By John, TradingSpotSilver.com
Every forex trader’s dream is to get to a level when they do not need to think of a second source of income. Maybe one in three forex trader, somewhere dreams of emulating the ‘Soros Model’ of getting rich. While this might surprise some experienced traders, the truth isn’t far from the fact that some brokers in fact tend to advertise forex as a way to making money quickly… some forex ads even show pictures of fake people claiming to have earned more than their regular income from forex.
The truth is far from it and if you have at the very least traded a few times, you would know how difficult it can be to make money, consistently. Consistency is the keyword here and that is what defines your success with forex.
There are traders who manage to make big money one day, only to lose it all the next day. The markets are such. Fickle and unpredictable!
In this article, I’ll point out some simple tips to bear in mind in order to build consistent profits trading forex.
A Forex Trading System
At the core of every successful trader is a trading system. You can call it whatever… methodology, rules, whatever you fancy. But irrespective of how you call it, the ‘system’ forms the core that defines your trading methods.
Traders with a few months of experience in forex usually scour forex forums and other such places in an effort to find a trading system that they can use. Some traders even go to the extremes of purchasing a forex trading system.
When buying a forex trading system, there are basically two opposing schools of thought.
The first logic dictates that if a trading system is indeed successful, then why sell it for $99 when you can make more trading your system.
The second logic states that most of the trading systems available are indeed profitable. But the fault lies with the trader because most often they do not stick to the trading rules.
Whatever your opinion might be of a trading system, you cannot ignore the fact that it is the engine that takes you on your forex journey.
Testing, testing and more testing
Some forex trading systems seem to work amazing right from the moment you install it and start taking trades. This might get you so excited that you might end up increasing your lot size in hopes to ride this good streak, but sooner than later you would end up losing all your money.
Testing a trading system is key to forex and for two reasons.
#1 – You need to be familiar with the trading system and the rules for entry/exit and stops. Familiarity with a trading system can only come through experience, which is forward testing the trading system on a demo account rather than back testing.
#2 – You need to know the strong and weak points of the trading system. For example, you might have a trading system that might look to work well on a EURUSD or other major currency pair but performs miserable on crosses. Similarly a trading system might work best during a particular market session and go nuts during other market sessions.
Whatever the case maybe, if you want to consistently profit with trading forex, knowing the ins and outs of your trading system is of utmost importance.
Most traders tend to test their system on a demo account for a week or a month. Sadly that isn’t enough. A thorough testing needs to be done for at least a good three to six months. While this might delay your prospects of making money, the time frame is just good enough for you to know how the trading system behaves in various market conditions.
But again, even after thoroughly testing a system there is no 100% guarantee that it will work fine.
Discipline and Money Management
When we talk of trading systems, most traders tend to focus on the currency pairs or the time frames and sadly money management comes in last. A good trading system doesn’t mean having the right set of indicators but one that also takes into account the money management and the risk to reward ratio.
Quite often we have traders who lose money simply because they were on a winning streak, which tempts them to increase their lot size, or perhaps be a bit more ‘flexible’ with their stops, or even worse, adding more positions to a losing trade.
Sticking to a specified lot size and strictly following the trading rules will greatly benefit you in the long term.
EA’s v/s Manual Trading
I’m not a big fan of using automated tools to the extent that they place trades on your behalf. In fact I believe that those who use EA’s either do not know how to trade or are just lazy folks who don’t want to learn how to trade, yet dream of buying a $500 worth EA in hopes that it will make them rich.
The element of manual decision (despite the fact that emotions play a big role in the success of failure of a trading system) is an important aspect to building a good and consistent trading system that makes you more profits than losses.
In fact if you look around for a successful forex trader I’m certain that you won’t find that many traders who automate their trading system. Sure, you might have heard of algorithmic trading, but that’s in a different level and should not be mistaken as an EA’s big brother.
Remember that a trading system is like the engine of a car which is the heart of a car. The road ahead might be smooth, bumpy, steep or curvy. Whatever the path ahead looks like, if you do not know when to push the pedal and when not to, you’ll be setting yourself up for an accident, or in our context a wipe out of your live trading account equity.
To conclude the article, here are some key points to take away.
- Always test a system in a demo account for a considerable period of time before taking it live.
- Every trading system has its strong and weak points. The sooner you are familiar with this, the better you will get at managing your risk.
- Disciplining yourself in terms of trading hours/trading times, money management can go a long way.
About the Author
John is a full time forex trader and contributes regularly to tradingspotsilver.com, a blog focused on trading systems, trade analysis and MT4 tutorials.