistent profits, so to put too much emphasis on any one trade is simply a mistake.Give yourself the best shot at becoming a consistently profitable forex trader by combining a great method like price action with the power of position sizing and risk to reward scenarios. To learn more about these concepts check out my Forex trading course.

Nial Fuller is considered a leading ‘Authority’ on Price Action Forex trading strategies. If you want to learn more about harnessing the power and simplicity of Price Action Trading Strategies please visit Nial Fuller’s Forex Trading Course & Traders Community Page Here. Nial’s Students get lifetime access to all of his advanced price action Forex Courses, video lessons, webinar tutorials, daily trade setups newsletter, live trade setups discussion forum, traders support line & free ongoing course updates. For more information visit theForex Course page here.

Forex Traders Rehab – Recovering 1 Pip at a Time

So you’re on a losing streak and your capital is down by 50 percent from recent highs, you keep on punting away in the belief that you’re about to recover all your losses. You just know that if you can hit that big winner it will bring your account back up to where it was when you started. You are very excited about the prospect of making everything back you have lost recently and are looking forward to finally making some decent coin above and beyond your initial account deposit.

WARNING!!!! YOU NEED TO ENTER FOREX TRADERS REHAB.

While losing a few trades in a row does not necessarily mean you need professional help, it does mean you need to stop and pull yourself away from the market and objectively think about your trading decisions. Over trading and obsession with the market are two very real problems that many traders experience, with a little time and effort on your part you can easily over come these often made trading errors. This article will give you some good pointers in how to effectively pull yourself out of a rut of trading mistakes and help to push you on along the correct path. Combined with usingprice action strategies, a good mindset is crucial to trading success.

Rehabilitating traders 1 pip at a time

High my name is “insert your name here”, and I’m a trade-aholic, today my goal is to not make a trade. This cliché first born in alcoholics anonymous groups is just as relevant to alcoholism as it can be to trading. The fact is that over-trading is no different from alcoholism or any other form of addiction or lifestyle abuse. Many people become addicted to Forex trading and don’t even realize it, it is easy for forex trading, or any other form of trading to not seem like gambling because it doesn’t necessarily have the stigma attached to it as gambling does and is seen as a more acceptable profession than say, professional poker playing. However, once you start becoming preoccupied with your trading while you are away from your computer screen you have essentially entered the realm of gambling.

Problem gambling is any gambling behavior that disrupts your life. If you are losing money in the markets that you cannot afford to lose than you are at least hurting yourself and probably other people in your life as well. This is a really serious problem that needs to be fixed as soon as possible. It is just too easy to get sucked into the trap of believing you can make back the money you lost in the markets, only to continue losing it and continuing believing you can make it back. Just as the main theme of alcoholics anonymous is to quit drinking cold turkey, the only way to effectively eliminate your gambling habit in the markets is to stop trading with real money until you realize what you are doing.

Steps to recovery

Admitting you have a problem with trading

Tell yourself each morning when you wake up that you are addicted to trading. You need to be consciously aware that you have developed a bad habit so that you can work on fixing it. The first step to solving your addiction to trading is to admit that you indeed do have a problem. Many people do not even make it to this first step because their ego is too big to even see the fact that they are over-trading and probably completely out of control. A classic hallmark of people with gambling addictions is not being able to control the impulse to gamble, even when they know their gambling is hurting themselves or their loved ones. The first step to being able to control your issues with over-trading and risking too much is to admit that you are an over-trader and also to admit that you are being careless with your money.

Work to retrain your brain

An essential component to effectively solving your trading addiction is to work on retraining your brain. The reason you are stuck in a cycle of destructive trading is because you have most likely reinforced bad trading habits by getting lucky on a few big trades. Once you hit a few big winners you have wired your brain to expect the same out come from similar behavior in the future. If this behavior was risking 20% of your account than you will probably continue to do that because you remember how good it felt when you risked 20% of your account last time and doubled your account value. You then continue to do this until you have lost all the money in your account; it is only a matter of time.

The first step towards effectively retraining your brain to eliminate bad trading habits is to quit trading with real money. If you still feel the urge to trade than you must force yourself to only demo trade until you can prove to yourself that you can control your behavior. For example, you could set a goal of 5 winning trades in a row in your demo account before moving back to a live account. Make sure you are only taking well defined price action setups in your demo account and concentrate on only risking a very small amount per trade, less than 3% of account value. The only way demo trading will help you retrain your brain is to treat it as if it is a real account. You need to just forget about the fact that it is not real money and treat it as if it is. Only after you have proved yourself on a demo account should you allow yourself to switch back to real money trading, this will work to build your confidence as a trader and as a person because you will have to prove that you can control your actions before rewarding yourself with a real money trade.

Other exercises

Increase the extracurricular activities in your life. One of the classic symptoms of compulsive gamblers is that they are so focused on their gambling activities they lose sight of other priorities in their life. Professional traders do not sit and watch their charts all day, they have gotten to the point of trading Forex full time because they know that spending obscene amounts of time in front of a trading screen is not the way to consistently make money. In fact, there is actually a negative correlation between time spent analyzing the markets and the amount of money you will make, in essence, the more time you spend thinking about, worrying about, or watching your charts the less money you will make overtime. Warren Buffet did not become the wealthiest trader in history from staring at charts all day. He essentially used the “set and forget” method of Forex trading; you find a high quality setup, enter your entry and exit parameters, and then let the market do the work.

One way to consciously reduce the time you spend trading is to focus on other activities, if you have a full time job than go to the gym after work instead of racing home to look at your charts. The charts will be there when you get home, no matter what, there are constantly opportunities forming in the markets. One big issue most traders deal with is worrying about missing trades; this is one of the silliest mistakes to make, but also one of the most common. You just have to accept the fact that the Forex market is constantly ebbing and flowing, you are going to miss many trades, that’s just the nature of the beast. If you go chasing every trade that you think “looks good”, you are going to blow out your account faster than you ever dreamed possible. Don’t worry about missing trades; trading should be done at a certain time each day, for no more than one hour or so. Set a certain time period each day that you will interact with the market, and then shut down your trading station for 24 hours. You are not going to improve your long term equity curve by messing around with stop losses or profit targets once you have entered a trade. All of your trading parameters need to be set before entering the trade; this is the time you will be thinking the most objectively and clearly. When you starting meddling with your trade after it is entered you are working off pure emotion and have cemented your name in the wall of trading addicts.

If you know that you are a trading addict than you need to schedule activities to fill the time that you normally spend over-analyzing the market. As previously stated you should join a gym or exercise some other way, exercise clears the mind and cleanses the body, it will lift your spirits and help you to think more objectively, any serious trader should have a regular exercise schedule to aid in overall trading performance.

Make the market work for you, not against you

One thing that everyone can agree upon is that the forex market exhibits extreme volatility at times and often develops some very strong trends within the various currency pairs. The way to make the market work for you and not against you is to harness the directional power of the Forex market by risking a very small amount of your account and letting the leverage grow your small seed into a huge ball of profit. The problem is that most people do the opposite; they start off risking a very large amount and the emotional mistakes that ensue as a result of risking too much end up turning a large sum of money into nothing, very quickly. The only way to feel in control of your trading activity is to begin by risking an amount that you sincerely do not mind losing. You should have no problem sleeping at night when you have a trade on, if you can’t sleep because you are lying in bed thinking about your trade than you have a problem, you are Forex trading addict, and the market is going to chew you up and spit you out faster than you believe. The market is uncontrollable, but you can harness the power of the leverage it provides by controlling your behavior by only taking A+ setups and consciously being aware of how much money you are risking per trade.

If You Enjoyed this article, Click the following links for more information on how to become successful at forex trading and habits of successful traders.

Can You Really Make A Living Trading Forex?

Aspiring traders often ask me whether or not it’s really possible to make a living trading the Forex market. The short answer is yes. The longer answer is, yes you can make a living trading the Forex market but you have to consistently do a lot of things right. Most traders simply do not yet possess the necessary trading skill, discipline, patience, or realistic attitude to succeed long-term in the markets.

However, this does not mean that it is impossible. You simply have to learn what you need to do to become a consistently profitable trader, and then do it. Easier said than done, I know. But, I am living proof that you can make a living trading the Forex market, and I personally know other people who make consistent money in the markets. So, it can be done. My story has ultimately led me down the path of helping other traders, so let me give you some valuable insight into what it takes to be able to trade Forex for a living…

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How much money do you need to make a living as a Forex trader?

The first thing you need if you want to make a living trading the Forex market is enough starting capital; if you are under-funded you will have to accept that you will not be making a living from trading Forex any time soon. The exact amount of disposable money that you will need in order trade full-time will be different for everyone. But, generally speaking, if you plan on effectively managing your risk on every trade, you will need a decent amount of money at your disposal in order to trade a large enough position size to make enough money to support yourself while at the same not risking too much of your account on any one trade.

Part Time trading for extra income is more easy to achieve in the early stages of you trading career. You can obviously still trade and make consistent money each month even if you don’t have enough money to allow you to trade for a living just yet. However, instead of putting pressure on yourself to make a lot of money really fast, focus on building a consistently profitable track record and self confidence and the money will follow. Even if you have a lot of money to trade with, if you do not focus on the mechanics of successful Forex trading, you will lose regardless. When I started trading, I started small, and when I became good, I approached people for money to trade, I built up my own capital and then went out on my own. People need to focus on becoming good traders and not focus on how much money they are trading, because let me tell you, if you are good, people will throw money at you to trade for them, and you will be fine in the long run (there are funds and private investors looking for good traders to trade for them, but you need to be good). My most sincere advice in the early stages of your trading pursuits is to aim to be a part time trader and a good one ! Big things will follow for you in the future if you can get this first part right.

So, yes, you do need a relatively large amount of money in order to trade full-time and be a player, but you still must be able to be a consistently profitable trader regardless. If you cannot make consistent profits on a small or medium size trading account you will not make them on a large account either, in the end it’s just Zeros .. $1, $100, $1000 per pip means nothing, it’s all the same.

Learn to trade the daily charts:

I trade mainly off the daily charts, and I teach my students to do the same. If you want to have a realistic chance at making a living as a Forex trader, you need to master trading the daily charts before all else. This is one of the most important pieces of the puzzle of being able to trade for a living.

The daily chart gives us the best combination of accuracy and frequency of price action trading setups. Meaning, you will get a much clearer, accurate, and more relevant view of a market’s price action on the daily chart than you will on any time frame below it. The weekly and monthly charts also provide a good clear view of a market’s overall movement, but they do not provide enough trade setups to be practical enough for the short to mid-term retail Forex trader. The daily chart gives us enough trade-worthy setups each month to be able to make consistent money, while at the same time filtering out a lot of the “random” and less reliable trade signals of the lower time frames. So, the daily chart should be your primary or “core” price action trading chart.

Trading full-time is not about over-analyzing and over-trading, it’s about being a “sniper”; making sure everything is as “perfect” as it can be before risking your money. Combining this high-reward / low-risk “sniper” mentality with a high-probability trading strategy like price action, is your edge in the market, and you must learn to trade the price action setups that I teach on the daily chart first. Focusing your efforts on trading higher time frames will give you a much better perspective on the markets and will greatly reduce the amount of trading mistakes you make.

Trading Forex for a living is the result of doing a lot of things right…

Trading the Forex market for a living does not only depend on being sufficiently funded and trading the daily charts. These two components are important, but there are a lot of other things you have to do too. Including the following:

• Learn and master a truly effective Forex trading strategy like price action.

• After learning and mastering an effective trading strategy, design a tangible and “working” Forex trading plan around it. Refer to this trading plan every day and tweak or update it as you learn and grow as a trader.

• Record your trades in a Forex trading journal and start creating a track record. This is important for keeping you accountable and helping you maintain discipline.

• Identify a logical and tolerable risk amount for every trade you take, do not ever risk more than you are comfortable with losing on any one trade. Practice proper Forex money management.

• Do not over-trade. Doing everything else discussed in this article will help you to not over-trade. But you really have to be consciously aware of this huge trading mistake. Most Forex traders trade too much and in my opinion this is the number one reason most of them fail to make a living in the market.

If you are properly funded, have mastered the daily charts, are consistently and perfectly executing your edge, are following your trading plan, are recording your trades, and not over-trading or over-leveraging, you have a very good shot at eventually making a living from the market. The trick is that you must do ALL these things right. You can’t just do one, you have to be on top of your game all the time to make a living as a trader; it’s not easy or get rich quick.

Learning to trade from a successful trader can help you achieve your goals faster…

Just like any other profession or skill in life is easier to learn from a mentor, learning to trade Forex from a skilled trading mentor is arguable the most efficient and effective way to achieve your trading goals. ( No this is not some marketing pitch lol, I am serious, you need to educate yourself and be around others with the same goals, that is the entire reasons I started my trading community in the first place, ie; to share ideas, to be around other traders who have similar goals and to continue my own learning journey).

For almost 4 years, I have shared all my technical price action trading strategies with the public in my trading course and members’ community. I provide aspiring traders with the necessary pieces of the puzzle, but it is up to them to put them all together, I cannot do this for you. There are many “human” elements to trading that will require much effort on your part to master. If you can master the technical aspects that I teach along with the human elements, trading for a living is a realistically achievable goal for you.