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Essential Knowledge in Forex Trading
Essential Knowledge in Forex Trading
The below section forms part 3 of the Defensive Trading course in How to Trade and Invest in Forex. We will begin by looking at the various rigid facts and parameters of trading Forex which includes the most absolutely essential part of this course for your personal trading. The information below will incrementally establish the Risk Management calculations for your trading and is paramount for you to complete.
Trading Session Times
When starting out in this course in Essential Knowledge in Forex Trading one of the first things to understand is that there are days and times when you are actually trade in most asset classes, usually with the exception to Cryptocurrencies which are a 24/7 market.
The Forex market is traded 24/5 with Monday morning signalling the commencement of the trading week.
Market sessions begin in Sydney, Australia and follows on to the Asian session in Tokyo and Singapore. London and other European centres open as the Asian markets are preparing to close. This period of the day signals the heaviest trade volumes through to the afternoon of the European session. Also, at this time, the US centres New York, Chicago and Los Angeles commence trading for the day. As the US session draws to a close, the Sydney market starts a new trading cycle.
What to Trade?
Of course the next step in this course Essential Knowledge in Forex Trading is to identify what to trade.
This is one of the most common question that I get when speaking with a new trader. There seems to be such a wide range of options that it is almost impossible to know where to focus your attention and what to ignore.
My advice on this matter is always the same. Trade what you know and expand from there. The longer you are trading, the greater the understanding you will gain of the context of where particular assets fit in, and thus, you can focus on different assets, or asset groups at different times.
Most professional traders will tend to gravitate towards where the volatility is, as this will provide the best opportunity for sizeable gains in the shortest period of time.
Prices and Pips
Following what to trade in this course in Essential Knowledge in Forex Trading is to identify how we actually make money in trading. This in it’s most reduced form this would be a PIP.
What is a PIP? Pip means ‘percentage in point’. It refers to the smallest increment of an exchange rate. For example, it is 0.0001 for the currency pair EUR/ USD, but is 0.01 when referring to USD/JPY, or 0.1 in the S&P 500.
This means that when you are trading Euro/ Dollar, if the price goes from 1.1591 to 11592, that is a gain of one pip. Likewise, a move in USD/JPY from 111.23 to 111.24 would be a one pip move. The currency value of this move depends on what the size of the trade is.
Pips actually aren’t always correlated to the same amount of currency.
If the USD is the cross, then in a 1 Lot trade, one pip always equals US$10 per 100,000 units of currency.
For the other pairs where the USD is the base currency it varies depending on what the base currency is and the size of the trade (see below). They are calculated as follows:
1. Pip Value = (1 pip [with decimal placement for currency being referred to] /currency exchange rate) x trade amount
2. For example, that means that if you are trading EUR/USD at 10,000 units, (0.0001/1.1404) x 10,000 = €0.8768 per Pip
Spread
Next after establishing what prices and pips are is this course Essential Knowledge in Forex Trading, the following point to understand that, uniquely to finance trading and investing, Forex quotes are provided in a two-way price. The bid and the ask prices.
The bid is always lower than the ask price. This means that as a trader, you can enter the market to buy at a slightly lower price than you would enter as a seller. Before you are going to start making profit, your trade needs to cover this spread. This means that as soon as you open the trade, you will see that you are down the price of the spread, before the asset has even moved a pip. Once this is covered by the asset moving in the favoured direction you start making profit.
Fixed or Floating?
Spreads can be set by brokers and will be in one of two formats, fixed or floating (variable).
Floating
Floating spreads are sensitive to volatility and are subject to change by the broker whenever there is a volatile period in the market like a news announcement or a political event etc. This means that while you are normally trading an asset, let’s say EUR/USD at a 2-pip spread, during a time of high volatility, the spread is more likely to be 6 or even 10 pips. This means that the unaware trader has unwittingly spent a significant amount more on that trade than they otherwise would have. If you are trading at $10 per pip, that could be up to $100 just in spread.
Fixed
The alternative is to have a fixed spread. This means that the broker has predetermined the levels at which they are happy to offer the asset to the market. It is essentially an average of what the floating spread would have been over a period of time offered as a constant. So, where a floating spread might range from 2 pips to 10 pips as discussed earlier, a fixed spread might be offered at 3 or 5 pips all the time, depending on the asset.
Which Is Better?
The differences and preferences on a grass roots level for each trader is going to be what kind of trader you are. For example, for a scalper or day trader, it is probably going to make more sense for them to take an account that has fixed spreads because they are very likely to be trading at times of high volatility such as news announcements and economic releases. Using fixed spreads is going to allow these traders to know in advance how much they are going to pay in spread, no matter the market conditions.
A swing or position trader, however, is probably better advised to look at an account that has floating spreads because they are aiming to hold their positions on a much longer time frame and are more likely to already be in a trade when there is a news release or event that is going to cause short term high volatility.
Alternatively, they are more likely to wait until the volatility has left the market and the asset has started to move in a trend or range before entering their trade. A floating account will allow that type of trader to enter the trade at a lower spread than a fixed account would.
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Trade Size (Lot)
In this course in Essential Knowledge in Forex Trading, this may be the most important section for you to understand. This section commences the part of the course that formalises our thinking regarding Risk Management.
Forex is traded in Lots.
The standard value for a lot is USD $100,000 which correlates to US$10 per pip.
However, depending on your broker, you may also be able to trade Mini Lots (US$10,000) or even Micro Lots (US$1,000) which risk a lot less capital per pip respectively US$1.0 and US$0.1. We discuss this further in the Risk Management section.
So, what is the best trade size for you? This can be determined by doing some calculations based on your account size, or capital, and how much you can achieve out of a given trade.
Let’s Look at The Calculation
1. Total Capital x Risk appetite % = $Value of Risk per Trade
2. That means if we use our example from earlier, we have 10,000 x 2% = $200
So now that we have that, we can look at what trade size to use in order to attain that Capital at risk rate.
There is a calculation for that too.
3. $Value of Risk per trade / PIP value of risk = Trade Size
4. Following on from the above example, that would mean that if we were using a 1:3 risk return ratio (100 pips to 300pips)
5. $200/100 = $2 per pip, or 2 mini Lots.
It all depends on the amount of capital you have to start with, and what kind of trader you are, to determine what your risk appetite is. Understandably, a scalper is not going to have the same trading goals as a swing trader. It will be virtually impossible for a scalper to make 300 pips in a single trade, where as a swing trader should be able to achieve that target in a few days under the right conditions.
Defensive Trading Tip: Always try to use a smaller trade size when starting out in trading. It will seem like you aren’t making very much to start with but remember the 90/90/90 rule. Your goal as a new trader is to gain experience, not to get rich overnight.
Long and Short
One of the great things about trading CFDs and in particular Forex is that you can trade in either direction. The logic of this can be a little bit confusing to being with but it becomes second nature after a while.
You are always dealing in the base currency; this is a key concept to master. In reality, you don’t actually need to understand how the exchange works on a technical level, it is helpful to.
As we will be discussed throughout, there is never a simple answer to the question of buying or selling a particular asset at particular point in time. Especially if you are inexperienced.
In Forex, when you hear people talk about buying, what they are referring to is buying the base currency and selling the cross. This is known as going ‘Long’.
The idea is to buy the base currency at a point in time, then wait while the market increases in price, then sell, or close the trade, at a higher price.
For example, if a trader goes Long EUR/USD at 1.1404 then that is saying that €1 = USD$1.1404, so after buying that currency and waiting X period of time, the exchange rate is now 1.1434. That means that now €1 can purchase $1.1434. Therefore, the purchasing power of the Euro has increased against the Dollar. You have made a profit of 0.0030, or 30 pips.
The reverse is also true, if you feel that the currency pair is going down, you will want to sell the base currency and buy the cross. This is known as going ‘Short’.
In this instance, you will be selling the base currency and buying the quote currency at a point in time, then waiting while the asset decreases, at which time you would then buy the base currency back at a lower price.
For example, if a trader shorts EUR/USD at 1.1404, they open their trade and wait until the asset decreases to 1.1394, €1 can now only purchase $1.1394. In that scenario, it is now costing less US Dollars to buy €1 than it was before. You have made a profit of 0.0010 or 10 pips.
Leverage
When you are trading a leveraged account, you are essentially borrowing money from the broker that you require in order to trade.
Forex typically offers high leverage compared to alternative areas of investing such as Crypto.
The current standards across CFDs are now set by law at 30:1 for major Forex pairs, 20:1 for non-major pairs, gold, and major indices, 10:1 for other commodities and non-major indices, 5:1 for stocks and 2:1 for cryptocurrencies.
This change took place in a regulatory attempt to protect the client, and you are now limited to these maximums. Previously you could leverage an account up to 1:400! The reason it was changed was that, yes, a trader can make more money per dollar invested with higher leverage, but the reverse was also true. Traders could then trade larger than they should have been, and ended up eating up most their account, usually on one or two bad trades. Sometimes this could take a few days, but it could also happen in a matter of minutes.
Margin
Directly related to Leverage is Margin. This is the minimum balance required in order to place a trade. As of 1 August 2018, this is now set at 50% of the value of the trade.
Defensive Trading Tip: You are not bound by the amount of margin required to be held by each trade as your risk amount. You are free to set a stop-loss within that range to close your trade out before the account reaches that level. As a Defensive Trader, this is essential.
Margin Call
Margin call occurs when the amount of available capital in an account falls below the broker’s required minimum. This happens when one or more of the assets that are being traded moves against the trader sufficiently so that the capital of the account is now in risk. The account holder is required to add additional funds to the account in order to prevent one or all of their open positions being closed.
To make sure that this doesn’t happen to you, it is important to understand how much leverage you have and how much margin is required by any given trade. Luckily there is a calculation that you can do to determine this in advance.
1. The formula is as follows: Required Margin = Trade Size (units of currency) / Leverage * Market Price
2. For example, if we’re trading 10,000 units of EUR/USD at 1:30 leverage at an open price of 1.1404 = $380.13 or margin required.
Rollover
In spot Forex, transactions are ‘due for settlement’ 2 days later. In practice, as traders using a leveraged account never intend on taking delivery, the broker will ‘rollover’ the trade. This involves closing the open position and opening an identical one with a settlement date in 2 days-time. This process is usually done on a daily at 5:00 pm New York time.
Please note, that this will only affect traders who are holding their positions overnight, or longer. During this process, the broker pays or charges you whatever the interest rate differential is between the two currencies in the pair.
For example, if you have a long trade, and the currency you have bought has a higher overnight interest rate than the cross currency, you will gain. This is also known as a Carry Trade. For more information on this trade setup please see the Carry Trade section in Part 4.
Understanding Charts
Support and Resistance
The importance and significance of support and resistance in Forex Trading cannot be overestimated. Being able to identify these correctly is a huge part to being able to understand where points of interest are in the market and therefore where the safest and highest probability trade set-ups are.
In reality, the levels aren’t always strictly adhered to by the market, but they are defiantly indications of points of interest for traders. The exact levels can be ‘tested’, furthermore, when there is a high level of volume/volatility in the market. In these market condition, it will not be uncommon for you will see the price literally crash through the previously held levels making them then redundant in that scenario.
Initially it can be confusing to try to mark lines of support and resistance that are actually significant. We recommend that, depending on your preferred style trading, you use a top down method of looking at candlestick charts to identify which areas are stronger than others. This will probably mean for most people, starting on a Daily or even Weekly timeframe and working your way down to the timeframe that you are trading on, 4 Hourly or Hourly.
Psychological Levels
Psychological levels are price points in a certain asset that attract a large amount of attention in the trading community. They tend to be very strong historical levels, or round number figures that stand out significantly compared to the usual Support and Resistance levels. It is very common to see stronger than usual support and resistance around these levels. Notwithstanding, if the fundamental conditions are correct, they can be broken as with any other Support and Resistance level.
Trends and Channels
Trends and Channels are probably the most useful analysis method in forex. They are basically levels of support and resistance that occur in a diagonal fashion as a market is trending up or down.
Trading Tip: It is always very important to appreciate that the trading opportunities presented in these trending markets are not there indefinitely. For that reason, it is always advisable to trade with a stop-loss, even if it is very wide. See Risk Reward Ratio for more on this calculation.
Trading Tip: Markets quite often will not move in a neat trend. They can spend a lot of their time simply consolidating or ‘drifting’ sideways in a fashion that does not indicate a specific intention of direction. For more on what to expect from these periods, see chart patterns in Part 3.
Uptrend
Uptrend is essentially what it sounds like, when you notice that an asset is moving in a set direction in a set range over a certain period of time. It allows the trader to look at the chart and identify that the levels of support and resistance are, as the price is increasing in a linear diagonal way. This indicates the pattern that the asset has settled into. While it ebbs and flows its way in an upward direction, it obeys a
certain range increasingly high highs and higher lows. This gives the trader the opportunity to enter the market at a point that will allow them to maximise profits and minimise risk.
Downtrend
Downtrend is the same as an uptrend but in the opposite direction. This appears when you are looking at a chart that is producing lower highs and lower lows.
Trading Tip: Any trending market will not stay trending forever. As fundamental conditions change, or technical levels are hit, the trend will break, whether higher or lower. Be careful of this eventuality and make certain your stop loss is set in order to account for this scenario.
Stop Loss and Take Profit
These are the essential automatic actions that you must set on every single trade. As the names would indicate, the Stop Loss will close your trade in loss, a pre-determined amount of loss you have decided you are comfortable with prior to opening the trade. To calculate this loss, see Risk Reward Ratio.
Similarly, the Take Profit level is the target level that you determined prior to opening the trade. It will automatically close the trade as soon as your target price has been hit by the asset, even for a millisecond. It is a much more accurate way of trading than using your delayed ‘human’ speed reactions. It is also able to work perfectly even when you are away from your screens etc.
Setting these levels is done by using the aforementioned Support and Resistance levels. This is done by looking at your analysed charts to determine where these levels are. This is a visual way of deciding levels and is and is effectively the best way of being able to a realistic idea of how many pips the asset is likely to move, in what period of time.
It is essential to use the pre-determined stop loss level calculated as a ratio of expected profit. Please note however, this ratio can be altered depending on market conditions. By using this numerically based system of predetermined decisions, you are then able to analyse your profitability by comparing apples with apples as it were. You can then tell month on month, and year on year what your performance is like, if you are improving, where your weak spots are etc.
Defensive Trading Tip: Sometimes when you are watching an asset, despite your expert analysis of the market, it behaves in a way that is not in keeping with its established pattern. For this reason, always set stop-loss and take profit levels for every trade.
Some more experienced traders prefer not to use a stop loss, especially in times of high market volatility, however, at this beginning stage, it is advisable in order to avoid being margin-called and losing all the hard-won profits you have made on one silly mistake and ‘blowing up’ your account.
Volatility
Volatility is extremely important for trading Forex. It is essentially the level of velocity at which the price change take place within a set period of time.
If the price increases and decreases over a wide range during a short period of time, then there is said to be a high level of volatility.
Accordingly, when there is very little price movement in an asset over a period of time, it is said to have low volatility.
For traders, their appetite for volatility is a spectrum. Some who trade on fairly short-term timeframes prefer a higher level of volatility as this presents opportunities for them to make money. Others prefer a slightly more conservative level of volatility because their style of trading is better suited to slightly slower and more predictable rates of change.
In the end, all traders require a sufficient level of volatility for the market to be moving enough for them to trade. It is virtually impossible to safely make money out of a stagnant or drifting market.
Prices Gaps
Price gaps are empty spaces between the close of one candle and the open of the next. It is not that common, but it does happen from time to time. It is usually caused by an announcement or event that has such an effect on the market as to cause a vast increase in the differences between ask and bid prices. There are several types of Gaps which traders use as indications of future behaviour of the current market.
1. Breakaway gaps are considered significant indicators that it is the beginning of a new trend.
2. Exhaustion gaps occur near the end of a price pattern and signal a final attempt to hit new highs or lows.
3. Common gaps are those that cannot be placed in a price pattern – they simply represent an area where the price has “gapped”.
4. Continuation Gaps or Runaway Gaps occur in the middle of a price pattern and signal a rush of buyers or sellers who share a common belief in the underlying stock’s future direction.
Risk Management
This is the section of the course Essential Knowledge in Forex Trading where all the above items come together in order to formulate an overall picture of how we can safely trade.
Managing capital is the most essential elements to trading. It is all well and good to have expert opinions on the global economy, or to be a superior chartist, but with no money left in your account it is all for naught. You must protect your capital at all costs!
Interestingly, lots of analysis has been done on the retail Forex market and concluded a fascinating finding. In the majority of cases, retail (non-professional) traders close the majority of their trades in profit, however, when they closed their losing trades, they did so having allowed their losses to exceed the profits.
This means that due to having lost more on losing positions, than the amount they made on the winning trades, despite being right the majority of the time, they were still making a loss overall. It was found that the average profit on the EURGBP was only 30 pips, while the average loss was closer to 51 pips.
So, what can we learn from this? That there is a tendency for traders to seriously doubt their winning positions and get out of the market with a small profit, however, when the market goes against them, they are far more likely to stick with the losing trade struck by an incapacity to take the hit and move on to the next one.
This is probably one of the single most significant difference between professional (profitable) traders and an amateur. The amateur seems to be unable to stick to their predetermined trading plan and risk/reward ratio (RRR). Whereas, the professional trader is very comfortable with accepting that market conditions or asset behaviour have changed and refocus their trade setups.
The only solution is to agree, ahead of time, on a set risk/reward ratio and stick to it while you determine your win rate.
It is always going to be disappointing when the trading decision that you made doesn’t turn out to be correct, however, it will not hurt as much as opening your trading account and seeing that 50% of your capital has been eaten up by one silly trade decision.
Trading Tip: Moving a stop loss as a trade is running is very common among amateur traders as they watch the asset move against them, they somehow convince themselves that if they just risk a little more and a little more, that the asset will change direction and they will not only cover their losses but stat trading in profit (essentially, that their analysis was right on to start with!).
It is also as common to see a trader ‘double down’ on a losing trade, convinced that if they open another position trading in the same direction as their original losing trade, when the asset moves in the direction they what it to, they will make even more profit than they were going to when they just had one trade open.
If you ever find yourself considering doing this then you should immediately agree with yourself on a palatable stop loss level, set leave it there. Or you could simply close your losing trade manually and recalibrate your opinion of this asset.
Risk Return Ratio
There are millions of strategies out there to tell a trader to (mindlessly) only risk a certain ratio of what they aim to make. This idea is wonderful in theory but the problem is that we can never know in advance what the market is going to do on any given day, and thus, we need to become experts in reading different kinds of markets that are constantly changing.
In addition, each trader is different and has different success rates. That is why as a general rule, you can look at ratios on a sliding scale.
Let’s look at some calculations to help us understand RRR better.
If we take into consideration that the amount of trades we win is as important as the amount we make on those trades, we can create a formula to help us understand how to perfect our trade set-ups.
Let’s look at this formula in order to better understand how that works.
1. Minimum Win Rate = {1 / (1 + Risk: Reward)} x 100
2. So, if our reward to risk ratio is 1:2 for example, {1/ (1 + 2)} x 100 = 33.33%
3. This means that if we are correct 33.33% of the time or more, we are profitable traders with a Risk Reward Ratio of 1:2.
4. If you had a RRR of 1:10 you would only have to get it right 9.09% of the time!
There are also other things to consider with thinking about RRR. The important thing to consider is how many pips are you willing to lose in order to gain? A 1:2 ratio would mean that a trader is willing to risk 50 pips, for example, to gain 100. 1:5 would mean that for every 50 pips risked the upside is expected to be at 250. Bearing in mind that GBP/USD moves on average 127 pips a day during the London session, these figures are quite achievable.
Before you go off and make an arbitrary decision on what your RRR should be, it is important to take some things into consideration.
Firstly, earlier we discussed volatility. If you are trading in a very volatile period in a market then you are going to be well advised to set your stops with more ‘breathing room’ than what you would be when you are trading in a nice neat trending market.
Secondly, it will depend what style of trader you are as to what your preferred timeframes you are trading on. It is much more likely for a trader who lets trades run over a few days to make 200 or 300 pips out of a trade, whereas the trader who is only leaving positions for the duration of that day to aim for a more conservative 30-50 pips.
The third key point to consider is your risk appetite, as we mentioned earlier. Generally, 1-2% of total capital of perceived as being pretty conservative and a good place to start.
In summary, how much you should sensibly and realistically be aiming to make is completely dependent on how much you invest in the first place. Which will in turn directly affect what your trade size is.
How Much Capital (Money) Do I Need?
As we have said throughout, how much you need in your account is directly related to what trade size you want to make and what your leverage is, in order to determine how much margin in required.
Of course, the more money you deposit the more options you have. You will be able to make more trades at any given time, or, conversely, you will be able to trade larger trade sizes on fewer trades at any one time.
It would be impossible for me to provide an exact figure on what this is for each person, however, for a complete beginner, as an absolute minimum amount I would advise to start with not less than $500.00, preferably $1000.00. This figure can achieve two key things.
Firstly, that you can afford to make several mistakes early on, but with the application of the Defensive Trading approach, you ought to double your money in a short period of time, depending on how often and on which assets you trade.
Secondly, that you don’t have so much in your account that you are reckless with your capital. Seeing a reduction in your account of $50.00 on an account with $500 looks much more significant than a reduction of $500.00 to an account of $5000.00.
It is completely psychological of course, however, whatever you decide to deposit in your account to start trading with, make sure it is an amount that is sufficient for you to make a few mistakes and still be fine, while at the same time, not so much that you make haphazard decisions.
The best thing that you can do as a beginner is to start small and learn, make mistakes and get better, then increase your capital once you have earned your stripes.
Your capital is at risk. Other fees apply.
Psychology
Psychology is probably one of the most difficult elements of trading. So much so that I could write an entire other book on it. For the purposes of progressing with the skills-based material in this book, I will keep it brief and point out only the essential information.
Before we begin you must know that you going to have good days and bad days, good weeks and bad weeks. As long as month on month, year on year you have consistency profitability.
Lesson one in trading psychology is to accept the inevitable. You are going to lose trades. It is what you do with that information that makes the difference.
Can anyone who can remember learning to ride a bike? If so, you can probably recall the bitter burn of grazed knees and elbows! You had seen other kids riding around on their bikes like it was second nature, so you picked yourself up (with some encouragement from mum or dad) and got back on, a better rider that what you were before you fell off.
You did that because you had the absolute belief that it is possible to ride a bike, after all, all those other kids were doing it so why not you? And secondly, you knew you had to do something different the second time around than what you did originally in order to avoid the same sting.
Trading is no different.
If you speak to almost any professional trader you will probably tell you something similar to: “don’t aim to make big wins, aim to make small losses.” Or “If you cover your downside, then your upside will look after itself.”
This can only be done by doing your calculations in advance, knowing the assets you trade and accepting reality; come what may. In essence, you need to be able to take emotion out of the equation when you are making your trading decisions and stick to your calculations during the trade. You have probably heard the saying “don’t change horses midstream”, well it couldn’t be more true in trading Forex.
1. Be patient. No FOMO. No overnight millionaires. One of the biggest elements of the psychology of trading is FOMO (Fear of Missing Out). In plain English, this term is used to describe the irrational rush to enter the market due to the fear that the asset is going to rocket sky high and that the trader who is not in the market will then miss out.
2. Be realistic, not greedy. Set realistic targets for your trades and take the money when it is on the table. As I say repeatedly throughout this book, there are always more trades around the corner. Yes, it hurts when you see an asset move past your take profit level, especially it if is significantly, but no where near as much as it hurts to look at your account at the end of the day and see that your take profit wasn’t hit at all, and the market has turned around and is fast approaching your stop loss level.
That’s money you are handing over, not collecting on which is the wrong side of the equation to be on in any game.
3. Keep your cool. Don’t panic. It should also be noted not to hesitate. If you see a trade in front of your face, take it. Should it go against you, keep your head. If you follow the steps set out in this book, you will be prepared for the downside and it is all accounted for. It is only a matter of time before you will see the profits stack up.
4. See what is really there. This is probably the hardest of them all. All too often a trader has a winning streak where they are so in tune with the markets and the asset they are trading, they can tell you what is going to happen two weeks from now. And it does. Good times. But, then, alas, something changes. There is a new fundamental factor affecting the prices in the market, or perhaps it may just be as intangible as market sentiment, risk appetite etc. Then, the moment is gone.
The trader who once had godlike control over the price movements of the asset is now playing a game of cat and mouse and getting beaten at every turn. This is ok. It is at this time that you need to stop and recalibrate your point of view.
That doesn’t just mean do a 180 degree turn and jump into a trade. It usually means that you are too early to make that trade set up that you believe that will take place and you keep getting stopped out on your trade. To prevent this, wait for signs of confirmation before getting into your trade rather than trying to will the price to move as you what it to.
5. Don’t get too confident. Often traders have periods of exceptional profitability where they are correct in their analysis and time trades wonderfully. This is a fantastic experience and can help a trader to make a great return. It can also do something more sinister. It can lead a trader to believing that that they are so in tune with the market price movements, that they are going to continue this mastery indefinitely.
This is not true and all too soon they will find that they could pick a winner in a one-horse race. When experiencing a larger than usual return, maintain constant awareness that this is cream on top of what you would usually generate, and that is it not going to last.
6. Tomorrow is another day. Defensive trading teaches traders to protect capital and profits at all costs. This logic works based on the knowledge that there is always, always another day of trading following this one and that no two days are alike. Do not lament bad decisions, do not dwell on them. Certainly, learn from them, but do not be defined by them.
The reality is that a meticulous, cool-headed and systematic approach to trading anything, is the winner at the end of the day. This is much easier when you use a trading plan or checklist and stick to it in the heat of the moment.
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