2Bull Forex Blog

The Forex market can lure the novice Forex trader into trading scenarios that appear very attractive at first glance but turn very quickly into a losing trade.

Many a Forex trader will relate to this experience:

* Price has been in a consolidation channel for one or two hours.
* You place an entry order to get taken in at the top or bottom of the channel.
* Within a few minutes your trade is in and within a few minutes more you are looking at a loss of -10 pips, then -15 pips, and then your stop gets taken out.
* Price hardly moved for hours but as soon as you got into a trade you were taken out within minutes for a loss leaving you bewildered and muttering, “What happened?”

In the early stages of gaining trading experience, it is good for the novice Forex trader to go by a checklist every time before entering a trade until certain habits become ingrained.

Just having a procedure in place that has to be executed before pulling the trigger on a trade can prevent the Forex trader from quickly entering a trade just because there are some sudden movements on the screen and the trader is worried about missing an opportunity.

Yes, disciplining oneself to take time and go through a checklist first may mean missing some good opportunities occasionally. On the other hand, it will prevent having losing trades frequently.

For a very cautious approach to trading the newer Forex trader can use this Failsafe Checklist to determine whether the potential trade setup is likely to be high probability or low probability.

FailSafe Checklist

Avoid Going Long If:

* There is negative divergence on MACD on the 4 hour, 1 hour, or 15 minute chart.
* MACD on the 4 hour or 1 hour chart is pointing down.
* Price is well above the Central Pivot Point for the day in a Sell Area.
* Price is below the 200 EMA (Exponential Moving Average) on the 4 hour and 1 hour chart but above the 200 EMA on the 15 minute chart. (With this setup on the 3 times frames price is bucking the overall trend and can turn against you at any time.)
* Price is above a Fibonacci 50, 62, or 79 retracement (calculated from the last high and low)
* Your stop is not below multiple layers of support such as a significant previous high or low, pivot point, or Fibonacci level.

Avoid Going Short If:

* There is positive divergence on MACD on the 4 hour, 1 hour, or 15 minute chart.
* MACD on the 4 hour or 1 hour chart is pointing up.
* Price is well below the Central Pivot Point for the day in a Buy Area.
* Price is above the 200 EMA on the 4 hour and 1 hour chart but below the 200 EMA on the 15 minute chart.
* Price is below a Fibonacci 50, 62, or 79 retracement (calculated from the last high and low)
* Your stop is not above multiple layers of resistance such as a significant previous high or low, pivot point, or Fibonacci level.

The Most Important Lesson Of All

Implementing this Failsafe Checklist strategy may reduce the number of trades the Forex trader participates in. However, here an important lesson is learned - patience! Waiting for a high probability setup can make many demands on a Forex trader’s mental resources and emotional strength.

This is probably the most important lesson the new Forex trader will have to learn. Using a Failsafe Checklist like the one above can make the Forex trader slow down, engage in thorough analysis using the technical indicators available, and really start to make progress as a trader.

Why not print off the Failsafe Checklist and keep it beside the computer for consultation before pulling the trigger on any trade?

Currency day trading is 90% mental! I had heard this from many professional traders but when you start as a novice in the Forex world you can fail to realize the significance of that statement.

Of course, it is necessary to develop analysis skills using a variety of technical indicators. Risk management and understanding of the market is also crucial if anyone is to succeed at currency day trading.

But the greatest challenge of all is developing mental discipline and emotional control. After many months of practicing in a demo account and testing the water cautiously with a few hundred dollars in a mini account, I studied my main trading faults and documented them.

Here are my 5 biggest mistakes. Perhaps you can learn from them too!

1. ANXIETY & DESPERATION - LEARN TO RELAX!

Feeling a compulsion to trade - its poison!

If good opportunities were missed the day before, or if one or two days have been quiet with no trades, then you need to carefully monitor your emotional and mental state.

If feelings of desperation begin to rise take a step back and enforce strict mental discipline - keep to your strategy, only look for safe trades, wait for the right setup!

2. IMPATIENCE - LEARN TO WAIT!

How many times do we enter trades prematurely? Wait until the setup really sets up!

Don’t be afraid of losing an initial big run because:

* Its not worth the risk

* There will always be another opportunity

* Catch the next retrace when it is much safer

3. LOSING CONCENTRATION AFTER A LOSS - KEEP FOCUSED

There is a danger after a losing trade to either:

* Shut the mind down so you become closed to further opportunities that day

* Act in desperation by impetuously entering an ill-thought out trade soon after to try and regain losses

After a losing trade muster up all your mental resources and detach yourself from it. Imagine standing on a chair and shouting at the top of your voice: “NEXT!”

4. THE MENTAL RUT - BE READY TO SWITCH DIRECTION

If price goes opposite to what your initial analysis told you, look at charts with new eyes following the direction of price.

It can help to maximize a chart on your screen and look at it from across the other side of the room. Get your mind out of the one direction rut and look at the chart afresh looking for new opportunities in the new direction.

5. FAILING TO TAKE REASONABLE PROFITS

How many times I have been looking at a profit of 20 to 25 pips on the screen only to see it evaporate before my eyes because I was hoping for a big move and decided to hold on.

Currency day trading by nature revolves around smaller price movements. Often price will get to 20 or 25 pips and then retrace. It may then resume its direction or it may not.

I have learned it is important to take the first profit early, and then let an additional lot or position(s) run to a more ambitious profit target. At the same time as taking out the first early profit, the stop is moved to protect the remaining positions.

I used to put myself through much mental anguish from failing to take a 20 or 25 pip profit. Price would come back to perhaps 5 or 3 or 2 pips and now your emotions come rushing in regretting you didn’t take the profit that was offered to you and hoping against hope price will return and even go on further for the big one!

Save yourself a lot of mental exhaustion by taking a reasonable profit early after examining the charts to see where the first major level of support or resistance is likely to be.

Identify And Act

I have heard it said many times that currency day trading is more an art than a science. Each individual interprets the charts according to their own perception. There are no rigid, hard and fast rules. Having said that, a solid currency day trading strategy is necessary obviously.

However, it must be backed up by strict mental discipline and control over emotions. See if you identify with any of my 5 biggest mistakes listed above and take the appropriate action!