You Don’t Need a Crystal Ball to Make Money in Forex
This week’s lesson is designed help you make the shift from your random haphazard trading habits, into the disciplined, professional forex trader you know you can be.
We have all heard the following sentence before,
“You don’t need to know what will happen next in order to make money in forex”.
But do you truly understand what is being said?
How can that statement be true? You need to pick a direction don’t you? So you need to have some idea of what you think might happen next, otherwise why would you put money on one outcome over another?
This statement niggled at me for the first year of trading, until the penny finally dropped on what the professional traders of the world mean when they say “you don’t need to know what is going to happen next to make money in forex”.
The “ah ha” moment came for me as I was reading Mark Douglas’s legendry “Trading In The Zone” and I had just been stopped out of another ill planned trade that I was sure I would retire on the proceeds once it manifested itself as I KNEW it would.
This single concept, this single line of text is the basis for all psychology in trading. Once truly adopted and taken onboard as a belief, this will shape your trading habits for the better.
Turning the tables
As you know having an edge on the market, a pre-defined set of rules that allows you to identify a high probability trade set up of one thing happening over another is essential for trading in this market. But why is it we feel compelled to step outside these rules because we see a setup that we know is going to work, so why wait for the stars to align to take the trade?
Fact: You can’t possibly know what is going to happen next in the market
The forex prices are a forever changing set of prices and patterns, being pushed around the screen by countless, traders, financial institutions and big businesses conducting, well…. business!
As you would have noticed, no two trade ‘set ups’ (your pre-defined set of parameters you use to identify your edge in the market) are the same. This because the market could never replicate the exact same trading environment as has happened in the past.
For any particular pattern to be exactly the same as it was in some previous moment would require that every trader who participated in that previous moment be present. Each of them would have to interact with each other in exactly the same way with exactly the same position sizes over the same period of time to produce the exact same outcome.
If you take in to consideration all the possible variables and forces on the market such as global fundamental sentiment, central bank policies, geopolitical factors all impacting on the individual minds of traders and their individual psychology and ‘take’ on the current trading environment, you can see the odds of the exact same pattern being replicated by the market are zero to none.
With that being said how is it possible to “pick winners” and make consistent money in an unpredictable environment? How are these professional traders doing it?
The Professional Edge
If you have ever attended a seminar on trading the forex market or purchased a training course you will notice professional traders look for patterns of similarity. Using various tools in their bag of tricks to identify a specific trade setup, they identify points in the market with statistically a have a higher probability of one thing happening over another.
That’s not a new concept to you I’m sure, but it’s how you view the trade before you place it and during the management that separate the professionals from the novice.
- When a novice trader places a trade, his mindset is this.
- I’ve seen this setup before, the market is ready to go up.
- If I put my stop there and hold onto this one I could make a handsome profit.
- If I put ‘X’ amount of $ on the table, I stand to make ‘X’ amount of $ when the market goes to that point as I’m pretty sure it will.
- I’m getting on this one for sure.
You will notice a few things about the novice thought pattern before he/she takes the trade. Firstly they seem to be diving in on a trade that kind of looks like something they have seen before in the market. They are very focused on the outcome and the $$$ without paying too much attention to the risk involved.
The worst thing that could happen in this situation if the trade goes on to be a winner. Having such a poor mental state when entering a trade and having that experience internalized by receiving a reward, will just set back this traders progress in making the mental shift to that of a professional.
When a professional trader places a trade, his mindset is this.
- Anything could happen.
- The is a random distribution between wins and losses with this trade set up I am about to take
- I am executing this trade because I have identified (with my edge and specific rules) a higher probability of one thing happening over another.
- I am willing to loose ‘X’ amount of money to see what is going to happen next.
The Mental Shift
How many times have you looked at a level and said to yourself, “I think that level will hold”, but don’t execute the trade, to then watch it hold to the pip and sails off into the sunset.
I’m sure everyone reading this has left money on the table or had a trade that moved half way to your stop loss and you have thought, I was wrong, I am going to get out here and look for the next trade. Of course it was a winner. Or ever worse, a trade comes half way to your stop loss, and you are so sure of it you take another trade (adding to your position) and it only has to move back to my original entry and I’m already in profit!
These thoughts and practices couldn’t possibly eventuate unless you knew for a FACT, through and through, that price is going to do what you thought it would. Why else would you double your risk or not taken profits when the market made them available to you unless you knew for a fact, without a doubt that the market was going to move in a particular direction over another?
But hang on a minute, how you could know exactly how the millions of traders around the world are currently viewing the market. With their endless indicators, trading methods, position sizes and personal psychology taking perceiving the technical and fundamental information in their own unique way to then interact with the market.
How do you know where the price is going to go next? … The answer is you couldn’t possibly.
The mental shift you need to make as traders is from the thinking in absolutes to thinking in probabilities.
Thinking in Probabilities not Absolutes
Like the tides in the ocean, the forex market is constantly shifting and changing from one end of the probability continuum to the other. Form low risk trade entries and setup to high risk ones. This shift can often happen relatively quickly and subtly.
Knowing for an absolute fact that anything can and will happen in the market and having an entry and more importantly and exit strategy, will allow you to extract pips from the market on a consistent basis.
Having back tested this edge yourself (even if it is closely based on the strategy of another) and knowing it to have a positive outcome not just copying another successful traders plan to a tea, will help you make the mental shift to that of a professional trader who knows the probability statistics of his/her system.
You will become a trader who understands the market for what it is, and submits to it once a trade is live. You will also understand you are trading with a positive expectancy system with a random distribution between wins and losses, so what happens next really doesn’t matter.