Forex trading can be very complicated. There’s so much to learn and so many different methods of analysis to choose from that things can easily get overwhelming and the journey to success can be a long & daunting one. However, with the right roadmap your learning curve can be smoothed out significantly. To succeed you don’t need to know everything you just need a solid trading plan and a strong understanding of the aspects included in that plan. I’ve put together a 5-step process to follow before entering trades to set you up with a simplistic & successful approach to the forex market.
Step 1: Risk vs Reward
Your first consideration for every trade should be risk vs reward (RR). As realistic traders who understand losses are a part of the overall process, it’s crucial that we keep those losses down and manage our winners to profit considerably more than the losses we do take. For this reason I put RR at the top of the 5-step trading process. Before you even consider moving forward with a trade Idea you must make sure RR is worthwhile. I personally don’t look to ever take a trade with lower than 1:2RR which essentially means that even in 50% of my trades lost I’d still come out of each month with a nice profit overall. The chart below shows the account growth through 4 wins & 4 losses at 1:2RR:
Step 2: Simplistic Analysis
Keeping your analysis straight forward and simple is the best way to approach markets. Price action is all you really need – there’s no need to use indicators or moving averages they generally just add confusion to what can be a simplistic and laid back process. Market structure, key levels and supply & demand are enough to get you by consistently without clouding your mind. Keep your analysis simple & you will be rewarded with a lower stress career and more effective analysis free of distraction.
You will learn all about the analysis aspects that really matter in my Online Trading Course.
Step 3: Multiple-Timeframe Reviews
While you should keep your analysis as simplistic as you possibly can it’s also important that you don’t miss out areas of importance like reviewing multiple timeframes before going in for a position. I whole heartedly believe that reviewing multiple timeframes is one of the most important areas of analysis and an aspect that can save you from many losses when carried out during the analysis phase.
Sometimes when you have a trade prepared on your timeframe of choice all analysis may line up to perfection and you feel ready to take the shot and enter the position. Before you do, make sure you review the higher timeframes to see if they line up with your overall view of the market. Sometimes a setup that looks amazing on the 4h/1h can be completely blown out the water with a simple view of the daily or weekly chart which shows an absolute contradiction. Get into the habit of reviewing the higher timeframes before entering your trades & save yourself from some losing trades.
Step 4: High Selectivity
Successful traders have developed patience like no-other and the ability to select only the best of the best trades to execute. There are two main ways that we can be selective for better results:
- Be selective about the currency pairs/assets you trade
- Be selective about the actual trades you choose to execute
In regards to the first method of selectivity some traders including myself choose to specialise our skills into a small basket of currencies and assets rather than keeping the whole list of global currencies open for opportunity. Selecting just a few pairs to trade and cutting out all the others allows you to dig deep and specialise on 1-5 major currency pairs/assets allowing you to follow the flow of the market & make profitable trades in doing so. This filters out all noise and allows you to master the movements of specific markets & keep up to date only with the news & fundamentals that matter to your chosen specialist pairs.
The second and most important type of selectivity is developing the ability to only execute the best of the best trades. A lesser experienced trader could have 8 setups on their watchlist and take every single one of them, exposing their account to 8x standard risk. A more experienced trader understands that 8x trades in one go is entirely unnecessary, and has the ability to selectively choose just 1 or 2 of those positions: the BEST OF THE BEST. This keeps account exposure down low and leaves the trader with only 2 positions to manage.
Lower risk, lower stress, higher probability.
Step 5: Exceptional Stop Loss Positioning
By this point we have discussed putting focus on risk vs reward, using simplistic analysis with a multiple-timeframe approach and being highly selective with the trades you decide to execute. The final step to consider before going in for the kill is finding the ideal stop loss positioning for your trade.
Learning how to position a stop loss effectively brings your number of losing trades down significantly which can do wonders for your account & your mindset. Losses are hard on us mentally so keeping them minimised is always favourable. There are a few things you should consider when choosing how to position your stop loss order:
- Does it fit into your Risk vs Reward strategy?
- Is the SL clear of any key levels/zones that price could tap into?
- Is it realistic or is it dangerously placed based on hope of catching a higher RR?
Stop loss orders are essential for maintaining profit over the long-term so mastering SL placement is a key step in your path to trading success.
The 5-Step Checklist for Winning Trades
That’s my advised 5-step process for consistently catching winning trades. Find your edge in the market through simplistic processes & a sturdy mindset, and have the patience & consideration to follow through every step in this checklist before entering a trade. Successful traders are calm, rational and selective with their actions; replicate this approach for lasting success.
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