Developing Your FX Trading Plan / Strategies: First Ref.

Successful forex trading doesn't happen by chance. The best way to begin making money forex currency trading is to develop an executable trading plan. Most currency traders have no plan at all. They follow the crowd, take tips from other traders and wonder why they don't make consistent gains. Your forex trading toolkit is the foundation for a solid trading plan that you can use time and again to make money trading currencies.

Instructions

Step 1:

Develop a strong understanding and application of technical analysis. You must learn how to read charts for price action, use indicators, and develop strategies to make logical guesses on price movement. This is a large field of study, so start with learning the broad basics of technical analysis before diving into the specifics needed for your trading plan.

Step 2:

Learn the effects of psychology on trading. There are several excellent books on this subject that are must reads. Traders react to currency price movements emotionally. They get excited (greedy) when the price moves in their direction and they get fearful when the price moves against them. Awareness of this dynamic is extremely important in your trading. Once you're aware of the circumstances that cause these emotional responses, you can put measures in place to adapt to the situation and stick to your trading rules.

Step 3:

Understand money management and risk management as it applies to forex trading. You need money management rules in place to ensure you have enough money to ride through the eventual losing streaks. Your rules should include how much initial capital is required (most people start undercapitalized and lose all their money quickly), and how much to risk per trade. Many traders risk too much on low percentage trades and lose their money over a short period of time. The idea is to trade high percentage setups without risking too much of your trading capital on each trade. Stay away from low probability, high risk trades.

Step 4:

Get some experience by forex trading online. Actual online trading will let you test your strategies under real conditions. Begin by trading a free demo account so you can make some mistakes before risking real money. Then move to forex currency trading in a "live" forex account. Again, start slowly and don't risk too much money until you understand how you react emotionally to winning and losing.

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Trading System

When selecting a trading system, first try to paper trade it. You need to paper trade your trading system to get the bugs out. Paper trading is not a substitute for live trading but still you can assume that 75% of the results that you achieve in demo trading can be replicated in live trading. Try Netpicks forex signal service. Understand forex charts. Develop your own forex trading system.

Use the results of these paper trades to calculate your win ratio and payoff ratio. These two figures are highly important to know for any trading system. Determine what your personal win ratio and payoff ratio are in using that trading system over time.

It takes three to tango here. The trading system, your money management system and you yourself, all three of you have to gel together. The stronger and more developed the relationship is between the three of you, the more profitable you will be over time.

A trading system is not enough. You need a good money management plan as well. These numbers are required in developing a sound money management plan that will work hand in hand with that trading system. What can be the best parameters to selecting your trading system? When selecting your trading system, use these five parameters:

1) The trading system is analytical. Trade entries in the trading system are defined by market price activity, key support and resistance levels, volume and volatility dynamics and not on random and spontaneous decisions.

2) Before you enter the trade, the trading system is supposed to tell about the stop loss. The initial stop loss exit is determined before entering your trade.

3) Just like the trade entries, the trading system determines the trade exits by market price activity, key support and resistance levels, volume and volatility dynamics and fundamental rules, not on any arbitrary dollar loss that you feel comfortable with.

4) You must not underestimate the importance of paper trading though it is not a substitute for live trading. Your trading system has been adequately paper traded or live traded and you have determined your personal statistical performance. You need to know your win ratio and the payoff ratio.

Some traders would like to use the win ratio and the payoff ratio achieved by the other traders. Do not rely on the results that the other got with that trading system. Use the actual results that you attained while using that trading system in calculating your win ratio and the payoff ratio.
Again do not delude yourself by thinking that computer back testing can give you your win ratio or payoff ratio. Do not try to rely on computer back tested results. Your personal performance results are the real results that matter. You cannot depend on computer results and other trader’s results.

5) This is very important. Your trading rules should be written out step by step in sequence so that the entries and exits are consistent, clear and above all quantifiable. This makes your trading mechanical and emotions free.

Have you ever heard of the Turtle Trading System? One perfect example of a rule based trading system is the Turtle Trading System. This system was developed for the commodities futures market.

You must know the story of Turtle Trading Rules. The story of Turtle trading rules is very interesting. The creators of that trading system had a discussion one day. One was of the opinion that great traders are born. The other said great traders can be made.

Both had a bet. Advertisements were placed in the Wall Street Journal and the Barrons. A number of completely new traders were selected to teach them those rules and see if they could become successful traders. Many succeeded with this trading system and became highly successful traders.

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When trading the forex there are a few very important rules that you should never break. By sticking to these rules on a consistent basis, your chances of success as a profitable forex trader will greatly increase.

A big mistake most unsuccessful traders make, whether they are forex trading, trading stocks, or any other market, is that they let emotion get in the way, they break their own rules, and they lose big. Don't let this happen to you.
For your forex trading to be successful you need to set specific goals and objectives regarding your forex trades.

Like almost anything else you want in life, you'll greatly increase your chances of being a successful forex trader by developing and writing down specific goals that you want to reach. Your goals need to be specific, measurable and realistically achievable.

This doesn't mean you shouldn't aim big, but if you are starting with $10,000 in your forex account, you should not have a goal of being a millionaire by the end of the week. You're just setting yourself up for frustration and failure.

Your forex trading goals could be things like:

Achieve a maximum draw-down ratio of 1.6:1

Develop one new positive-expectancy forex trading system every six months

Consistency And Discipline in Forex Trading

If you are going to be a successful forex trader, you need to be consistent and disciplined when it comes to implementing your forex trading system. This is where many forex traders lose their way. They let their emotions get the best of them and break the rules of their trading system. This causes more (and larger) losses than usual and may drive you away from trading permanently.

It takes a lot of discipline to stick to your trading system. But it's necessary for long term success.

Let me give you an example that hurts many traders on the upside. They follow profitable trades after they have already closed out their position. While you need to let profitable trades run, it's also important to have ever higher stop losses in order to protect yourself.

For example, in your forex trading system your stop loss may be 5% behind the current price. If your trade drops 5%, you trigger the stop loss and get out. Here's where the problem can occur. It then rebounds and scoots much higher.

So instead of being happy that your system worked and you profited 20 or 30%, you are unhappy because you missed out on another 20% after your stop loss was triggered. So next time, you ignore the stop loss.

Unfortunately, it keeps going lower and lower and you keep holding, waiting for a rebound that never occurs and you've suddenly lost half your training account.

Discipline is a huge component of successful forex trading. Forget it at your own peril.

Learn more about forex trading tips and tactics for more profitable currency trades at http://www.forextradingtactics.com/ where Richard Pfaeltzer, an investor and freelance investing and success writer, contributes articles on forex and currency trading
Article Source: http://ezinearticles.com/?expert=Richard_Pfaeltzer

Developing Your FX Trading Plan / Strategies

Saturday, January 30, 2010

First Ref.

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