Finding The Holy Grail in Forex

The foreign exchange market can be very lucrative, especially if you found the Holy Grail. This Holy Grail of Forex is a trading strategy to allows one trader to always hit his take profit with pin-point accuracy with 100% precision. However, this grail has remained elusive similar to how it was in medieval times. This endless pursuit for the Holy Grail is futile because it never existed.

The Holy Grail of Forex will never be found because it doesn’t exist.

This begs the question, how does 10% of Forex traders consistently earn profits and is able to increase there capital in more than 1000% or even more? There are 3 things that separate these 10% from the rest of the 90% of losing traders and these are Psychology, Money Management, and Trading Strategy ordered in descending priority

Psychology

This skill is the most important yet sadly most underrated among the three pillars of becoming one of the 10%. Its a common story for a trader with a sound money management and a sensible trading strategy to burn his account because he lose one big trade and then made another trade not utilizing proper money management and not following his trading plan leading to his demise. We’ve all been there, I would be amazed if someone never experienced this and I would applaud them for that.

The time where you can detach your emotions in trading by letting your left hemisphere, the logical side, decide when to take a trade or cut a loss is the only time you will be ready for the next step.

Here are a few things that helped me improve my psychology:

  1. Find a trading partner — Consult this person whenever you take a trade. This person will ask you a few questions. Are you emotionally ready? Is this based on your strategy? Are you willing to take the risk? This will allow you to reassess before you jump in.
  2. Keep a journal — Don’t just track when, what, and how your traded. Also track your feelings about the trade. Understanding your emotions will help you understand which habits you should reinforce and which scenarios you should be more conscious of
  3. Set realistic expectations — Forex is not a quickly get rich scheme. Don’t expect that quitting your job and focusing on Forex will net you millions of dollars after a year. Do not over-trade or over-leverage, you will just lose your hard earned money.
  4. Join a community — Join a community of like-minded individuals who support each other both in success and failures. This community will serve as a pillar to lean to in times of failures, a place to celebrate success and a trading room to share strategies.

Money Management

Money Management comes hand to hand with trading psychology. It is more than just saying “I will only risk 1% of my capital per trade”. Well if you have a $100 account then $1 per trade sounds perfectly fine but what if you have $100,000? 1% of $100,000 is $1000. Are you willing to lose $1000 if things go south? The mentality of trading in Forex changes when you take into consideration the dollar amount and not just the pips in a trade.

Consider both the percentage and monetary value of each trade

Accept the fact that you will lose even with perfect setups and its your responsibility to cut your losses to a minimum.

http://www.investopedia.com/articles/forex/06/fxmoneymgmt.asp.

The table above shows how difficult it is to recover from a debilitating loss. Its best to cut losses short and let the profits run on. Greed plays a lot in these scenario. Do I cut loss now? Maybe price will reverse? Do I take profit now? Maybe price will keep on pushing to my favor?

Greed is good. Without greed you won’t be able to let your profits run?. Without greed you won’t be able to take your trade. But at the same time Greed can be bad. To much greed then a losing trade might very well destroy your capital. Balancing your greed with proper risk-reward ratios and leverage, psychology and proper exit plans to minimize losses and maximize gains will lead to better money management.

Trading Strategy

There are countless trading strategies out there. A quick look in Forex Factory forums displays 2,675 strategies given out for free. That is only from one site. Googling “Forex Strategies” will net more. A lot of the authors of these trading strategies claim 70–80% success rate which can be true depending on who uses it.

A trading strategy is a sword. It doesn’t matter if the greatest blacksmith in the world built it. In the hands of a recruit sent to the battlefield, only death awaits him.

If someone claims that their strategy has 100% success rate and wants you to pay for them to teach it. I call BS. So how do you come up with a profitable trading strategy? Understand that a trading strategy must match your personality and psychology. A trading strategy is not a one size fits all. With the vast resources available in the web you can find one or even develop one on your own.

What matters is that you hone your skill in the trading strategy you choose.

If there is one advice that I can give in developing your own trading strategy is to backtest. Backtest your strategy with historical data and see if it works then forward test it in a demo account until you have reasonable confidence that it works 80% of the time.

Summary

The path in becoming part of that 10% is long and tedious not because the Holy Grail doesn’t exist but because the most important traits to achieve is patience and discipline. There are two things I live by in trading and these are

  1. It isn’t the plan that will make you successful; it’s your ability to follow it.
  2. I would rather lose a trade following my trading plan than win a trade out of sheer randomness.

We’d love to hear your views on this