More often than not, many traders get misdirected into thinking that Forex Trading is a ‘get-rich-quick’ scheme, and some even think that success in trading can be achieved overnight after attending a workshop or a programme.
To set the expectations right, and to be very upfront with you, Forex Trading is NOT a fast money, easy money solution. And you do NOT achieve success in trading overnight. It is NOT something that you simply pick up over a weekend, and become a millionaire the following month.
At Alpha Play, we stand firm on discussing the unpleasant realities about trading, though not many want to hear of them. And if you think about it, why would mastering trading be any easier than learning other skills that yield you good income?
It takes commitment and effort to develop oneself into a consistently profitable trader. Period.
Taking reference to our ProTrader Programme, we will be sharing with you the 3 proper and essential expectations to have in trading and why it is so important to your success in trading.
1st Expectation - Market Direction
In the Forex market, we can make money in both directions – whether the price of the currency pair goes up or down. The key as a trader is to have the right expectation of the market direction.
If we are expecting the price to go higher, we buy to profit; and vice versa, if we are expecting the price to go lower, we sell to profit.
This market expectation can be established through various methodologies namely –
1. Technical Analysis
Technical analysis is an analysis methodology to forecast the direction of prices through the study of past market data. This is done mainly via a technical chart.
In addition to the study of price data reflected on the chart, many technical traders also use various technical indicators to assist them in establishing the forecasted direction in the market.
2. Fundamental / Macro Analysis
Fundamental analysis or some traders called it macro analysis, is an attempt to measure the intrinsic value of a currency, and thus the price movement of it by examining the related economic and financial factors of the particular country.
This usually involves understanding of the tools that central banks use, studying the various economic indicators that might have an impact on the market, and how the different markets in the financial world relates to one another.
3. Sentiment Analysis
Sentiment analysis is where traders seek to gauge the market sentiment expressed in numerous channel including news reports, tweets or even social media and blog posts.
Some traders also look into the positions held by the non-commercial traders under the Commitment of Traders (COT) report to get a longer term gauge on the expectation of the market direction.
Watch the short recording below on how we establish a directional bias using the concept of Elliott Wave Principles, combined with the fundamental risk event of the Reserved Bank of New Zealand’s (RBNZ) Rate Statement as a catalyst to profit from the NZDUSD trade.
In doing so, we were applying both technical analysis and fundamental analysis to help us gauge the direction the currency pair was likely to go towards.
2nd Expectation - Market Price Movement
The next market expectation a trader needs to have is forecasting how the market price will move. This is NOT saying that a trader needs to know or can know what will happen in the market, we can’t know and we will never know. However what we need is to at least have an idea how we are expecting the market to develop.
This is important because we will then be able to visualise how we are anticipating the market price to move. If the market price develops as we have expected it to be, we have a trade. On the other hand, if the market price moves totally out of our expectation, we don’t have a trade.
Without this proper expectation of market movement, many traders get into a trade too early, only to be stopped out from the market, before the price eventually start moving in their favour. Or they tend to get into the trade too late, missing out on most of the profit potential, only to enter a trade and find their trades in a drawdown after that.
Building an expectation of price movement in the market doesn’t have to be complicated or difficult. In the video below, we share with you one of the very profitable patterns in the market – The Crawl Pattern, and the expectation you can have trading such a price pattern.
3rd Expectation - Your Comfortable Drawdown Level
Many traders when they wanted to enter into Forex Trading, or first start out in Forex Trading, only talk about the expected returns from the market. “I want to gain 10~20% per month; I am expecting to gain 100% in a year’s time, etc.” and the expectation list goes on.
While it is important to have a return of investment (ROI) target to work with as a trader, but we can’t just look at returns without looking at the risk factor.
This brings us to the third expectation which is one of the most important factors in trading, yet ignored or conveniently forgotten by many traders. This expectation we are referring to is your comfortable drawdown level when trading.
Only when you have established your personal comfortable drawdown level can you start to have a proper and realistic ROI target from trading.
The right question you should start asking yourself first is how much are you willing to risk or lose from your trading capital in order to make some money.
It wouldn’t be realistic to have a 20% monthly target if you are only willing to have a maximum drawdown of 10%. Conversly, it wouldn’t be very wise to only have a 10% monthly target if you are willing to risk a maximum drawdown of 50%!
Below is a video sharing with you the basic and fundamental building blocks of risk management – money management. In this video, we touch on how you should and could properly position your trade size in accordance to your stop losses.