My Mistakes and Building A Trading Strategy (1)

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February 20, 2012 9:33 AM EST

FXEmpire

 I am going to share a personal story with you about my beginning in the forex markets and how I learned how to develop a trading strategy and the mistakes I learned along the way. I share my journey with you in 5 articles, as you will see that I have developed very good trading strategy overtime. I hope you can learn by mistakes and that you use my system as a guide or comparison to your own. If you like please comment and share your experiences and thoughts.

I was introduced to trading currency by a friend, who showed me this incredible program based on 5 and 15-minute charts, would, as the little candlesticks appeared on the charts, make huge profits. 

My Mistakes and Building A Trading Strategy (1)

Nevertheless, I was hooked. All those little candles moving in obvious patterns, up and down the chart, must be easy to understand, I thought. All I needed to do was find the correct combination of indicators and I would get rich. In addition to this, there were so many online sites offering free advice on where currency pairs were heading, all I had to do was take these experts' advice and I'd always be on the right side of the trade. I ended up with a folder full stuff on trading; different methods, different indicators etc. I had RSS feeds pumping information at me all day long.

However, I still couldn't make money. 

There were, for me, several areas of confusion that affected my progress as a novice, and I'll address these areas individually. I've put them in this order, as this was the route I took when I started out. I now realize that that was the wrong way to approach trading currency, so I modified the list later to show the route I wished I'd taken.

My route:

  • Indicators
  • Systems
  • Time frames
  • Account size and leverage
  • Money Management
  • Psychology
  • Demo versus Live

An alternative:

  • Account size and leverage
  • Demo versus Live
  • Time frames
  • Psychology
  • Money Management
  • Systems

I will explain, in more depth, my reasoning for each heading as I go along, but for now this is the thinking behind the modified list.

 1. Account size and leverage

It takes time to learn a consistent way of producing steady growth in your account. To ensure you have that time it's important to consider how much effort and money you are prepared to invest in that learning and, more importantly how slowly you are prepared to lose your money. Because, as a rule, you will be more likely to lose than win as you start trading. The smaller the account, the more risk is involved, therefore the less time you can afford making wrong decisions.

Whether you go for a live, or demo, account) you should start with a broker offering 400:1 account leverage. This lets you master Money Management (MM), by trading micro lots (0.01). You also need to understand the difference between Broker Leverage and Actual Leverage, and I'll point you towards links that will help you with this terminology.

'Should I demo or go live?' I started live, and was sorry I did, however, I started the wrong way. I began with too small an account relative to what I was trying to achieve. I didn't understand any of the stuff in my list; all I could see was the house on the beach. 

Not understanding money management or risk management, I tried Spread Betting. The same problem of account leverage came up. I didn't have enough in my account to enable me to set sensible stops,  I couldn't face the drawdown's while waiting to see if my trade was going to turn into a winner. The value in demo trading is two-fold. 

First, you get to understand all the jargon and how things work and, secondly, you get to develop a feel for how your chosen method works. Every method, or system, has weaknesses. You need to find those out as soon as you can, and how money management can keep you in the game longer. When you decide to go live, stick with Broker Leverage of 400:1 and continue to trade micro lots. As you gain experience, and your account grows, your money management and risk assessment skills will enable you to increase your lot size and grow it faster.

 3. Time frames

Time frames are down to personal choice; all I can do here is tell you what worked for me. As I said, I started on 5 and 15-minute charts, and always struggled. I now focus on the daily charts, but use the shorter time frames to look for better entries in order to reduce risk. I realize that many people, starting out, have difficulty with this. I now feel that the reason is simply that we fall into the trap of 'having to trade'. By that I mean if we're not trading, we feel we're not working. The urge to always have a position on is hard to resist, but it's the biggest problem I had to overcome. Not all trades are good trades and sometimes you need to sit on the sidelines.

4. Psychology

Even when I felt I'd started to turn the corner in trading, I didn't really make the major leap forward until I read a book entitled several books. I recommend that you read and learn as much as possible as it will help further your trading. It will help you come to terms with losing trades, and develop the vital neutral mindset so crucial to your success. Park your emotions at the door.

5. Money Management

I've mentioned money management already, and you may wonder why it's this far down the list, but until the first four items are resolved it's hard to fully understand how important this is to you. Choose your account size and leverage, demo to learn the how things work, and what it all means, pick your time frame and get to grips with your mental state. Now you can devote time to mastering money management and risk assessment.

continued ( see part 2 )

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