Greetings Forex Factory.
I'm a retail trader with just over 5 years experience trading foreign exchange markets. When I began I had absolutely no idea what I was doing, but despite this I was 100% hooked in a very short space of time. Despite consistently losing money in the early years, I found myself having that constant feeling in the back of my mind that trading was something that I could very well succeed at if I could only apply myself for long enough.
They say that 90% of traders will never become consistently profitable. They're correct. This business is tough both mentally and emotionally.
Happily, I can now say after 5 years that I am a consistently profitable trader. I make more money than I lose, and have experienced trading in enough different kinds of market environments to be comfortable in all of them. In addition, I'm aware of my strengths and weaknesses as a trader and know how to capitalise or avoid them as necessary.
Despite saying this, I know that I am only one part of the way down this treacherous and difficult journey towards mastery. My hope is that by making and keeping up this thread I will be able to fine-tune my strategies and risk management even more.
This thread is also my way of giving back to the Forex Factory community, who if nothing else, helped me to discover my own identity as a trader. I hope that it helps you in your own journey.
Improving Yourself
Let's start of with a definition of a consistently profitable trader. Note that this has my own spin applied and may not be the same as how another person might explain it.
A trader who consistently makes more money than they lose, taking into account other related costs such as:
- Brokerage fees
- Cost of setting up / running equipment such as a PC, trading platform etc
- The time cost of money; in other words if you could be out earning money in a "regular job" for 8 hours at $20 per hour, you should be making more than $160 per day across a reasonable period of time trading the markets.
Now it could be argued that a person trading micro lots and making consistent albeit small gains on an ongoing basis is consistently profitable, however for me personally, I want to trade for a living. I trade for a number of reasons, but one of those is so that I don't have to work a 9-5 job. With this in mind the bare minimum for me must then be that I should earn more from trading than I otherwise would in a regular job (in the long-run). In addition, there is a significant difference in trading micro lots and multiple contracts. Psychologically it is a very different ball game; I know from personal experience that you can be making a 2-3% daily gain on a micro-sized account and then try to translate that directly into a larger account and fail miserably. This is because when you introduce real money, and more of it, you must exercise greater self-control and emotional stability in order to trade. This is not an economy of scale! The more money there is involved the more difficult it is until you can develop a system for managing your emotions and managing yourself.
-- More to Follow --
The System
Firstly a disclaimer. Anything written here is an idea of my own and in my experience works well with my interpretation of the market as a whole. I may make statements that do not align with what others have said, however that is because these concepts are ones that I have developed/assimilated over time for myself and my own trading style and they may not work with other approaches to trading.
First and foremost, you must have at least some idea of the overall fundamental state of the instrument which you are trading. To use a current example, if you're trading almost anything right now you should be thinking of the possible effects that the Greek financial crisis will have on your positions. If I'm planning a long position on a EUR futures contract right now I should be exceptionally wary of the current downside risk. Some traders base their trading purely on fundamentals while others ignore these completely and trade only the patterns they see on a chart. I have tried both approaches and there are merits to both, but in my experience a healthy balance of both is essential. In short I would describe myself as a technical trader who makes decisions with fundamental occurrences in mind.
Secondly I will begin a top-down analysis of the markets which I trade. This starts with the Daily, 4 Hour and 1 Hour charts. On these three time frames I use a few strategies to analyse potential price movements:
- Conventional price action analysis. There is a lot information on this forum about this, personally I use price action such as pin bars, inside bars and engulfing bars as modifiers to the probability that a trade will succeed. I never use them as the origin for a trade idea, only to support a trade that I am already considering.
- Supply and Demand Analysis. I discovered the Sam Seiden (Online Trading Academy) brand of SD trading a while back and have found it immensely useful in developing my own concept of how large institutions manipulate price. I use it to determine price points where there exists an imbalance between buyers and sellers. These price points tend to make for higher probability trades. A good portion of their methodology is available online for free.
- Trend lines and channels. When trading I am always looking for value in price. You'll often hear people talking about "going with the trend" or "buying low, selling high." Some people might have you believe that these are mutually exclusive ideologies, in other words that you cannot go with the trend at the same time as buying low and selling high. I would argue that this is not the case. In the below chart you will notice that the price is presently in an uptrend. I like to describe a trend from a technical perspective using an equidistant channel. If I sell when price nears the top of the channel and buy at the bottom, I am both going with the trend AND obtaining value. I find this to be a high probability approach.
Third, I drill down to the 5 and 15-minute time frames in order to develop an intraday perspective on price movements. I will typically rely heavily on trendlines and price action here.
The most important time frame for me is the 1-minute chart. Here I draw horizontal lines to indicate round levels, the ones I use are .00, .25, .50 and .75. I find that more often than not a price imbalance at a round level will be 1) more likely to result in a profitable trade and 2) will move further in the direction of profit, letting me set more aggressive targets on a setup involving a round level.
I use the ADX indicator as a filter for trades. This is one rule I do NOT allow myself to break; for a long trade the red (downwards momentum indicator) line must be above 40 on a 14-period ADX. For a short trade the green (upwards momentum indicator) must be above 40. I will very rarely, if ever take a trade that doesn't have an ADX signal supporting it. This rule has stopped me from entering the market prematurely on many occasions.
Last of all I like to time my entry by using a tick chart. I use a 2-tick chart with a 20/10 period Keltner channel (see below screenshot). The rule here is that for a short position I will attempt to enter the market when the bid exceeds the upper limits of the channel. For a long position I'll wait for the ask to dip below the channel. I've found that using this tactic helps me to pick up on average 0.5 - 1.0 extra pips of profit every trade, as I'm almost always getting filled at a reasonably good price. This may seem insignificant but across many trades this extra profit really makes a difference. I would encourage any short-term trader or scalper who is not using some method to improve the timing of their trades to try something like this.
Final Words
It is my hope that this thread will be of help to more than a few traders. It's entitled "Variant Perspective Trading" as I believe quite firmly that in order to become profitable you must learn how to develop an approach to the market that differs what the herd is doing. Unless you have a variant perspective of some sort it is very difficult to make money. This really is the key to why only a very small proportion of traders win in the long run!
I'll be editing this first post to be more comprehensive, and of course I'll be posting live trades as they happen. If you'd like to instigate any kind of constructive discussion please feel absolutely free to do so
Mike