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Article #297: Fundamentals of Forex Trading

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Trading is not an exact science. You knowledge that your method of trading
can't do X and get Y every time. It is as will produce profits in the longer term
much an art as it is anything else. There is the state we have to aspire to.
is no magic formula. Trading is all about Whenever I think of risk management I
probability. It is the art of correctly always think of an article I read on 925
applying a set of carefully thought out CTA programs between 1974-1995. It
rules and allocating the probability of essentially confirmed what I have long
that event to result in success. held to be true. To summarize the report,
Each trade is an independent event. The of all the CTA's who managed funds, the
market does not remember if you lost or most consistently profitable were the
made dollars the last time you traded. ones with the best risk management
The way you approach the market systems.
psychologically has as much to do with To trade successfully you have to take a
your success as any trading plan. long look at yourself. Ask and answer the
Risk management is crucial if you want to following questions.
have any hope of becoming a successful How much equity do I need to start? How
trader. Matching a method of trading with much should I risk on any one trade? Am I
your personality is the only way you will undercapitalized?
ever feel comfortable in the markets. As a trader you will probably fall into
An adequately funded account is necessary two main categories, traders who like to
-- not only to be able to take the trades trade the breakout and traders who like
you want, but also so you don't feel to join the trend once established. We
every trade is a live or die situation. could also add congestion traders,
The journey to the road of successful reversal type traders and mechanical
trading will make you confront your signal traders but for the vast majority
deepest fears. Your armor on this journey of traders you are going to fall into one
will be confidence, knowledge and belief of the two categories.
in yourself that you can achieve your If you are a trend trader, you like to
dreams. Never, equate your success or define a trend and then find a way in.
failure in the markets with who you are This may be with the aid of fibonacci
as a person. retracement levels, moving averages, Gann
As humans we have a natural tendency to or one of the other many indicators
try and influence our surroundings and available today. Your goal is to enter
events we take part in. This is one the trend as early as possible with the
reason we, as a species, have succeeded least amount of risk.
but it is also one of the fundamental Breakout traders like to enter the market
flaws we all have when trying to achieve on the breakout of a previously
success as a traders. identified range. This may be support
As traders we have to realize we have no resistance areas, rectangles, triangles
control over the market and if we accept or one of the many other chart patterns.
that then we have to accept that we can The secret to this type of trading is to
not influence the direction of the determine a valid break.
market. During this lesson I have tried to give
The problem of course is we have a you a glimpse into the world of trading.
tendency to try and succeed and when I have also taken a slightly negative
inevitable losses come, it is easy to let stance, as I don't want you to get
those losses effect us emotionally. unrealistic expectations of what to
Becoming euphoric when you hit a winning expect.
streak is almost as detrimental as On the more positive side, trading is a
becoming depressed when you have a string fascinating world, which will allow you
of losses. to really exercise your brain. There is
We as traders have to try and achieve the no other arena where you get to play with
state of impartiality. We have to accept some of the best minds in the world on a
that we will have losses as readily as we level playing field.
will have wins. Reaching the stage where Once mastered, if you can ever use that
you can comfortably accept loss in the term then the possibilities are endless.






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