How A Professional Trader Approaches The Forex
Market
The simple fact is that professional traders
approach trading much differently than most inexperienced, retail
traders. If you are reading this article, you have most likely begun
your trading journey, and you are seeking to become a successful and
consistently profitable trader. The good news is that trading can be
one of the rewarding and profitable business ventures ever! The bad
news, of course, is that it is risky and very few traders make it.
We all know the industry statistic that 95% of traders lose money,
fail, and give up trading. What is not discussed so often is the
fact that a high percentage of failed traders fail due to
preventable reasons. In this article, we are going to discuss a few
basic principles that govern the way professional traders approach
financial markets.
Strategy Development
When a trader first decides to trade the forex market, it is natural
that he or she will need a strategy. Therefore, most new traders
find the best
forex course, learn a basic strategy, open an account
at an online forex brokerage, and begin trading away. This is very
dangerous. First of all, it is essential that a trader fully
understand his strategy. A trader must be able to answer the
following questions:
1. Does the strategy yield positive expectancy?
2. In what market environment does the strategy perform best?
3. In what market environment does the strategy perform worst?
4. What do basic backtesting results reveal about the strategy?
5. What are the strategies strengths?
6. What are the strategies weaknesses?
7. Is it possible to neutralize the weaknesses and improve the
performance of the strategy?
These are just a few questions that a trader must be able to add
with depth, clarity, and conviction. Unfortunately, most new traders
cannot answer these questions because the strategy they are trading
is not “their own.”
Ralph Waldo Emerson once said, “Imitation is
suicide,” and this wise proverb is so true in trading. A trader’s
strategy must be his own. Now, let us clarify this point.
This does not mean that a trader must develop his own strategy from
scratch. It is quite okay to use another trader’s strategy, but a
trader must take that strategy and test it over years and years of
historical data in order to prove to himself that the strategy is
legitimate and will yield positive expectancy over time. The reason
is simple—trading is very challenging.
The emotional challenge of trading is very difficult, and if your
trading strategy enters into a period of underpeformance and your
account suffers a drawdown, most traders will abort the strategy and
begin trading another strategy. This is trader suicide. It is
absolutely imperative that a trader first prove his strategy through
backtesting and forwardtesting, and that he then execute the
strategy perfectly. Keep in mind that historical results may not be
indicative of future results – the markets change. However,
backtesting should give you some indication of how the strategy
performs in different market environments and how well you can
execute the strategy.
Analyze Losers
This principle of successful traders is commonly neglected among
inexperienced traders who engage in
currency trading. When most
traders have a losing trade, they immediately want to move on to the
next trade because they feel the emotional sting of the loss of
money, and the easiest and quickest way to get rid of that emotion
is to forget about the trade and move on. This is a huge mistake,
however!
Some of the most valuable information a trader will ever get about
his strategy is hidden in his losing trades. Think about—what
happens when you have a winning trade? The trade most likely did
exactly what you thought it would do, so what can you learn from
that? In a losing trade, however, something happened that you were
not expecting. Identifying this information can be priceless.
Perhaps you will begin noticing that every time your strategy yields
an entry signal when x, y, and z happen, the trade never works out.
You can then modify your strategy to not take those signals, and
voila! you have just increased the winning percentage of your
strategy.
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