Many Forex traders are unsuccessful for one reason: they over-trade. If you are not having success trading, you must first determine whether you are over-trading before adjusting your trading strategy.
The 3 questions that follow will help you determine whether you are over-trading.
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Are you using too many strategies?
Many unsuccessful traders use between 5-10 different strategies and, of course, they do not make any money. The main reason for that is that, the more strategies you use, the less you can focus on the market itself. I am not saying that you shouldn’t know the market or master your strategy. Those are essential to become consistently profitable. However, this may be an impossible task if you are trying to master 3, 5, or 10 different strategies at the same time.
Are you risking too much on every trade?
Understanding the amount you risk is of more importance than knowing/setting the amount you are going to make. Money management is the most important step of your trading strategy. Many traders go from being unsuccessful to being extremely successful by simply implementing a sound money-management strategy.
What do you do when you are making money?
Greed is your worst enemy. It is human nature, we often get greedy when profits are running high. I’ve been there, done that, but, at the end, ended up losing it all. Greed leads many traders to reckless acting and committing mistakes.
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After asking yourself these questions you probably know whether you are over-trading. Over-trading is really as harmful as using a strategy that has a low ROI (return on investment).
Now let’s discuss how you can prevent yourself from over-trading.
Establish a trading plan: Before you enter a trade you should always know where you are going to exit. You should also have a set of rules to gradually take profits, where your stop loss will be if the trade goes against you, and, as you gradually take profits, where your trailing losses will be.
Your trading style should fit your personality: this is very important because your money management strategy should emulate your personality. Every trader has a different tolerance for risk and, while higher risk may lead to high rewards, it may also lead to bigger losses. As a scalper you will probably set small percentages for profit in each trade (0.5% to 2%) and, as a swing trader, a bigger percentage like 3% or 4% is the norm.
Your trading style and personality should be the driving force behind the Forex strategy you implement.
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This simple 5-step strategy will help you simplify your trading while making you consistent profits.
1. Check the trend using your daily chart. The chart should tell you whether the market is in an uptrend or a downtrend.
2. Once you know what the trend is, check for fundamental news releases that may affect your trade. Do not go to any of the following steps if there are any major news releases within 2 hours of your trade. You can get the current economic news from the news feed in our blog: ForexTraders.Blog.
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3. If there are no news within 2 hours of your trade, execute your trading plan. For example, if the main trend is up, look for “buy” signals from your technical indicators and vice versa if the main trend is down.
4. This is the most important step and your decision on whether to enter a trade lies here. A common strategy is to use the crossing of 4 EMA (Exponential Moving Average) and 23 EMA on the 30 minute chart to decide whether to buy or sell. You should use other indicators like the weekly pivot, Stochastic, and MACD (Moving Average Convergence Divergence) to corroborate your trade. These indicators should also follow the trend and not look flat. You can further edge the trade to your favor by trading only during high liquidity sessions and confirming the trend by using a 4 hour chart. If all looks good, you are done!
5. The last step to manage your money by setting the trade with a tight stop loss of around 35 pips while using one of 2 methods of targeting profit. The first method is to use healthy risk to reward ratio of at least 1:2 and the second is to use your daily support and resistance.
As you can see, a good trading strategy does not have to be complicated to be successful. This strategy should help you achieve consistent profits with your trading.
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