Hi I`m back having taken a break, although I did not plan to take time out from my daily trading life and although I did not have anything planned. So why take a holiday?
Forex trading is best kept simple; in fact I believe it should only be approached once you have made it simple.
Let’s face it life is too complicated anyway, every day turns up a challenge and every day you have to battle your way through decision after decision. How do you go about this? What I mean by that is how do you decide what it is you are going to do to resolve the problem that you have been faced with?
Personally I would look to my predetermined rules/ criteria and use them to deal with the issue. For example when my cars fuel gauge drops to read only a quarter full I will look to refill at the soonest possible convenience. I do this because I do not want to find myself in the awkward position of not being able to find a fuel station when my car is gradually running out of fuel. The reason I set the level at a quarter full before requiring a refill was down to an incident a number of years ago when having ignored the fuel gauge reaching this level I found myself hitting reserve and not knowing where the nearest fuel station was! (This was before the advent of the sat nav). To compound the problem I was travelling Europe and had little bilingual skills. Luckily I found a fuel station just in time, but I promised myself that I would never put myself through that again. The rule therefore that I established, was that when the fuel gauge drops to a quarter full I will refill immediately.
What on earth has this got to do with Forex Trading? Well the above story although a little simplistic, enables me to show how forex trading must be approached with discipline and therefore rules to adhere to. As in the above story if the rules are followed the likely outcome will be success, if of course they are appropriate rules. So where does the phrase “Only a fool breaks the 10 pip rule!” come from?
When I analysed my trading after a number of unsuccessful years, I realised that although over 75% of my trades were successful I was still making a loss! There were two reasons for this. One of these was I was staying in losing trades too long, and winning trades too short a time. The end result being that losing trades lost me more than the winning trades gained me.
Whilst this was critical to my trading its solution would lie in my reading of the charts in front of me and the rules I applied to my trading strategy. An action that would take me some time to learn and apply. So I concentrated on the other reason that Forex trading was not making me money –OVER TRADING.
My definition of over trading is simple; I was taking on too many trades. I could easily take a trade 50 plus times a day. A ridiculous number now that I look at it, but then it seemed perfectly logical that if I wanted earn a large amount of money from forex trading then I would need to win as many pips as possible and therefore I would trade as much as possible. No… NO…NO.
Quite the reverse I believe is true. If you think about it the more trades that you take on the more likely it is that you will find a losing trade, that’s the way probability works. So by reducing the number of trades you take you reduce the chances of finding a losing one. How do you achieve this? I achieve this by looking only to win 10 pips a day, once I have achieved this I walk away from the charts, the markets and my pc, in the knowledge that I have achieved my daily goal and that if I continue then Greed is taking over.
Through tight money management I have increased the size of my trading pot over the years which allows me to increase the size of my trade and therefore the 10 pips now represents a healthy income and as my trading pot increases I increase the value of each trade and consequently the 10 pip gain represents a larger profit. It’s simple, but incredibly hard to carry out, which is where the discipline comes in. Your natural instinct is to trade the opportunity and having just netted a profit you want more, but that’s emotional trading and ill disciplined. Do not let greed win, remember
“Only a fool breaks the 10 pip rule”
Author; Powlo. Forex Trading Made Simple