Examine your strengths and your weaknesses, then ask yourself how you might react if you perceive an opportunity or how you might react if your position is threatened. This is also known as a personal SWOT analysis. But do not lie to yourself. If you are not sure how you would act, ask the opinion of someone who knows you well. Match your personality to your trading: Be sure that you are comfortable with the type of trading conditions you will experience in different time frames.
For example, if you have determined that you are not the kind of person who likes to go to sleep with open positions in a market that is trading while you sleep, perhaps you should consider day trading so that you can close out your positions before you go home. However, you must then be the kind of person who likes the adrenalin rush of constantly watching the computer throughout the day.
Do you enjoy being computer-bound? Are you an addictive or compulsive person? Will you drive yourself crazy watching your positions and become afraid to go to the bathroom in case you miss a tick? If you are not sure, go back and re-audit your personality to be certain. Unless your trading style matches your personality , you will not enjoy what you are doing and you will quickly lose your passion for trading. Be prepared: Plan your trade so you can trade your plan. Preparation is the mental dry run of your potential trades—a kind of dress rehearsal.
By planning your trade in advance, you are setting the ground rules, as well as your limits. Be objective: Do not become emotionally involved in your trade. It does not matter whether you are wrong or right. What matters, as George Soros says, is that "you make more money when you are right than what you lose when you are wrong. It is a matter of training yourself to accept that not every trade can be a winning trade, and that you must accept small losses gracefully and move on to the next trade.
Be disciplined: This means that you have to know when to buy and sell. Base your decisions on your pre-planned strategy and stick to it. Sometimes you will cut out of a position only to find that it turns around and would have been profitable had you held on to it. But this is the basis of a very bad habit. Don't ignore your stop losses —you can always get back into a position. You will find it more reassuring to cut out and accept a small loss than to start wishing that your large loss will be recouped when the market rebounds.
This would more resemble trading your ego than trading the market. Be patient: When it comes to trading, patience truly is a virtue. Learn to sit on your hands until the market gets to the point where you have drawn your line in the sand.
If it does not get to your entry point, what have you lost? There is always going to be an opportunity to make gains another day. What is a realistic expectation? Most of them achieve much less than that and are well-paid to do so. With anything in life, if you don't know where you are going, any road will take you there. In terms of investing, this means you must sit down with your calculator and determine what kind of returns you need to reach your financial goals.
Next, you must start to understand how much you need to earn in a trade and how often you will have to trade to achieve your goals. Don't forget to factor in losing trades. This can bring you to the realization that your trading methodology may be in conflict with your goals.
Therefore, it is critical to align your methodology with your goals. So how many pips can you expect to earn per trade? Take your last 20 trades and add up the winners and losers and then determine your profits. Use this to forecast the returns on your current methodology. Once you know this information, you can figure out if you can achieve your goals and whether or not you are being realistic.
Cash is the fuel needed to start trading, and without enough cash, your trading will be hampered by a lack of liquidity. But more important, cash is a cushion against losing trades. Without a cushion, you will not be able to withstand a temporary drawdown or be able to give your position enough breathing space while the market moves back and forth with new trends. Cash cannot come from sources that you need for other important events in your life, such as your savings plan for your children's college education.
Cash in trading accounts is " risk " money. Also known as risk capital, this money is an amount that you can afford to lose without affecting your lifestyle. Consider trading money as you would vacation savings. You know that when the vacation is over the money will be spent and you are OK with that.
Trading carries a high degree of risk. Treating your trading capital as vacation money does not mean that you are not serious about protecting your capital; rather, it means freeing yourself psychologically from the fear of losing so that you can actually make the trades that will be necessary to grow your capital.
Again, perform a personal SWOT analysis to be sure the necessary trading positions aren't contrasting with your personality profile. Pick a currency pair and test it over different time frames. Start with the weekly charts, then proceed to daily, four-hour, two-hour, one-hour, minute, minute, and five-minute charts. Try to determine whether the market turns at strategic points most of the time, such as at Fibonacci levels , trendlines, or moving averages.
This will give you a feeling of how the currency trades in the different time frames. Set up support and resistance levels in different time frames to see if any of these levels cluster together. For example, the price at Fibonacci extension on the weekly time frame may also be the price at a 1.
Such a cluster would add conviction to the support or resistance at that price point. Repeat this exercise with different currencies until you find the currency pair that you feel is the most predictable for your methodology. Depending on how developed the system is, this may simply mean where to set the stops and when to realize profits or it can be more complex and include follow-up actions in separate asset classes like options to increase or hedge positions as the market trend continues to develop.
Forex system trading can be based on a set of signals derived from technical analysis charting tools or fundamental news-based events. Forex trading systems can be either manual or automated. For most day traders, a forex trading system is usually made up of technical signals that create a buy or sell decision when they point in a direction that has historically led to a profitable trade.
The system is generally comprised of a trading plan that outlines what a trader should do when the signal is identified and a trading journal report that captures what was done and why for future analysis and refinement of the system. This is manual forex system trading that anyone can engage in. Running a manual system involves sitting at the computer screen, looking for signals, and interpreting your results to decide what to do. In an automated forex trading system , the trader teaches the software what signals to look for and how to interpret them.
It is thought that automated trading removes the emotional and psychological components of trading that often lead to bad judgment. Automated forex system trading also tends to reduce human error and reduce reaction time when certain levels are breached.
More complex automated systems also come with common strategies and signals loaded in so the trader can combine several approaches in their system with relative ease. Both automated and manual day trading systems and signals are available for purchase. That said, when it comes to manual systems traders sometimes find the process of developing their own part of the learning curve to becoming an effective trader. It is important to note that there is no such thing as the holy grail of trading systems.
If the system was a perfect money maker, the seller would not want to share it. This is why large financial firms keep their black box trading programs under lock and key. They have invested significant capital in developing a system that can produce profits, and sharing that model widely would remove their competitive edge. Advanced Concepts.
Technical Analysis. Automated Investing. Your Money. Personal Finance. Your Practice.
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We will guide you through the process of designing your own forex trading system. Here are six steps. We will guide you through the process of building and developing your own forex trading system. The first thing you will decide on when building your trading system is what timeframe you will be trading. If you prefer shorter trades and.