The perfect trading system

FOREX TRADING 101

INTRODUCTION


Trading internet foreign exchange (forex) is a very high risk business. It is important to have a sound Knowledge of the operation of the forex market and the risks involved to be successful. Forex market could be likened to a mighty ocean and retail traders are small fish swimming with sharks. It is very easy for such traders to be devoured within an instant resulting in financial ruins. Most traders often fall into this dangerous trap. The fact of the matter is that the odds are simply against the retail traders. The question at this point is how do you survive in very dangerous environment that has ruined the life of many? The statement that 95% of forex traders will end up being as failure is well-known to all forex traders. What are the things that a forex trader need to do to avoid being part of the statistics of failed trader and be counted among the 5% elites of successful traders?

WHY MOST NEW TRADERS FAILED

I considered it necessary to address why most traders failed because majority of them come to the market with the mindset that forex trading is the easiest way of making money. Having studied forex critically for the past six months by learning from leading forex websites, books, experienced traders in various forums, attending seminars and trading over 10 systems both in demo and life accounts, I have come to realize that what is required to be successful traders are quite simple rules. In the process, I have blown over five accounts both life and demo. I even reached a point where I was making constant profits on my demo accounts, but ended up still blowing my live accounts. Why am I a successful with demo accounts and end up failing with life accounts?


I will make efforts to provide answers to some of these questions in my next post.


ADDITIONAL INFORMATION

This thread has evolved over the last few years and one of the important posts which I thought I should share on this page is the "The mindset of a successful trader". This post encapsulate my trading philosophy. You should endeavour to look for the posts related to the steps mentioned here. These posts are some of the most important ones. As times goes on, I will provide the links to these important posts and update them depending on new findings. Knowledge is dynamic, it is not static. Read on.


THE MINDSET OF A SUCCESSFUL TRADER!

For those who have been following this thread for quite a while, you should have by now be in a position to trade with confidence. That notwithstanding, I will today discuss the following specific stepson how to think, act and develop the mindset of a successful forex trader:

Step 1: Trade the Masterchart. It should be your No. 1 guide. The levels on the Masterchats I posted here are products of extensive research. What is happening in the forex market is that series of bad/good news (fundamental), manipulation/greed by the big players (banks, hedge funds etc) and most times fear/panic by the investing public will always push the price from one support/resistance level to another. The truth of the matter is that the world economy generally is in shambles that is why you will constantly see series of bad economic news followed by series of good news resulting in “bull+bear+bull+bear” usually repeated over and over again on your weekly chart.

Step 2: Trade in the direction of the weekly chart: The most reliable direction in the forex is the direction of the weekly. If the weekly is in a bear/bull mode it could stay that way for 4-10 weeks. Read the post on understanding trend to better understand how to see the bigger picture using the weekly chart.

Step 3: The best trading opportunities are in the weekly: To increase your chance of success, sell only the top of nN, mM and buy around the base of V, U and W on the weekly charts. To identify these level signs, open a weekly chart, look closely and you will begin to recognize them. This simple trick will make your trading live a lot easier. I will begin to post this signs on this thread.

Step 4: Use money management: Use my recommended money management lots/account size ratio as follows:

0.01 lot for $1000 Trading account (max of 5 open trades at the same time)
0.10 lots for $10000 trading account (max of 5 open trades at the same time trades), etc

If you gather more experience or make money regularly, you can gradually increase your lot sizes or open trades to double the recommended lot sizes.

Go through the early part of this thread for a better understanding of my views of money management.

Step 5: Trade the daily trade-friendly chart: The weekly is your guide and the daily is your main field of play. Trade the daily chart following the direction of the weekly. Study some of the daily charts I have on this thread for better understanding of the daily charts.


Step 6: Trade 1000+ Pips circle. Read and understand the 1000 pips price actions analysis. For the major pairs from the pin of a weekly candle expect 1000 and more before any major reversal. If the destination of 1000 pips PAA is closer to a major support/resistance on the master chart anticipate a touch of that level. Identifies expected levels in advance and you only monitor price reaction around such areas.

Step 7: Avoid thinking in terms of pips. Avoid thinking in terms of pips but in terms of actual currencies e.g. cent, pence, etc. If you think this way you will avoid the graveyard of most forex traders (i.e. chasing low pips (below 100 pip). If you think in terms of currency you will realize that a move 1000 pips move by GBPUSD move from 1.54000 to 1.64000 is a mere 10 cents. Further a 1000 pips move on GPBJPY from 130 to 120 is a merely 10 yen.

Step 8: Use H4 50 Pips Price Action Analysis. Utilise price movement on H4 candles within 50 pips range to determine where to enter a trade. If you do this you will realize that you can have up 16 hours and more to enter a trade. Trading this way you do not need to sit in monitor your chart endlessly to get trading opportunities. In the worst case scenario you only need to check the chart every 4 hours.

Step 9: Enter trades using only M15 trade-friendly chart: When the price get to your desired areas on the higher time, enter your trades at the best discounts by using M15 on a trade-friendly chart. If you need further explanation read my previous post about creating a trade-friendly chart.

Step 10: Understanding the importance of 50 point level on RSI: 50 point level on RSI on your trade-friendly chart is usually an area where price normally stalls, changes direction or continues on any time frame. Study how price react at this point for a better understanding of price action.

Step 11: Set concrete zone on H4 chart: Price usually trade for most major currency pairs within 250-400 pips over a period of time within a concrete zone. The concrete zone is a good guide on where to place stop losses. For your short term trade, place stop losses slightly above the concrete zone for your sell and slightly below for your buy. Read my previous posts on concrete zone for better understanding of the concrete zones.

Step 12: Stop loss: Most traders recommend that you should not risk more than 2% of your account per trade. This is a fair recommendation, but I do not support tight stop loss. With my maximum recommended lot size/account ratio 2% account risk per trade on $1000 account size trading 0.01 lots is $20 i.e. 200 pips (If you trade the maximum you increase your exposure to 10%). The important thing about stop loss is money management, if your lot size is small you can afford to increase you stop loss settings and give your trades room to breathe. Read my views of stop loss in some of my earlier posts.

Step 13: Take profit at pre-determined level: Set your take profit at pre-determined points depending on your expected returns. If you are trading the weekly chart anything less than 200 pips is a waste of efforts. You should be aiming for 200 pips and above.

Ok, waiting to read your next posts, and find the Holy Grail

Live fails on psych or method, demo on method.

The Holy Grail is never caught, just chased. Some tire, others don't know when to stop, and a very few say, "This is enough for me."

This post made me feel like I was getting ready to buy something! lol

Really?

The first time I didn't feel like any fish, big or small, at all. After all, even the smallest fish was born with the ability to swim.

I felt more like someone pushed me overboard in the middle of Atlantic while I knew nothing about swimming. Either I learn on the spot, or drowned.

Plankton! lol

Cue regurgitated trading mantra.....

you mean shark's snack?

during my beginnings i lost 2 accounts only on my third one it kept growing till this day then i realized that losing the 2 first accounts was not my fault more then the fault of choice of a bad broker.
from these 2 experiences i lost respect for MT4 platforms, and learned it the hard way, now i can proudly say i m a one of protraders, if i can help anyone to become good in forex and have fun making good profits it will be an honor : )

always remember everything in life is simple, we human make it complicated lol

regards
tony

In my last posting, I promised to provide answers to some questions. To do this, I will first make an attempt to provide an insight into the reasons why most traders, failed with live accounts. These reasons are:

a) Lack of knowledge or understanding of the forex market: Majority of new traders jumped into forex trading without adequate knowledge of how the market works. And it well-known fact that people perish for lack of knowledge. Such traders jumped into forex trading without being equipped with adequate knowledge on how the market works and ended up being swallowed within an instant. If you don’t have enough knowledge on how the market work, never open a live account or only open micro accounts with less that 1o% of the amount you wish to trade with.

b) Most new traders think forex market in an avenue to get-rich quickly:Most new traders including this author are attracted to forex because of the misinformation that forex trading is an avenue to make quick money and the ultimate solutions to your financial worries. In fact, I was actually attracted to forex by the information that I can make between 10-30% of my account within 24 hours. How wrong I was! I started trading with the mindset to double my accounts every month. To achieve my target, I overtraded by opening many positions at the same time and whenever the market is in my favour, the reward is usually mind boggling. However, whenever the market turn against me, the consequence are usually disastrous. Most times, after increasing my account by 60% over two weeks or three weeks period, I often ended up blowing such accounts within two to three hours when the tide turned against me. The lesson is you should aim at realistic returns on your investments and increase your returns over time as you acquire knowledge, experience and expertise.

c) Under-capitalisation: Most new traders started trader with gross under-capitalisation and ended up being annihilated within seconds. Most people starting with ridiculous low amount of between $100-$500 and expect to turn it into millions within months. How ridiculous! In a market where $1.5 trillion dollars are traded on a daily basis, majority of the traders are small flies capable of being crushed in milliseconds. Forex is business and should be treated as such. My advice is if you don’t have enough capital to start trading, don’t ever dream of opening a live account. The fact that you don’t have capital should not discourage you. For a start you can build your trading capital over time while acquiring skills through demo trading. If you have less than $1,000, don’t ever dream of trading live.

d) Lack of trading plan: Most new traders enter trade without adequate trading plan or no plan at all. Such trading is akin to crossing a twenty-lane highway with your eyes close. For such a pedestrian, death is a sure certainty. Plan your trade to the last detail before your entry. Your plan should include, entry point, expected profit and exit point and retreat strategy (stop loss) if things go against you. Stick to this plan because it is your only chance of survival in this high risk endeavour.

e) It is not compulsory that you must enter any trade:Most new traders never want to miss any opportunity. No trade opportunity is compulsory as there are many more trade opportunities by the corner.

f) Be very sure of the direction of the market before you enter a trade

Most inexperienced traders believe that they can predict or anticipate the direction of the market end enter a trade with such erroneous belief. This is usually not the case. Most of them are often fooled by what sideways movements. For moving averages, look for sharp angles and an obvious degree of separation between the two lines to determine upward and downward trend. Once this separation is obvious and a few candles have opened higher than the previous (lower than the previous in the case of a downwards trend) the market has shown its true colors. At this point, you should be looking to pull the trigger.

g) Profit should never be your main motive principle

Most new and inexperienced traders go into trading thinking that they could begin to make profit instantly. The fact of the matter is that most businesses do not begin to make profit until their fifth anniversary. Furthermore, most financial investments would be rated 1st class if they are able to return between 10-20% annually. In spite of these obvious facts, most traders think they can achieve a return of between 30-100% on a monthly basis. In other to achieve their unrealistic target they gamble away money and ended up being losers. The forex graveyard is full of greedy traders. Please don’t be part of the casuality. Your profit target should be realistic. If you are able to achieve a return of between 2-5% on a monthly basis, you would have outperformed most blue chips investment outfits in the world. As a new trader, fund preservation should be your number first priority and profit distance second. Once you acquire experience, making profit will come naturally.

h) Cut your losses and live to fight another day

Most new traders hate losing money by closing loosing trades. They often leave such with the expectation that the market will turn around in their favour. The resultant effect is that 40 pips ended ground to 100, 200, 200 and perhaps 1000 pips. The main message is cut your losses and live to fight another day!


i) Psychological deficiencies

Majority of new traders are psychologically deficient to handle trading live trading. Their trading is guided by inadequate knowledge, greed, desires to get rich quickly amongst others which are perfect recipes for disaster. As a new trader, make your trading as mechanical as possible because you definitely lack the psychological control to handle live trading. Live trading is high pressure game and is not meant for the inexperience and faint-hearted.



In my next post I will address how to be a successful trade. Happy reading!

Having discussed why most traders failed, I will now discuss how you can avoid being part of the infamous 95% failed traders.



From personal experience and studying the experience of others, I have come to realize that what is required to be successful traders are quite simple rules captured in the statement “Acquire as much knowledge as you can about forex trading, have a detailed plan in place on how to achieve your desired objective and imbibe the self-discipline to abide by your strategy." I will now attempt to address the pre-requisite for successful trading:



1) Acquire adequate knowledge about the forex market: It is essential to acquire enough knowledge on how the forex market operates. You should have understanding of the basic components of the market such as:



a. What is forex?

b. The global nature of forex market

c. The role of the brokers in having access to the market

d. Forex Market Hours and their impact on your trading

e. "Bid" vs. "Ask"

f. Things that influences Price

g. Profit Potential in Both Rising and Falling Markets

h. Currency pairs – the majors and the minors

i. The impact of margin on your trading in terms of profit and losses

j. Contract size and margin call

k. Percentage in Points (Pips)

l. Fundamental and Technical analysis

m. Demo trading



2) Do not see forex trading as an avenue to get-rich quickly: Forex trading is not a get rich scheme. You should aim at realistic returns on your investments, and you will increase your returns over time as you acquire knowledge, experience and expertise.



3) Adequate capitalisation: Forex is a business and should be treated as such. To have a chance of survival you need a minimum of $1,000 and your target should be to increase it over time to between $10,000 - $20,000 before you can begin to expect appreciable returns on your investment



4) Trading Strategy and Plan: You should have a trading plan/strategy in place to guide your trading. Put differently, plan your trade to the last detail before you enter any trade. Such plan should include, entry point, expected profit and exit point and retreat strategy (stop loss) if things go against you. Stick to this plan because it is your only chance of survival in this high risk endeavour.



5) No trade is compulsory Do not enter a trade simply because you want to trade or the opportunity is too tempting to loose. No trade opportunity is compulsory as there are many more trade opportunities by the corner.



6) Be very sure of the direction of the market before you enter a trade: Never trade in anticipation of the direction of the market. Let the market shows you its direction and follow the trend. Trading against the trend should be avoided at all cost because it has led to the downfall of many. For example in case of moving averages, look for sharp angles and an obvious degree of separation between the two lines to determine upward and downward trend. Once this separation is obvious and a few candles have opened higher than the previous (lower than the previous in the case of a downwards trend) the market has shown its true colors. A candle is not a candle until it is fully formed. You need two or three candles to confirm the direction of the market.



7) Your main objective should be fund preservation: Your first priority should be fund preservation. You are not in trading to throw away your hard-earned money foolishly. It is better not to make any profit in your account in a whole month than lose all trying to chase unrealizable profit. The key to preserving your fund is money management. Do not expose more that 1% of your account per each trade and your total exposure at any point time should not be more than 10% of your account. In case of major disaster, you will still have between 99% and 90% of your capital to fall back on.



8) Set realistic target of profit for yourself and take whatever the market gives you: Set realistic target of profit for yourself and stop trading if you achieve your target. If you are able to achieve a return of between 2-5% on a monthly basis, you would have outperformed most blue chips investment outfits in the world. As a new trader, fund preservation should be your number first priority and profit distance second. Once you acquire experience, making profit will come naturally.



9) Cut your losses and live to fight another day: Trading without stop losses is a perfect recipe for disaster. Set your stop loss target before your enter any trade. This will put in control of your loss. Allowing the market to control your loss is a sure way to quick annihilation, because the market could be ruthless.



10) Trade higher time frames: As a new trader, avoid short time frames and only trade higher time frames to guarantee your success. Trade only 1 hour, 4 hour and daily time frames only as a beginner, anything lower would end up in disappointment and heartache.



11) Be a mechanical trader As a new trader, you are psychologically equipped to handle live trading on your. Make your trading as mechanical as possible. What this means is that you do your analysis, know the direct of the market, set up your trade with stop loss, take profit target ensuring this are within your money management zone and leave the market to do the rest. Leave the trade, close your laptop or computer if you can and go out and do other things. Check back later and if your analysis is right, your profit will be waiting in your account. Where you are wrong your loss will be very insignificant. ‘Baby-sitting’ your trade will definitely shorten your life-span. Live trading is high pressure game and is not meant for the inexperience and faint-hearted.




12) The first 3-6 months is crucial to your trading life: The first three to six months is crucial to your trading. If you are able to make profit consistently no matter how small over the first 3-6 months of your trading life, you will be on auto-pilot if you stick to the same strategy, improve on its flaw and maintain the same discipline.



I believe we have enough discuss enough theory for now. Beginning from my next post, we shall begin to discuss practical trading that will guarantee you success.

I will now discuss the ground rule for this perfect trading system


1) Confirm the overall trend of the market before you place a trade (1H or 4H Candles)


2) Trade only 0.01% of your account at any point in time (e.g. 0.01 lots for $1,000 account, 0.02 lots on $2,000 etc)

3) Set you stop loss at 200 pips or no stop loss at all (manually close your trade if your stop loss is approaching 200 pips

4) Max open trades - 5 at any point in time

5) Leverage 100:1

I will explain the ground rules in my next posting.

Let me digress a bit and share some trading signal here. 1.5703 is significant support level for GBPUSD. However, before you pull the trigger waiting until 1.5900 is broken and short around 1.5880.

Very Interesting, i would like to learn some more...

3) Set you stop loss at 200 pips or no stop loss at all (manually close your trade if your stop loss is approaching 200 pips

5) Leverage 100:1

OH MY GOD ! This is the holy grail!You will save all the universe!

simple reply to this thread,main reason for may traders broke is just because of wrong choice of broker.

broker plays an important role is failing and success of a trader.

the reason for many people's problems is not the broker. They may blame the broker, because they have absolutely no clue what they are doing. The reality here is that the vast majority of 'traders' on this site have no idea whatsoever as to what drives currency markets, yet they still expect to make millions from it. It is not the broker's fault that the client is underleveraged, or stupid. Proper brokers who meet capitalisation requirements are all safe bets. Slippage is a fact of trading I'm afraid. Those who think it is a scam by the brokers have no experience of stock trading with high volume (trying to get filled with thousands of shares can be very difficult).

I would recommend actually reading around the subject before getting into this business before actually risking a penny. You will soon find that forex has a tendency to be unpredictable, unlike stocks, as there are so many market variables in play, which you cannot forsee.

Due to the fact that the currencies are far more 'trendy' than the other markets, a good idea would be a simple trend following system, entering on retracements. However, watching option and futures volumes of the pair too at these levels. Or, you could try to use an 'overall market sentiment system' (ie basket trading methodology), but it is complicated. I'm part way through making sense of the workings of trader101s basic strategy, I'll be talking to one of Oxford's top economists in the new year to see his take on it.

Anyway,

Hope you have a fantastic Christmas everyone!

Emile

Interesting about what you think of MT4 brokers. If you are a scalper, yes I can see you might have some problems or feel you have, but once you become a position trader and you can wait hours, days or weeks in your trade I cant see how a broker can cheat you. I mean if price moves 100, 200, 300 or more pips in your favor the broker cant just stop price from moving on your chart when you can easily prove from other companies it has. I mean if you play with 20 pip stops you are asking the broker to take your money. If you understand the market some then you know this can happen at anytime and your money is gone no matter how much you study or am sure of a trade. So why would you consider MT4 brokers dishonest. I know some are but even they cant stop a chart from moving in your favor if you are holding a position long enough and your stop loss isnt too tight.

As promised in the last post, I will explain the five ground rules for this trading system beginning with Rule No. 1.

RULE NO. 1: Confirm the overall trend of the market before you place a trade (1H or 4H Candles)

‘Trend’ is the most critical factor that can make or mar your life as a trader. What drives the market is the herd mentality, momentum or the fact that majority of the traders are going in one direction. The question is how far will they go before the momentum changes? To be successful you must learn to follow the general direction and make sure you disembark before a change of direction. To clearly understand the direction of the market, H1, H4 and daily charts are your guides. To illustrate this statement look at the EURUSD H1, H4 charts below. You can clear see direction of market from the charts. The simple message is if the trend is up go long of buy and if the trend is down, go short or sell. Forget about the indicators on the charts for now, they are not of any great importance for this trading system. I inserted them in my early days in forex trading, but rarely use them now as the direction of the market is obvious enough to the eye without any aid. They could however serve as a guide or confirmation of the trend.

RULE NO. 2: Trade only 0.01% of your account at any point in time (e.g. 0.01 lots for $1,000 account, 0.02 lots on $2,000 etc)

‘Lot size’ is another is another determinant of whether you will be a successful trader or not. Forex trading is often attractive to investors because Forex trading offers such high leverage. Without high leverage most retail investors would not be able to afford trading in the Forex market. However, with increased buying power comes increased risk. A quick market move can then result in substantial losses. Rule No. 2 allows managing your risk effectively and reducing it almost to an insignificant level. In forex you start you trading from the position of a loss (i.e. traders’ spreads) and there is no guaranty that you will turn your loss into gain.

Now, let us look at the effect of unpredictable market movements on 3 traders. Trader1 (experienced, knowledgeable but a high risk Trader), Trader 2 (experienced, knowledgeable but conservative trader), Trader 3 (Experience, inexperience but understands market trend). Multiply the situation below by 2, 3, or even 10 and you will realize by the time Trader1 and Trader2 are blown out of the market, Trader3 (you can call him the Immortal Trader or Holy Grail Trader) is just scratching the surface of his account.