How to Survive in Forex

What's one of the most dramatic changes you can make to your trading game? Knowing just exactly how to deal with a succession of losing trades and periods of drawdown. This is how you can survive in Forex. Think about it.  What's most likely to depress you, stress you, flood you with anxiety, destroy your trading confidence, or worse - take you out of trading altogether? What would it mean to you if you could transform what is experienced by many as stressful and emotionally jarring trading experience into a carefree and relaxing hobby... so that you can just celebrate losing trades as part of the process? 

In this article I will tell you exactly what you need to do in order to remove crippling emotions from trading, to step off the emotional roller coaster of the highs and lows of winning and losing as a trader.

Removing Crippling Emotion from Trading

It's an inconvenient truth, but no Forex trading strategy is ever profitable the whole time. Nor is any trader. If they say they are, at best it's their ego talking.  At worst, they're being deliberately deceptive. Some strategies yield winning trades some of the time, other strategies can give winning trades most of the time...but no strategy can give the trader an uninterrupted flow of winners the whole time. Losing money is never easy, especially if the trade set-up smelt good, felt good and, of course, fulfilled all of the rules for entry. Losing trades knock our trader confidence and our account balance.

Losing Money in the Market - Why Educators Don't Talk

Losing money in the markets is part and parcel of trading, yet it's a topic which many do not like to talk about. The very idea of Forex trading being fast and easy money is a trading myth!

Let's pretend you are an educator whose business perpetuates the dream of untold riches to the novice trader.  To stay in business, your unsuspecting prey need to spend $1000s of their hard earned money on your seminar or course where you may teach them about candlestick patterns.  Furthermore, once the amateur trader feels that they are ready to be set loose on a live trading account, they will experience the inevitable euphoria of both winning money from trading and the debilitating sense of abject horror and pulse-pounding bewilderment of losing.

How long will you stay in business if your prey get a realistic view of the ups and downs of trading? How many victims will you lure into your web if you promise hard work and real world results instead of overnight wealth?

You will find that the educators who are willing to talk about losing money are those who want their clients to make informed decisions based on completely realistic expectations.  In all humility, that's why you see Losing Trades is not a taboo topic for me.

Trading is 90% psychology and 10% strategy

The moment you accept this truism, the greater your receptiveness (consciously and subconsciously) to actively improving your mindset and trader psychology - especially when it comes to implementing the following advice.  This is the cornerstone of your most clear advantage when it comes to handling losing trades effectively.

Don't have an emotional attachment to the outcome

If you have an emotional attachment to the outcome, you will more often than not be sorely disappointed. Yes, your trade could win or it could lose. Intellectually, you know the risks. Emotionally, that is a different kettle of fish. It is easy to say, Just Get Over It! Give yourself permission - intellectually and emotionally - to accept that trades can win and lose. It will help if you understand the philosophy behind the way we trade. We are able to construct things so that we can win big and lose small. Thanks to our risk management techniques, and from targeting trades with high reward potential, we can be safe in the knowledge that if the trade moves against us then we have only lost a pre-defined amount (your risk per trade) but if it goes in your favour then you stand to make a lot more.

Please bear in mind:

• Markets are irrational and anything can happen at any time.
• Accept that sometimes the best set-ups that you may deem to be 'dead certs' can turn against you without warning or explanation, losing you money.
• Markets do not care what you do or where you are from - they will simply do their thing, for better or for worse.
• Markets do not care how desperately you need or want the trade.

Trading is an investment... investments go up and down

View your trader training as an investment in yourself (which according to people like Benjamin Franklin is the "best kind of investment") and your application of it as a long-term process that helps to grow your capital over a healthy period over time. Be fair to yourself. Have realistic expectations as to what trading can get you over longer term time frame (ie. A year). It is inevitable that your trading account will fluctuate in value over the days, weeks and months as the variance delivers a random sequence of both wins and losses.

Have realistic expectations.  This will make your goals far more attainable and save you from becoming seduced by the hunt for the Holy Grail. Some of my shorter-term clients have gone off in search of it...few have come back alive with their accounts intact!

Remember that (at the time of writing), many high street banks barely give 1.5% interest on your annum. So, if you're targeting a realistic 2% - 4% gain per month from your trading - and hitting your monthly target on a consistent basis, that's no bad thing! You will have still trounced most asset classes out there!

HOWEVER, if you're looking to turn a $100 into a $100, 000, 000 account in under a year, then step aside...you're in the wrong industry!

I encourage you to think of it this way:  No matter how big or how small your trading account is, or whether you are at a net gain or a net loss, you should not realise this as an actual profit or loss unless you withdraw the sum from your trading account and it is safely in your bank account.

Celebrate losing the battle in order to win the war

Accept that the number of set-ups in the market which meet your rules for entry will be completely random from month to month. So, too, will be the number of winning trades to losing trades. Not every trade you place is going to be a winner. In fact, some of the best looking trades out there, with the highest profit potential, could turn out to be duds. Providing you have faith in your strategy and it is profitable, the trick is to view losses as a short-term strategic battle which is lost in pursuit of winning the overall war. As Mark Douglas says in his book "Trading in the Zone", they are a necessary "business" expense prior to a win or even a string of winning trades.

Providing the trade meets your rules for entry, do not let a previous losing trade or string of losing trades deter you...it could be your great kahuna!

This is where having faith and holding onto your nerve is essential for long term success.

Do not watch your trades

We regularly tell our clients that this is the worst possible thing that they can do.  Every fluctuation in price in favour of their trade and against them will fire both positive and negative emotions. Watch your trades all day and it will leave you emotionally exhausted.  You could easily find the emotions your trade has caused will alter the way in which you interact with others and your environment.

To stay in non-emotional control, accept the risk you have placed on the trade as being what is lost in the worst possible scenario and the reward potential of what you could gain if things go in your favour.

Set the trade up, put the mouse down and walk away from that blasted computer!

Always go for high reward

There are two ways to do this:

• Have a limit on how much you are prepared to lose if the trade goes against you (trade sizing)
• Only trade set-ups which have a high reward potential, which will keep the wins big and the losers small. (You can even set things up so you can profit from losing trades)

Perhaps you will do what we do here at The Lazy Trader and only trade set-ups with a minimum of a 3:1 reward/risk profile (where you can hope to make $300 while risking $100 in pursuit of this). Always having a decent reward will dramatically help to rationalise (take the emotions out of) your trading decisions - especially at times of drawdown. After all, what is the worst possible thing that could happen if you take the trade? You lose $100. But what is the worst possible thing that could happen if you do not take the trade? You could potentially lose out on a profit of $300!  Using this strategy, looking at your trades this way can make a huge difference in whether the fangs of emotional trading have sunk into your jugular and your wallet. 

Take ownership - Don't listen to others

Every Tom, Dick, Harry, Sharon and Stacey have an opinion on where the market is going to go or whether it should down.

Important Questions to ask yourself:

• Are they are trading your trading style?
• Do they share your trading strategy?
• Are they consistently trading profitably?

If they don't meet ALL these criteria, then don't indulge others by taking tips from them. If they recommend a trade and it loses money...whose fault is it? Yours. Take ownership and accept that most people out there love to talk a good game and swing the bat. A journalist told me off the record that: "You don't really have to know anything about the markets to seem knowledgeable about them or report them". Case in point!

See the bigger picture

Did you choose trading for a quick buck or rather to obtain long-term capital growth? Those who see the bigger picture fall into the camp of the latter. Do not fall into the trap of shifting trading styles or strategies as a knee-jerk reaction after a couple of losing trades. Thanks to variance and the flow of winners and losing trades any strategy or system manifests, you will typically be missing out on a flow of trades with a winning outcome.

Give your style of trading/strategy a chance. If you trade end of day, it may be 6 months - year in terms of time - or a sample of 20 trades. This will enable you to get a more representative picture over how a strategy can work for you.

I sometimes get the occasional client who decides to leave the signal service after we call two losing trades in a row based on the fact that the strategy "doesn't work". Just giving a strategy two chances to prove itself is very much like asking two people out of 100 whether they prefer beer or wine, and calling the results conclusive...best of luck to them

Conclusion

If you are in a prolonged period of drawdown, instead of simply trading in anticipation of a string of winning trades, this could be a strong time to take the initiative to review your strategy. This can permit you the much needed perspective to see what you could do differently.  Use this as the opportunity to see if the new tweaks or changes yield a more positive outcome. Sometimes all it takes is one extra ingredient, rule or filter in a strategy's rules for entry to turn a loss making strategy into a profitable one.

But, for this, it's time to get your hands dirty! Identify a modification, back-test it on the trades you would otherwise have taken.  See how it would affect things for you. Will it affect things for better or for worse? It is this very routine - and critically important - work that many traders simply do not bother with.  Doing this work separates the serious and successful traders from all the others. Which one are you? Can you survive in forex?