Forex Trading Philosophy
What is forex trading philosophy?
Forex trading philosophy is how a trader view the forex market to make his/her trading decisions. It is how a trader investigate the forex market in order to discover the truths and principles behind the price movement.
Forex trading philosophy is critical to trading success as it forms the picture for how a forex trader view the action on a chart. It has to do with how a trader view information, what types of information and how to implement that information.
Forex trading philosophy can be include or summarized as follows:
i. Newbie forex trading philosophy
ii. Forex philosophy of money management
iii. Technical indicator philosophy
iv. Chart and price pattern philosophy
v. Forex robot philosophy
vi. Order flow philosophy
vii. Philosophy of successful traders
1. Newbie forex trading philosophy
The newbie forex trader is excited to start a forex trading career; he/she is attracted allure of making easy money. As most of the forex site offer “risk free” trading with high returns at low investment. It looks really astonishing but in reality it’s not a cup of tea. As any thing with life, this market also does the same ie. What you put will decide what you get. The two most common mistakes beginner make in forex are let the emotion rule their trades and trade without proper strategy. As soon as we get the life account we attempt to dive straight away in the ocean of forex. Watching the currency movement may make you feel like that you are missing an opportunity if you not enter the market. You place your order and the market turns against you. It makes you panic and sell with loss in hand. This approach will not take you anywhere except losses. Traders need to have rational strategies and don’t allow your emotions to rule your decisions. Keep all the emotions out of your trading and see results. To make sound decision trader must be well educated with market fluctuations. He must be able to use fundamental and technical tricks to enter and skit the positions. He must know the advantage of various order types so that he can maximize the gains and minimize the risks. The first thing you need to understand to be successful forex trader is to understand the movements in market and force behind those movements. This wil give a brief idea about identifying various techniques and use them in your own trading strategy. So guidelines and rule wins in the long run. You need to check yourself by yourself, if you must succeed here you must play smartly. So it is important to learn all the techniques and strategies before starting a forex trading.
2. Forex Philosophy of Money Management
Managing your money is an important part of your forex trading strategy. Other than knowing currencies to trade and recognizing exit and entry signal therefore trader has to integrate money management in his plan. Margin, losses and profits size of the position should be considered before entering the market. There are many strategies that approach money management and most of them rely on care equity calculation. Core equity is initial balance minus the account of money used in open position.
3. Technical Indicator Philosophy
An example of this is a forex trader that has a trading philosophy that revolves around technical indicators will view the market in a certain way.
When he sees price movement on a chart, those trader will automatically go and see if their technical indicators forex off a signal. They are attempting to explain price movements through the moving averages, MACD, stochastic etc they tend to assign certain meaning to the market movements. So when a technical indicator trader sees a huge market move, they will tend to say well the market moved because the moving averages crossed higher, there was divergence on this indicator, or this indicator was overbought/oversold or the market collapsed because a death cross formed.
4. Chart and Price Pattern Philosophy
This is a situation whereby traders believe in technical analysis the believe in studying price data, but many of them choose to “trade naked” or to use very limited technical indicators. They believe that the actual chart and price patterns are the truest senses of what the market has done and what it can do in the future. In this case, the noise of technical indicator are avoided, or can be used in a limited number.
This kind of philosophy forms a mental model inside the traders mind. When they see price move they assign meaning to it. They may say price dropped because the market formed a head and shoulders pattern. They may say price broke a trend line, reseated it and then moved. They may say the price retraced to a Fibonacci level and there was a nice engulfing bar that signaled a trade.
The use of trade setups, triggers and tools are part of their mental model. These traders love to use some sorts of Mize of support and resistance, tread lines, chart patterns, price patterns, Fibonacci levels, “key moving averages”, psychological numbers”, and the use of multiple time frame analysis, etc.
5. Forex Robot Philosophy
The forex robot traders have their own Philosophy and mental model as well. They believe that the forex market can have some mathematical code to them and they can be searching for the Holy Grail (system).
They believe it exits and if they just get the right indicator settings, and program it, and back test it, that they will be able to find a profitable system.
They like the concept of automation. They like to have a system that automatically generates buy/sell signals and place, the trades for them.
If the market makes a big move, they will tend to see if their system generated a signal. If it did them they captured the movement and explain the price movement through their forex expert advisor.
Thus, they view the market through mathematics, programming, automation etc. that is part of their Philosophy and mental model.
6. Order flow Philosophy
These traders view the market through the concept of order flow and liquidity. They view the market through what will compel traders to take action and generate order flow.
They like to use concepts such as stops, option barriers, news, market sentiments market expectations, market positing, stop cascades global macro, market sensitivity. All these concepts and principles form part of their mental model and Philosophy about the markets.
They do not use indicators or charts rather they explain big market moves either presently or in the future using order flow Philosophy, they love the truth.
They tend to have a more grip of the major market participants and their behaviour, they study market breakouts, what the global market is doing.
7. Philosophy of Successful Traders
Your trading Philosophy must include emulation of successful traders. Success leaves clues. That is, the successful day traders seems to all be doing same thing while the unsuccessful day traders are also doing the same thing-which is the opposite of what the successful traders do.
The successful traders have discipline and a solid set of day trading rules, and they have enough capitalization so that fear does not rule their trading. They know all about risk management and follow excellent risk management procedures.
To be sure you have a successful trading philosophy; you need the determination and principle to:
a. Learn what the winners are actually doing, so you can emulate them.
b. Get very clear on what your plan is, how you will trade, what you risk management strategy is.
c. Follow your plan to the letter.
v They know that a perfect forex trading system does not exist
v They follow real life examples etc.