Earlier this week my daughter Lucy and I were watching “The Empire Strikes Back”; although I’ve seen it before, it was the first time for her (and she loved it). Like the other Star Wars movies, it’s filled with the usual “Force Teachings” – how fear leads to the dark side and so on. During the film my thoughts kept wondering around the idea of what a mind game Forex trading is. In my personal experience, I did not progress as a trader until I let go of my emotions (read “fear”). I was reminded of a flowchart I saw on the Internet and, although I cannot remember where I first saw it, I’ve re-created a similar one below:
Once I learned to be disciplined, indeed my account started to grow. Now with that growth comes a perceived increase in risk. Whereas I really tried to keep my risk to around 2%, that 2% increased in dollar value as the account grew. So with time I became more and more afraid to open up positions as I emotionally struggled with the risk. Now let me be clear, a trader must never, never take on more risk than they are comfortable with; however, I needed to adhere to my money management plan or my growth curve would flatten. Which means basically that, as I was comfortable trading 0.1 lot (one dollar per Pip) with a $1000 account, I needed to be comfortable trading a standard lot ($10 per Pip) with a $10,000 account, and so on. I literally cringed and my stomach churned the first time I traded at one standard lot, and yes, I panicked when that trade went against me, but I did have enough sense to let the trading plan prevail and allow my money management scheme to work for me (which ultimately it did). Did this mean I was my own worst enemy when it came to trading? Well, in many ways yes. My trading never really took off until I was able to completely separate the trading activity from my own emotions. For me this means that I will only focus on a chart when I’m not in a trade. When I identify a set up, and get my trade placed with appropriate stop loss / take profit set, I will study other charts, leave the room, read, or whatever. I tell you the truth, I never made a trade better by tampering with it. With my stops covered I just let the market do its thing!
One of the more interesting observations I’ve made over time was that as I became more experienced and comfortable as a trader, I stopped agonizing over losses, but I also stopped getting excited about profits. For me, that was the turning point that made a difference in my trading activities. Not that I don’t get excited from time to time when a trade performs better than expected, it’s just that I’ve learned to be disconnected emotionally from doing this. It’s just nothing to get excited about. It’s mundane. Just another day in the office.
Am I a highly experienced trader? Not in the least. I consider myself to be fairly new at this, and I’m learning Forex stuff every day. Every single day. To tell the truth, I think I spend more time studying the market, studying price action, experimenting with strategies, than I do actually trading. One of the important lessons I picked up is keeping alerts active on my charts because I can’t be watching 26 currency pairs all the time. And as I’m writing this I just had an alert go off; now I had decided a while back that one of these articles was going to be devoted to reviewing a live trade. Well today’s the day!
The subject trade will be on me GBP/AUD pair:
The downward pointing purple arrow is a Slick Trade “Follow the Trend” signal. The other indicators are supply and demand bars (read, blue and gray bars above and below the candles) and an oscillator that I was demoing and just started using on live charts. The blue line is a 50 SMA. When the signal came in price was below the 50 SMA at 1.7386. I placed a pending sell stop order of one standard lot at 1.7373, which you can see is the dotted green line on the chart above with a 10 Pip TP.
Next I added my stop loss just above the 50 SMA and increased my TP slightly; although I did drop it down after the screen capture to 1.7311, just above the blue supply and demand zone. The SL will trail stop at 10 pips – now all set!
That wraps up part one, come back next week and see how this trade played out as well as my reasons why I placed it, and a few more tidbits about this mind game we call Forex trading. Until then have a great week!
Miss out on last week’s Pipsqueaks article? CLICK HERE to access