Right Trading Psychology is Crucial for Forex Trading Success

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One needs to have necessary knoweldge, information to master something, but to be successful in it one also needs to have the right psychology. Or else all the hard work, knoweldge would be of no use. A Tennis player worked really hard 8 hours a day for 5 years learning every craft of Tennis be it service, backhand, drop shot, volley. But if the player has not attained right attitude and psychology then he/she can't be a great champion like Rafel Nadal, Roger Federer, Serena Williams. Because no matter how well trained a Tennis player you are you would face many obstacles like losing rhythm during a match, losing a match from a wining situation, injury. If, one can overcome all these with the right mental attitude then only he/she can attain Immortality in tennis. Same with Forex trading. One might have put 10 hours a day, studied many technical indicators, analysis, read charts like a maniac and developed a good trading system whcih gave great profit in the past. But if the trader didn't have right mental attitude and trading psychology then he/she would lose eventually despite having a winning system. To be a great trader like Warren Buffet, Gorge Soros one needs to develop the correct trading psychology. One needs to accept draw down, losses, losing from winning positions, market's crazy behaviour, and then trade responsibly like a robot without emotion to be a great trader.

Get the right attitude:

Besides learning the mechanics of Forex Trading and creating a Trading Strategy, for a trader to be successful, the correct trading psychology has to be cultivated.

1. Accept Results from your own Actions:

Most People tend to blame their fate on everyone else including their cat/dog/tv/phone but on them. No successful trader can be a success with that attitude. The trader has to take informed well planned actions with each trade and accept the outcome of the trade. Whether the trade is a win or loss the good trader accepts it in his own stride. Only then the trader can rectify the mistakes and have a better trading plan for long term success.

2. Develop/find a system which suits your personality

If one does something which the person loves doing and it fits the person's personality then success is a given. There are many kind of trading styles. Scalping- opening and closing trades in matter of minutes suits people who are edgy, who like speed. Then there is day trading which is again fast but has some respite time of few hours with each trade- it suits people who love controlled speed. Then there is swing trading where each trade lasts between few days to even few weeks. This is suitable for traders whose personality is more patient, who can wait with calmness for things to happen over a period of time. So, if a swing trader's personality trader does scalping then the trader would burn out in the same day. As, scalping is really fast and it needs speed, guts and being on your toes. Likewise a scalper personality trader trading swing trading would feel bored, empty for waiting so long to open a trade and even longer to close a trade. As, a result the person would open many unnecessary trades without any plan just to be in the market. Again calling for disaster. So, before finalizing a good trading system find what personality you have and then pick a system accordingly.

3. Trade with a plan

We might have the best ever trading system, but if we are not disciplined enough to trade our system as per the plan then we are doomed. Once we put a trade, we don't know if that particular trade would be a profit or loss. As no one can guarantee the market's direction in advance. We created a system where we found when traded long term our winning amount is more than losing amount, thus we are in profit. But that system didn't or wouldn't tell us the fate of each trade we place in advance. So, we might have a series of losses or series of winners. But our job is to trade without emotion and place each trade as per our original plan based on our winning system. Long term any good trading system traded with the plan would give profit.
  
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Various trading statergies used in Forex trading

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When one enters a position whether long(buy) or short(sell) one can either make profit or suffer a loss in it. Market moves either up or down, and to make money we need to trade in the direction of the market. The important question is 'how do I pick the right direction?

Strategies are a systematic and planned course of action based on market's behavior, price patterns and trend. There are a multitude of strategies for Forex trading. 

Trading Market's trend

Trend is your friend. Be it life or in Forex. Trading trend means trading in the direction of the market which is going on over an extended period of time. Currency pairs often take either 'bullish' (up) or 'bearish' (down) trend.

So, when one trades in the direction of the market it means the person is hopeful that the market would continue to trend in that particular direction for some more time. So, trader places a trade in market's trend and books profit. This strategy is by far the most popular strategy for trading currency.

Trends can be short-term trends or long-term trends. Every chart has time frames from 1 minute till monthly time frame. So, if the market of a particular currency pair is down in the one hour time frame for last few days then its short term down trend. One can enter a sell deal and book profit in few hours to a day. But the same currency pair might show up trend in day chart for last one month. It means long term the pair has up trend. One can enter buy trade with a little wider stop-loss and bigger take profit to be closed in a week or so.

The Ranging Strategy

The Ranging Strategy occurs when a currency is trading between a set upper and lower limit and seems to constantly bounce up and down between the high and low limit. For example- we see EURO/US is bouncing down when its reaching price zone of 1.3200 and it's bouncing up when the price is about 1.2945 time and again in the last few days/week. It means EURO/US is trading in the range between 1.2945-1.3200. So, to trade Ranging market one would go for sell trade when price is around 1.3200 and one would go for buy trade when the price is around 1.2945.

The Breakout Strategy

The Breakout Strategy is the break out of a sideways trend. It means trading in the new direction of the market which is formed when the price of a pair breaches a particular price from which market was bouncing up or down many times in recent times. For example- EURO/US was trading in the range of 1.3200 and 1.2945. It means the market was getting down the moment price was around 1.3200 and market was getting up the moment price was around 1.2945. So, break out strategy traders wait and see if the market finally manages to breach the range/bouncing points. So, if the market breaches 1.3200 by 20-30 pips there is a greater chance of market keep on going up in that direction for another 100 or more pips. So, break out strategy traders would enter buy deal when market breaches the bouncing price of 1.3200 by  decent amount of pips. Likewise- if the market breaches the bouncing up rate of 1.2945 by 25-30 pips trader would go short(sell) in that direction. So, break out traders basically trade the breaking of cycle or range of a currency pair.

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Understanding various forex trading indicators

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Understanding is very important for our life. If, you can understand what your BOSS(monster) is thinking then you can always be prepared to tackle the bullets the BOSS throws at you. Similarly if you can understand your girl's mind(come on- whom I am kidding) then you can always get her birthday, the Anniversary and other important dates in advance and thus save your soul from torture. Understanding Forex Trading indicators would put you in a very unique situation. You would be able to grasp the Forex market in a much better way. You can see sense in the crazy movements Forex market unfolds everyday. And most importantly your would be able to take an informed decision before each trade. Thus, you would put your self at an advantage in trading.

There are over hundreds of indicators but we just need 2-3 indicators to devlope a good trading system. Let's look at some of the most popular and effective indicators for Forex trading.

MOVING AVERAGE

Simple Moving Average (SMA) Here, the prices for a specified period of time is divided by the number of prices in that period to get an average. Each price is given an equal weight. As each new price becomes available, the oldest price is dropped from the calculation.

Weighted Moving Average Here, the latest price is considered more important than older prices. Example- While calculating a three-day weighted moving average, the latest price is multiplied by 3, yesterday's price by 2 and the oldest price three days ago by 1. The sum of these figures is divided by the sum of the weighting factors 6 in this example. This makes the weighted moving average more responsive to current price changes.

Exponential Moving Average (EMA) An exponential moving average (EMA) is another form of a weighted moving average that gives more importance to the most recent prices. It takes all past prices into the current average. The current EMA is calculated by subtracting yesterday's EMA from today's price, multiplying the result by a constant and then adding this result to yesterday's EMA to get today's EMA.

Benefit: Moving averages are very useful for trading because, (1) Reveal trends by smoothing out data by filtering out the market noises, (2) Identify points from which a new trend might start or existing trend might end, (3) Indicate shifts in market momentum based on the performance of price vs. a moving average or one moving average vs. another.

Reading signals: The simplest signal involves only price and one moving average. When the price is above the moving average, enter long(buy); when price is below the moving average, open short(sell) position.

Moving averages are often used in crossover trading systems. A buy signal occurs when a short-term or intermediate-term moving average crosses from below to above a longer-term moving average. Conversely, a sell signal is issued when the short-term or intermediate-term average crosses from above to below the longer-term average.

Because the moving average changes constantly with each new price data input, many traders test different time frames before they come up with a series of moving averages that are optimal for a particular market. The shorter a moving average, the more responsive it would be to short term price movements. Traders have to find the best combination of moving averages to make a system.

Pros/cons: Easy to understand and implement. There is already Moving Average lines in the trading platform. One just needs to decide the how many moving average lines needed, the period, and then put them on chart to test the results in previous trading days.

Bollinger Band

John Bollinger in the 1980s developed Bollinger Band. The Bollinger Bands are based on a moving average - usually 20 periods - with upper and lower bands two standard deviations above and below the moving average. These bands covers all the price points.

Purpose: Bollinger Bands indicate a market's volatility with just a glance at a chart and can provide significant clues for volatility-based trading strategies. These Bands help to see if the market would move up, down or go side ways.

During high volatility, the distance between the upper and lower bands get expanded; when volatility is low, the distance between the bands get squeezed. If the distance between the bands gets very wide like a big gap between the bands then it indicates the current trend is reaching its end. When bands get squeezed to look very narrow, it indicates the ranging market is about to end and a break out would happen to make a big move in the market.


Basic signals: The best way to trade with Bollinger Bands is when price is touching either the top or bottom band. When the price touches top band, it means end of up-trend so we enter sell deal, and when price touches bottom band it means end of down- trend so we enter buy deal.

Benefit: Bollinger Bands provide a good, quick visual reference of market volatility and can be used in many different ways. 

MACD


The origination of MACD is generally associated with Gerald Appel in the 1970s.

Purpose: MACD finds  overbought/oversold zones and identifies price trends, conditions measuring the strength or weakness of a trend and indicating the momentum of market movements.

Basic signals: The MACD indicator is used in several ways:

Crossover signals When the MACD line - the difference between the two EMAs - crosses below the signal line - the 9-period EMA of the MACD line - it is a bearish signal; when the MACD line crosses above the signal line, it is a bullish signal. Another crossover signal occurs when MACD crosses above or below the zero line.

Overbought-oversold If the 12-period EMA pulls away from the 26-period EMA or diverges dramatically, it indicates the market may be getting overextended and is due for a correction to bring the averages back together (convergence).

Divergence As with other indicators, MACD can provide early clues about the divergences between prices and the indicator. If the MACD turns positive and makes higher lows while prices are making lower lows, as illustrated by the black lines on the chart below, this could be a strong buy signal. Conversely, if the MACD makes lower highs while prices are making new highs, this could be a strong bearish divergence and a sell signal. Frequently, the indicator will be a better indicator of the direction of a trend than price itself.

Histogram alerts MACD can also be shown as a histogram with each bar showing the difference between the 12/26 MACD line and the 9-period signal line. A reading of zero means no difference between the two lines. When the size of the histogram bars grows or shrink, it could be the first alert that the underlying strength or weakness of the market is changing. Note in the red box on the chart below that the histogram bars began to shorten several periods before the MACD line and signal line and before the crossover signal. This might be an early entry/exit clue for an aggressive trader. A more patient trader might wait for the histogram to move above the zero line to buy or below the zero line to sell.

Pros and cons: MACD identifies trend direction and tells us if the trend is losing strength or not by using moving average. It provides us an early signal of trend reversal. At the same time, MACD is a lagging indicator like moving averages and requires rather strong price movement to generate a signal. It can work very well in a market that makes broad price moves but may get bogged down in choppy trading situations.

Stochastic:

The stochastics indicator is often associated with George Lane.
It works like this. When prices are moving up, closes will tend to be near the top of the price range for a given period. Then, as the market nears a top, closes will slip back from the top of the range, suggesting a loss of momentum. Similarly, when prices are moving lower, closes will tend to congregate near the lower end of the price range for a given period. Then the downward pressure diminishes, indicating a loss of momentum.

Stochastics is intended to be an indicator that reflects changes in momentum, either up or down. It does not give specific prices but only offers clues on price direction. Although the premise of stochastics seems plain enough, its computation is more complex and best left to analytical software.
The clues are provided by the interaction of two lines. %K, the more sensitive line, determines where the current close is relative to the price range for a given time, typically 14 periods. %K is a percentage figure to show where the close is within the total price range for the selected period.
%D is a three-period moving average of %K in the fast stochastics version or another three-period moving average of %D arrive at a smoother, slow stochastics version favored by most traders who use this indicator.


Basic signals: Stochastics produces several different trading signals:

• Extreme readings in %K and %D. In general, a reading above 80, the dashed green line on the chart below, indicates an overbought situation and a potential turn down. A reading below 20, the dashed red line on the chart, indicates an oversold condition and a potential turn to the upside. A reading of 0 does not mean a price bottom but extreme weakness in prices
• Crossovers of %K and %D when the two readings are in the overbought (80-plus) or oversold (20 and below) zones. Sometimes the turn may not occur until after a second crossover. The arrows on the chart below show several situations where the crossovers led to timely buy or sell signals as a new trend was beginning.
• Divergence between the indicator and price action - that is, prices make a higher high but the indicator makes a lower high or prices make a lower low but the stochastics lines make a higher low. The solid black lines on the chart are examples of divergence at a low and at a high. Divergence is one of the most useful signals for a number of indicators, not just stochastics.

Pros/cons: Stochastics signals work great in side ways and ranging markets. But in strong trending markets they continue to show the same reading of number of periods and can't provide any valid trade signals.

 
RSI

Relative Strength Index (RSI) is one of several innovative technical indicators introduced by J. Welles Wilder Jr. in his 1978 book, New Concepts in Technical Trading Systems.
There are really two different uses for the term "relative strength." The first suggests the strength of one market vs. another or how a market or market sector compares to some benchmark. The second usage refers to the strength of a price move for one period against the strength of a move for another period and in this usage serves as a measure of momentum.

One of the problems in analyzing prices is that they sometimes make sharp, erratic moves that can distort the overall picture of strength or weakness for a market, especially when one of the older erratic moves drops out of the calculation. Wilder's RSI provides a smoothing effect for these changes and places the current strength of a market within a 0 to 100 scale.
Relative Strength takes the average of the up closes for a given time period and divides that up average by the average of down closes during that period. Typically, 14 periods are used for RSI, but the number can be more or less, depending on the sensitivity of the index desired. That can vary to fit the time frame the user is trading.
By plotting RSI on an index scale of 0 to 100, a move to above 70 can suggest an overbought situation that might lead to a downturn or a move to below 30 can suggest an oversold condition that might lead to an upturn in prices. (Those thresholds can change to 80 in bullish markets or 20 in bearish markets.)

As with a number of other indicators, RSI is most effective when its readings are at the upper or lower extremes of the scale. When the RSI moves above 70 and then fails to move above a previous peak and falls through the downside of a previous dip, prices can be expected to move lower. On the other end of the spectrum, a bottom failure occurs when RSI drops below 30, then fails to set a new low and moves above a previous peak.
Several examples can be found on the chart below. The first is a buying situation on a bottom failure when the second low is not as low as the first low and RSI breaks out higher. The second is a signal for a selling opportunity when RSI tops 70, the second RSI high is below the first high and RSI drops below the RSI low. Of course, not every move above 70 or below 30 results in a great signal so any trading requires sound money management techniques.
As with other indicators, divergence between the direction of prices and the RSI line is also an important clue that RSI has detected an underlying change in market conditions and prices may be about to turn in the direction of the indicator, as the chart illustrates. These clues can be used in conjunction with traditional chart pattern or moving average analysis.
 
Pros/cons: RSI works great in giving us the over bought and over sold zones. So, we can make good profit by entering trades in trend reversals. But during strong trending markets RSI fails to show trend reversal correctly.

CCI

The Commodity Channel Index (CCI) was developed Donald Lambert and was designed to compare the current price with a moving average for a specified time period by using a constant divisor based on deviation to normalize the oscillator. The indicator is usually based on 20 periods, but some users have tied the time span to the length of price cycles for a given market to produce a channel within which most of the price activity is expected to take place.

CCI finds the value of the current price in the context of a series of prices over a range of time, which can be varied to make the reading more or less sensitive. The intent of the index calculation is to have the indicator reading fluctuate between +100 on the upside and -100 on the downside, with moves outside of those boundaries providing signals for trading positions.


Basic signals: To trade based on CCI, the basic parameter is to buy when CCI crosses 100+ and sell when CCI crosses below -100. But some traders trade it in the opposite way. That is - they consider +100 as overbought so they sell there and for them -100 is oversold so they enter buy. 

Benefit: The CCI like Bollinger Bands is very easy to interpret to decide about market's directions.

The above indicators we discussed in details are the most popular and productive indicators. We have discussed the default parameters of those indicators as per the Developer's description. But one can easily research the above indicators with different parameters and find a more profitable trading system. The idea is to use 2 or maximum 3 indicators with the best parameters and enter buy or sell when all the used indicators are showing the same market direction. To reach into conclusion that we have a good trading system one needs to back test minimum 3 months trading results in at least one currency pair and see if the system has given minimum 8% average monthly profit without ever touching cumulative draw down of 20%. Once we find that elusive combination to get this result we are on our way to Forex trading glory and financial freedom.

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Life is full of opportunities when one sees the potential more than the problems.


Disclaimer- Like any other business Forex Trading too comes with certain risk. One might lose money if not done properly. Never invest money you can’t afford to lose. That’s the first rule for any business. Forex Trading is not suitable for everyone

Why Forex Trading can be the Best Business in the World?

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Why Forex Trading can be the best business on planet earth:

a)      Forex trading has no competition: In Forex trading we have literally no competition. There is no risk of more people trading Forex. As, more people trading Forex brings more movement in the currency pairs. Thus, it would give us more chance to trade and profit. But with other businesses they always fear new entrants in the same sector. Because it eats out their market share and profit. And if the new entrant is very good then the more experienced company might lose its entire market share. But In Forex- traders welcome more and more new traders to make bigger profit with the movement they bring with them, 

b)      No Operating Expenses: Forex trading is done from home over the Internet. So, we don’t have any operating expenses which normal businesses have like paying salary to employees, paying Office/Shop rent, Advertisement cost, Stationary cost etc.

c)        Works in every financial condition: Most businesses be it Retail, Real Estate, or IT sector get affected severely during recession. As, people struggle to earn money during recession their spending in most things get reduced. So, most businesses get hugely affected during recession with very less sales and profit. But in Forex the market is very huge with 4 trillion$ daily turnover. And 80% of the turnover in Forex market is done by Banks. During recession Banks put more money into Forex market to take advantage of the huge movement Forex market gets during recession. Forex traders make profit from movement, the bigger the better.

d)      No saturation:  Even the best of things get saturated when everyone starts doing it. So, if there are 10 Car companies for 100 million people all would get good profit for selling Car. But if there are 100 Car companies then the supply would get more that demand. Thus it hits saturation point. But in Forex the more people enter Forex the more movement they would create with their activities. And movement is a blessing for Forex traders to make profit.

e)      No selling to be done- In most businesses selling is the most important aspect to make profit. Be it a Service provider company like a Spa or a product based company like a Car Company. The company has to find buyers to buy their services/products to make profit. This is a very time consuming and expensive procedure. And also the same services/products are provided by many other rival companies. So, it’s hard to sell. But in Forex we are not selling anything to a person. We are just exchanging one currency with another currency. So, 24 hours a day 5 days a week we can buy/sell a currency in exchange of another currency without begging anyone to buy it from us. We always can sell/buy in Foex market,

f)       Profit potential- The most important aspect of a business is the profit potential. Due to the excessive competition in most business sectors targeting a profit of 20-30% yearly is the most. And to make 30% yearly profit one has to do so many things to get there. And it takes huge investment too. But the beauty of Forex trading is- If we can develop a good profitable trading system then we are going to make 50-100% return per year with even 500$ investment. Yes, many Forex traders are making in excess of 100% returns per year. For that, they don’t have to sell anything or leave their house, or fear competition. All they have to do is turn on their computer and trading Account, work 2-3 hours a day, and put some trades. That’s all they have to do. 100% return per year in Forex is very realistic and it beats return of any other business in the world by a huge margin.
                                                                                                    

Life is full of opportunists, when we see the potential more than the problems.

Disclaimer- Like any other business Forex Trading too comes with certain risk. One might lose money if not done properly. Never invest money you can’t afford to lose. That’s the first rule for any business. Forex Trading is not suitable for everyone

Money Management and Risk Management in Forex Trading

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Even when there is immense love between the Couple still the success of a relationship depends on how much effort a person gives to make the partner happy. And the person has to also see how much he/she is getting in response. If, the persons is putting enough efforts to make the relationship work and also getting proper reward from the partner for his efforts then the relationship would work. Likewise, in Forex trading too we might have the best trading system which has given big profit in the past and is giving profit in the present. But if we are not trading our Account with proper Money management and Risk management then we are going to fail eventually. Let’s know the importance of proper Risk and Money Management in Forex.

We worked hard, analyzed many charts, many indicators, support/resistance, and came up with a good profitable trading system. We back tested it for last six months, and found it gave us profit. Great job. You are a Champion. But you are yet to win the trophy. You just gained the skill to win the trophy. But to actually be a Champion you need to play the match, overcome the difficulties, and be a winner. In our case we have to trade live, see off the difficult loss making period and come out as a profitable trader. But to be in that position we have to have proper Risk and Money Management.

Let’s say we found in our last six months testing the highest draw down we had in terms of pips in our system was 500 pips, and average net profit was 250 pips per month. It’s still a great system even though the average draw down is double than the average monthly profit. It’s simple our system ending each month on an average in profit, so even if the draw down is bigger than the profit, it doesn’t matter. Now, we need to see how Money management and Risk management can make or break our trading Account.

Scenario 1- We have 300$ in our Account, we put 0.10 lots per trade at 100 leverage where one pip is 1$.  We need 100$ to open 0.10 lots. We made 200 pips profit in first 10 trades. Great our Account is now 500$. Then the loss streak started and we faced our highest draw down of 500 pips which is a loss of 500$. Now our Account is 0$ in balance.  Our Account is wiped out. We can’t trade anymore. Then we kept on forward trading the system on paper and found out our system worked great covered the losses and ended the month with 250 pips profit. But we ended the month with 0$ when we had started with 300$,

Scenarios 2- We have 300$ and we put 0.01 lot at 100 leverage. Here pip value is 0.10$. We started facing the highest draw down in the start. So, we faced 500 pips loss or 50$. Our Account is now at 250$. To trade 0.01 lots we need just 10$. We have 250$, many more times equity than the need. We kept on trading our system, it covered the losses, and we ended the month with 250 pips profit which is 25$. We ended the month at 325$ with a 25$ profit which is 8% profit in one month. Great result.

From above we can see we traded both the Accounts with the same system same way but one Account ended with 100% loss while the other one ended with 8% in profit. So, now we see the importance of proper Money management. No matter how good our trading system is we would face a series of losses and we have to be ready for that. Never ever allow your Trading Account to go beyond 20% draw down. That’s not accepted under any circumstance. So, see what the historical cumulative draw down was as per your system in last six months, add another 100 pips for safety as our future highest cumulative draw down. Then plan your Money management. Let’s say we found our highest draw down was 600 pips and monthly average profit was 400 pips in last six months as per our system. Then we would add 100 pips to our highest draw down of 600 pips. So, 700 is our new maximum draw down. Trade like this- 0.01 lot for every 400$ in the Account, at 100/50 leverage. So, even if we see 700 pips draw down our Account would still have only 17.5% loss. And as we are ending with 400 pips net profit each month, thas 10% monthly profit. Likewise if our system gave us only 200 pips maximum draw down in last six month. Then add 100 pips to it. So, total 300 pips expected maximum draw down. Our money management would be 0.01 lot for every 200$ in the Account at 100/50 leverage. So, if we faced 300 pips draw down that’s only 15% draw down. And as the system is giving 200 pips average net profit per month then we would end each month with 10% profit. Very impressive and commendable. So, plan your Money management as per the above examples based on the highest cumulative draw down of your respective trading systems.

The 2 main objectives of proper Money Management are,  1- We need to be sure that we have enough equity in our Trading Account to keep on trading and cover the losses and make net profit, 2- We need to keep the draw down inside acceptable limit to avoid unwanted mental pressure. A draw down of 50% in Account would give any good trader sleepless nights, even when his system is very profitable on long run.

Risk Management:

 It’s taken care of first before Money management. Risk management is planned while developing a profitable trading system. Forex trading is a probability business. So, the more powerful we plan our system with high probability the better our chance would be to make profit long term. Always, keep your winning trade size minimum 2 times than the losing trade. In other word our take profit should always be minimum 2 times more than the stop loss size. For every 1$ we are risking in case of a loss we should make 2$ minimum in winning trades. That way, even if we win only 40% of our trades we would still be profitable. This is putting us in advantage even before placing a trade. But don’t use too big profit size as that might be hard to achieve with regular frequency. The best win to loss ratio is 2:1 and 3:1 ratio.

So, now with a good trading system proper Money and Risk Management we are on our way to make constant return from Forex trading.

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Disclaimer- Like any other business Forex Trading too comes with certain risk. One might lose money if not done properly. Never invest money you can’t afford to lose. That’s the first rule for any business. Forex Trading is not suitable for everyone