When I first learned to trade futures back in the 1990’s, I was mentored by some of the best. The early lessons given to me at that time remain with me to this day. When we learn to trade, it tends to be a bottom-up process. We learn to chart, to calculate support and resistance, to determine trend lines.
But I am a top-down guy. That’s the way my brain works. And for many, it is important to have a top-down view of things, a structure in which to place the many details that we learn as we go along. So nearly twenty years later, here is my top-down advice to all Forex traders, my three pillars.
Pillar One: Forecasting
Never confuse forecasting with trading, and never let your forecasting supersede your trading. Forecasting involves both time and price. Why is day trading so popular? Because it does not involve forecasting and most traders do not know how to forecast.
Most technical analysts do not even pay lip service to timing. Yet forecasting involves recognising established cycles and learning to anticipate the moment when the market is most likely to reverse its trend. If that moment occurs when the market is meeting support or resistance, then your chances of success are very high.
I recommend the works of W.D. Gann as a starting point to understanding time in the markets. When you begin to recognise time cycles, and you know in advance when the market is likely to reverse its trend, your trading takes on a whole new dimension. However, you must not fall in love with your forecast to the point where you ignore the market’s signals. If the market is telling you your forecast is wrong, listen. But until that happens, stick to your guns and get in the market. Which leads us to pillar two.
Pillar Two: Entry Techniques
As a trader you need at least two and preferably three rock solid entry techniques. What is a rock solid entry technique? It is a technique that when deployed gets your trade to a breakeven status eighty percent of the time. Because the market is not going to let you have all that money without putting up a fight just because you can forecast.
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You need to preserve capital. Even when you pinpoint the exact day and hour of a market reversal you can still get a bloody nose. When you nail down two or three reliable entry techniques, stick with them and don’t improvise when it comes to making your trade.
Your repertoire of techniques should include both stop and limit orders. Limit orders give you the best fills, when they work. Stop orders force you into a position when the market moves in your direction even if your limit price was not met. By deploying reliable entry techniques at the time indicated by your forecasting, you will make good trades.
Pillar Three: A Pit Bull Mentality
Now that you can forecast the right time to enter the market, and you can deploy a repertoire of entry techniques, the market will still try to stop you out. You make your trade. The market moves in your favour then comes back and goes into negative territory for three hours just to wear you down. When your stop is finally hit you’re so tired that you’re ready to call it quits and wait for the next move. That is not a pit bull mentality. Because the next move is going to do the same thing again.
When you get knocked down, pick yourself up and get back in there. Find out what is a reasonable price to pay to make that move. This will give you an extraordinary amount of peace. For example, if you know that each move is likely to give you ten to fifteen times your risk, you can easily accept two or three losers as your cost of entry.
You will not be fazed after each loss. You will just get ready to enter the market again. If you have this mentality and you repeatedly use reliable entry techniques, one of them will pay off. You may find that it takes three or four tries before you catch a profitable move. But boy, is it worth the effort!
You will never stop learning about the markets and improving your own skills. Now you have a framework to put these lessons into. Everything you learn will fall into one of these three categories: forecasting, trading or attitude. Master all three and you will master the markets.