In order to trade the Forex market successfully, you must have a Trading System that you can rely on. This holds especially for those who want to trade the Forex market to earn a living for life.
From what I've gathered so far, the keys to successful trading boils down to 3 main points:
- Money Management
- Strategy
- State of Mind
Among the three, Mario Singh associates 55% of the success to the trader's state of mind. This goes in resonance with what Alexander Elder wrote in his best-selling book Trading For A Living.
The Trader is the Weakest link in any Trading System -Alexander Elder
Money Management comes second at 30% and only 15% is attributed to Strategy. Let me explain more in detail below.
STRATEGY
Strategy deals with the different techniques you use to enter or execute a Forex trade. This mostly is a combination of Fundamental and Technical Analysis. Most newbie traders actually concentrate on this area when in fact it only accounts for 15% of your success.
Don't get me wrong, I still consider strategy to be important. Without one, a trader would simply be gambling and speculating and won't be able to properly execute trades.
I guess the main point here is the fact that NO STRATEGY IS PERFECT and every trader is bound to have winning and losing trades! So it's important to have a great deal of the two other aspects to successful trading - Money Management and State of Mind.
MONEY MANAGEMENT
Money Management deals with Risk Management in Forex Trading. This accounts for 30% of a trader's success.
Basic Rule: Never risk more than 5% of your account in every trade.
Use this formula to compute the maximum number of LOT SIZES you can buy per trade.
In the example above,
Risk = 3% (Trader didn't want to lose more than 3% of his equity in this trade)
Capital = 3,000 USD (Total Equity of the Trader)
No. of Pips = 30 PIPS (PIP Count to Stop Loss)
PIP Value = 10 USD / PIP
Lot size is in Standard Lots. 0.3 Standard lots is equivalent to 3 Mini Lots.
There are 2 ways to manipulate this equation to increase the lot sizes you can buy without increasing the amount of risk to take. First way is to increase your Equity. The more equity you have the more lot sizes you can buy given a fix risk rate. Second step is to decrease your stop loss PIP count. The lesser the PIP count, the higher the no. of lots you can buy as well.
Note however that your stop loss PIP count should be based on the charts! Proper placement can protect your trades from getting stopped prematurely. Therefore it's not advisable to lessen the count simply because you want to buy more lot sizes.
Amateur traders are more concerned with winning while Professional traders are more concerned with how much they can lose. When it comes to Forex trading, you can only control your losses. As for when you're winning, you let your profits run.
If you lose 50% of your equity,
you'll need to gain 100% using the remaining equity just to break even.
A food for thought above to sum up why Money and Risk Management is very important. If you lose 50% of your capital you'll need to gain 100% of the remaining capital just to gain back what you've already lost. The more you lose, the harder it is to break even. And it only takes one bad trade to lose everything.
Mark So suggests not losing more than 30% of your capital on a single month. Losing 30% means you'll need to gain 43% the succeeding month to break even. He aptly coined the 50% mark as the point of no return. This is when a trader tends to lose all hope and logic - giving up in the process.
STATE OF MIND
Which brings us to the 3rd element - State of Mind.
You've probably read somewhere else already that in order to be a successful trader one must be able to separate one's EMOTIONS from his trades. This will account for 55% of your success as a trader.
When a trader is emotional, he/she won't be able to stick to his Trading System. And that will result in DISASTER!
Among the common emotions that a trader faces are: FEAR, GREED, and HOPE.
When one is fearful, a trader may not be able to execute a trade even when his system is telling him to do so already. When a trader is fearful, he may cut his profits short prematurely making him to lose potential gains.
When a trader is greedy, he may lose all profits because he kept moving his limit beyond what his system told him to do. When a trader is greedy, he may disregard money and risk management, buying more lots that what his system allows.
When a trader is hopeful, he may lose more money by removing or moving his stop losses hoping that prices will move back up/down depending on his positions.
STICK TO YOUR TRADING SYSTEM NO MATTER WHAT!
A Few advice on how to be able to Trade without Emotions:
- Concentrate on your SYSTEM, and not on the Monetary Gains.
- Take a break when things go wrong. (Mark So: After 3 trades that go against you, take a break, have a Kit Kat! ^^)
- Understand that losses are part of the Trading Game
- Have a Long term perspective. Practice Delayed Gratification as opposed to Instant Gratification.
- Never run after the Market. There will be other opportunities to trade.
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There you go friends. If you want to see the video where Mario Singh discussed his MSS Strategy, click this link.
Happy Forex Trading.
Pips Be With You!
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