Does a Perfect Strategy Exist?
Visualise yourself perfecting your trading method: spending countless hours working on a perfect system that has a 90% win rate and small losses. You study, study, study, and study again. At a certain point, the back-tested results give you the confidence to take it live.
After a few winning trades, you get stopped out. Instead of taking the loss as a natural occurrence in the markets, you try to "weed out" the imprecision in the system that caused this loss. You stop trading, go back to the drawing board and tweak the method.
If you can resonate with this situation, know this: no trading system is perfect and losses cannot be avoided. Many aspiring traders simply cannot accept this reality. Driven by fear, they tweak and mess up solid strategies, causing them to fall off the learning curve.
Show me the money
Want a solid strategy for interacting with the markets? Play volatility breakouts. When you see price consolidating in a shallow manner, get ready to play the break out of whatever tight range has formed. (Preferably in an established trend.)
USDCAD Daily Chart. Source: Pepperstone MT4
Sounds simple, right? Tips like this have lured many aspiring traders to risk hard earned cash in the markets, without fully appreciating the fact that by no means is it a perfect strategy. In fact, it's not even a strategy in itself. It's only a part of a strategy, because it doesn't tell you:
* Where to exit if the market moves against you
* If & where to exit (if & when the market moves in your favour)
* How much to risk on any given signal
* What kind of consistency the signal has
But these considerations seem to be "tedious" and "boring" for most aspiring traders. So what happens is something like this:
* Read the magic formula: buy/sell volatility breakouts
* Scour the charts for situations that look like setups
* Risk 5% (or more) on each setup
* Go to sleep
* Wake up broke
* Initiate revenge trading until savings are depleted.
The people that actually stop themselves before it's too late are still in the game, but they can be frustrated and find it hard to hear the hard truth:
"…you were on the right track, but you really did not understand what you were doing. Furthermore, you were risking way too much, and had no idea how to manage your trades. Trading is more complex than simply clicking a button after certain conditions are met."
A lot of aspiring traders go on a quest for the Holy Grail system. They think this "perfect" system will give them tremendous results with minimal effort. Ultimately this will only make life harder rather than easier, because there really is no perfect system. There is no "best fit", nor is there anything like "one size fits all".
Adopt Solid Setups
"We don't actually trade the markets. We trade our beliefs about the markets". – Van Tharp, PhD
If you believe there is a fail-safe way of raking in constant profits, your belief is not in line with the way the markets work. You will be constantly frustrated because your belief will take you on a never-ending journey of trial & error. This is also known as a wild goose chase.
It is important, early on in your trading career, to understand that no method is perfect. Every method is appropriate only in certain situations, and has advantages and disadvantages. The experienced traders know that the real key to trading performance is to understand what you're doing and why you're doing it.
With that said, let's explore some solid setups, and discuss how traders are able to mess them up.
a) Volatility Breakouts
USDCAD Daily Chart. Source: Pepperstone MT4
Volatility expands and contracts in a cyclical manner. A volatility breakout strategy is based upon finding those moments when volatility is dropping, and stalking a breakout – usually in the direction of the prevailing trend. It is a profitable strategy that continues to be employed by many market professionals.
And yet, the quest for perfection can invalidate its edge. How?
* Playing volatility breakouts against the trend. These typically have a harder time performing, relative to breakouts in line with trend.
* Playing any breakout, without factoring in volatility. Typically, volatility breakout days close in the upper range of their 20-Day ATR.
* Risking too much on each single trade.
* Striving for perfection; using too many indicators and filters. That is possibly the easiest way to dilute any potential benefits of the method.
b) Trend Following
USDCAD Daily Chart Source: Pepperstone MT4
Trend following, at its core, is all about letting profits run and cutting losses. Playing pullbacks that do not violate the peak/trough structure of the trend, or breakouts in line with the trend, are two ways to follow a trend until it ends. But it's also quite easy to mess things up. Consider:
* Impatience. Following trends for quick pips is like using a Ferrari to go grocery shopping around town. You never use its full potential. Take the following example:
USDCAD Daily Chart Source: Pepperstone MT4
You see price starting a new trend in February 2016. A simple Stochastic Oscillator can help highlight potential high-quality pullbacks to help you engage with the trend at value. You see that the Daily peak/trough structure is still in place. So you decide to switch to a 1H timeframe to "nail the entry".
USDCAD 1H chart. Source: Pepperstone MT4
However, once on the 1H chart you also see all kinds of potential "trouble" zones. You lose track of the fact you're playing a pullback in a Daily trend, and you get caught micromanaging a potentially longer-term trade.
* Playing every breakout in line with the trend. Of course, qualifying breakouts (perhaps using volatility breakouts in line with the trend) is much better than playing everything & anything.
* Entering with a limit order at your "perfect price". See the example below:
NZDUSD 4H chart. Source: Pepperstone MT4
Many traders assume "patience" means "only wait for the perfect price," where "perfect" is based on some kind of price pattern, level, indicator, etc. This is why we cannot really stalk "perfect" entries.
"All-in, All-out" strategies may work in some contexts, but with trend trading, it might be better to scale in and scale out. Looking for the perfect entry will oftentimes mean missed opportunities.
Confusing timeframes. When trend trading, the best thing to do is to choose one primary timeframe from which you observe your trend. A good choice is usually the Daily Chart. Then, when the Daily is pulling back or consolidating, you can dial down into lower time frames to try and get a better entry.
Avoid confusing time frames and trends. A pullback on the daily chart looks like a trend on the hourly chart!
The main idea is that no system, no setup, no indicator, and no method can ever be perfect. Usually, the more traders attempt to "optimize" or "perfect" a system, the more they deviate from the core concept of the system itself.
Moreover, the quest for the perfect method usually stems from fear of failure. The correct approach is to work through and understand this fear. It's the mindset that's wrong: not the market.
There will always be losses – the only thing to do is manage them correctly: cut the losses as soon as logically possible, and let your profits run as far as logically possible.
The correct mindset is something much more along these lines:
"I know that my next trade may not be successful, but I know that in time, after many attempts, on balance I will be positive."
Have a plan
"If you fail to plan, you are planning to fail." – Benjamin Franklin
At the end of the day, trading systems & setups are useful to build a strategy. Like any professional endeavour in life, in order to tackle the markets, you need a plan. The key is to have a plan that can be corrected and adjusted, based on the feedback (i.e. results) that you get when tackling the market.
Don't search for perfection; search for understanding. Become an expert at one strategy, and build a solid plan around it, having faith that whatever conditions the market may present, you will be ready to adapt.
The Forex market comes with its very own set of terms and jargon. So, before you go any deeper into learning how to trade the Fx market, it’s important you understand some of the basic Forex terminologies that you will encounter on your trading journey… BASIC FOREX TERMS: Cross rate – The currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in. This phrase is also sometimes used to refer to currency quotes which do not involve the U.S. dollar, regardless of which country the quote is provided in. For example, if an exchange rate between the British pound and the Japanese yen was quoted in an American newspaper, this would be considered a cross rate in this context, because neither the pound or the yen is the standard currency of the U.S. However, if the exchange rate between the pound and the U.S. dollar were quoted in that same newspaper, it would not be considered a cross rate because the quote involves the U.S. official currency. Exchange Rate – The value of one currency expressed in terms of another. For example, if EUR/USD is 1.3200, 1 Euro is worth US$1.3200. Pip – The smallest increment of price movement a currency can make. Also called point or points. For example, 1 pip for the EUR/USD = 0.0001 and 1 pip for the USD/JPY = 0.01. Leverage – Leverage is the ability to gear your account into a position greater than your total account margin. For instance, if a trader has $1,000 of margin in his account and he opens a $100,000 position, he leverages his account by 100 times, or 100:1. If he opens a $200,000 position with $1,000 of margin in his account, his leverage is 200 times, or 200:1. Increasing your leverage magnifies both gains and losses. To calculate the leverage used, divide the total value of your open positions by the total margin balance in your account. For example, if you have $10,000 of margin in your account and you open one standard lot of USD/JPY (100,000 units of the base currency) for $100,000, your leverage ratio is 10:1 ($100,000 / $10,000). If you open one standard lot of EUR/USD for $150,000 (100,000 x EURUSD 1.5000) your leverage ratio is 15:1 ($150,000 / $10,000). Margin – The deposit required to open or maintain a position. Margin can be either “free” or “used”. Used margin is the amount that is being used to maintain an open position, whereas free margin is the amount available to open new positions. With a $1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $100,000. This allows a trader to leverage his account by up to 100 times or a leverage ratio of 100:1. If a trader’s account falls below the minimum amount required to maintain an open position, he will receive a “margin call” requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade. Spread – The difference between the sell quote and the buy quote or the bid and offer price. For example, if EUR/USD quotes read 1.3200/03, the spread is the difference between 1.3200 and 1.3203, or 3 pips. In order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread. THE MAJOR FOREX PAIRS AND THEIR NICKNAMES: UNDERSTANDING FOREX CURRENCY PAIR QUOTES: You will need to understand how to properly read a currency pair quote before you start trading them. So, let’s get started with this: The exchange rate of two currencies is quoted in a pair, such as the EURUSD or the USDJPY. The reason for this is because in any foreign exchange transaction you are simultaneously buying one currency and selling another. If you were to buy the EURUSD and the euro strengthened against the dollar, you would then be in a profitable trade. Here’s an example of a Forex quote for the euro vs. the U.S. dollar: The first currency in the pair that is located to the left of the slash mark is called the base currency, and the second currency of the pair that’s located to the right of the slash market is called the counter or quote currency. If you buy the EUR/USD (or any other currency pair), the exchange rate tells you how much you need to pay in terms of the quote currency to buy one unit of the base currency. In other words, in the example above, you have to pay 1.32105 U.S. dollars to buy 1 euro. If you sell the EUR/USD (or any other currency pair), the exchange rate tells you how much of the quote currency you receive for selling one unit of the base currency. In other words, in the example above, you will receive 1.32105 U.S. dollars if you sell 1 euro. An easy way to think about it is like this: the BASE currency is the BASIS for the trade. So, if you buy the EURUSD you are buying euro’s (base currency) and selling dollars (quote currency), if you sell the EURUSD you are selling euro’s (base currency) and buying dollars (quote currency). So, whether you buy or sell a currency pair, it is always based upon the first currency in the pair; the base currency. The basic point of Forex trading is to buy a currency pair if you think its base currency will appreciate (increase in value) relative to the quote currency. If you think the base currency will depreciate (lose value) relative to the quote currency you would sell the pair. BID AND ASK PRICE Bid Price – The bid is the price at which the market (or your broker) will buy a specific currency pair from you. Thus, at the bid price, a trader can sell the base currency to their broker. Ask Price – The ask price is the price at which the market (or your broker) will sell a specific currency pair to you. Thus, at the ask price you can buy the base currency from your broker. Bid/Ask Spread – The spread of a currency pair varies between brokers and it is the difference between the bid and ask the price.
This topic (market makers vs ECN’s) is constantly discussed by traders. In this article, I am assuming that you have basic knowledge of how brokers and the Forex market operate. Most new traders start out trading with market makers, because of the minimum account size required to trade with an ECN broker. ECN brokers require a higher minimum account size, because ECN’s typically make money on trader’s commissions only. Lower operating costs, along with the added transparency of an ECN, make this type of brokerage seem appealing. Many traders believe that moving to an ECN broker is simply the next step in the evolution of their trading career, but are ECN’s all they’re cracked up to be? Are there any advantages to using a market making brokerage? Market Makers Aren’t As Evil As You Think With market makers, there is typically a step or two between the community of banks and the trader. Sometimes this can be a good thing. Funneling price through market makers has the effect of lowering volatility; depending on how you trade, that can be an advantage or disadvantage. Market makers are the counter party to all of your trades; meaning they typically make money when you lose money. This often causes suspicion of stop hunting among other things, as it well should. When you trade with a market maker, your entry point, stop loss, and take profit levels are always visible to your broker, and usually to its liquidity providers as well. Stop hunting can and does happen every day. ECN’s Have To Be Better, Right? As stated earlier, the main attraction to an ECN style broker is transparency. Some traders might be initially drawn by the attractive spreads that ECN’s can provide, but the real advantage is the added transparency. I say added transparency, because even ECN’s aren’t truly transparent; that is to say, unless you have access to the price feeds. Although there are clear advantages to trading with an ECN style broker, you may run back to your market maker broker after learning about some of the disadvantages. Yes, there are disadvantages to ECN’s as well. Some market making brokers guarantee no negative balances, but you will not find an ECN broker that can offer the same. Likewise, market makers can provide guaranteed stop losses; ECN’s cannot not do the same. I’ve heard of traders losing thousands because of missed stop losses. Lastly, you will not find an ECN broker that offers fixed spreads. This can be a real disadvantage for certain scalping techniques, or if you trade odd hours. Many times fixed spreads are better than interbank prices. So, Which Is Better: ECN’s or Market Makers? By now you should have a better understanding of the advantages and disadvantages of ECN and market making brokers. It is generally taught that active, experienced traders and scalpers will be happier with an ECN style broker; while new traders are most likely better off with a good market maker. If you are comfortable trading without the safety features and lower volatility provided by market making brokers, then you’re better off with an ECN. If you’re starting with a small account size, or simply want to trade with a fixed spreads, you’ll be better off sticking with a market maker. Only you can determine which type of broker is right for your trading style and level of risk tolerance. It all really comes down to your own personal preferences and trading method in the end. Happy Trading!
Many people who can do forex trading or want to take it in a good way, that is, want to work as a full-time trader, have many questions in their minds, how much do I actually know or do I qualify myself as a full-time trader, and so on and so forth. In fact, many things can be said and many things can be written in answer to this question. But by answering a few questions yourself, you may wonder if you have really qualified to be a full-time trader! # 1: How much experience do you have in Forex trading? Experience plays a very important role in every work. You will see that the money market is constantly moving through one cycle and the forex market is not the opposite. So if you want to trade regularly and consistently then you must also gain experience about different cycles; For example, if we look at the picture of the Forex market 8-10 years ago, those who have seen it will be able to tell how much movement there was per minute or every 24 hours. If not less, the up-down of 100 pips per hour was the normal picture of the market at that time but at present, there is not much of that picture except High Impact News. So you understand what trend you are in or what the trend may be in the future. # 2: Are you ready to deal with any trading situation? First of all, full-time trading is very profitable. Undoubtedly, you have to use it all the time and earn income which is not an easy task at all. Normally you keep monitoring your currency and don't go into any entry until you get a signal, you have to wait a long time for this; If you want to get the right signal, you have to match all your setups. When you get the trend according to your setup, your entry will be executed. Maybe after taking the entry some positive pips turned into negative pips again, What would you do in this situation? You entered after all your strategies and setups matched, in fact, this is the most difficult time in the Forex market; So the right decision at all times is not to worry you, but to make another reasonable decision in that situation and to make an average income without taking profit separately from each trade; # 3: Can You Manage Your Risk? In those difficult situations above, you need to know how to manage your risk. You never know exactly what's going to happen in the next market. So you have to be prepared with both decisions as to what to do if the market is in your favor or against. So you need to set up the trade through some risk management plan set;How much risk to take in each trade;Where to set stop loss (Do you set a stop loss at all?)When / how you exit the trade;Are you thinking of increasing your trading size;Are you going to take extra risks;So think of the above points and make the right decision according to the time. # 4: How much do you plan to earn per month? This question is one of the many important questions that vary from trader to trader; It is better not to worry about withdrawal every month. If you want to earn income by trading to repay your monthly loan, I don't think you can make a good decision in trading. The wise thing to do is to think of full-time trading as your regular job and keep the limitations in mind. Because as a full-time trader your income will not be the same in all months, some months will go bad, some months will be good and some months will be very good and some months will be very bad; this is normal; If you hold your income for a minimum of 6 months without calculating the monthly return, then I think your return will be much better and stress-free; # 5: Do you consider your trading as a second source of income? As a full-time trader you first need to know how to do consistent trading. That means you have to prove that you can always make a stable income. So for that reason, it would be better to think of it as the second source and not as the first source. Remember that if you fail to prove as a second source that you can make a flexible income on a regular basis then refrain from worrying about yourself as a full-time trader or you will bring your own risks. And last but not least, the headline made you read this article is about what the market is doing without relying on your magical tools and formulas.