Lately I have been spending a lot of time with new traders. Specifically I have been spending time training traders who:
- Fully understand the basics of Forex.
- Have a trading plan and a money management plan.
- Have a working trading method.
- Have nailed down their trading psychology.
- Are barely breaking even.
These new traders have all the pieces of the puzzle but are still failing. They most commonly fail because they follow their trading plan too strictly!
What is a trading method?
A trading method is an essential part of your overall trading plan. Ideally, a trading method lays out a set of guidelines and gives you a set of tools you use to:
- Analyze the market.
- Plan trades.
- Enter and exit trades.
Recently, I have been noticing that new traders tend to follow their method too strictly. This is no surprise as most new traders are bombarded with misleading information, by self-proclaimed trading gurus. A very common and very destructive piece of advice given is:
“trust your trading method, if your trading method tells you to go long, go long. If it tells you to go short, go short”
This advice may seem logical, on the surface, but it is in fact extremely counterproductive. If you follow the advice above, you are effectively switching off your brain and blindly following your method. The problem is that in trading it is perfectly sensible and healthy to question your method. With any given trade there are several variables that can affect the likelihood of the trade being profitable. Your method may signal a trade but when it does you should not blindly take it. You should always access current market conditions and see if the trade has a reasonable chance of success.
Your methods job is to suggest possible trades to you. Your job as a trader is to take those suggestions on board and decide if the trade is viable. Your trading method should not decide for you when you should enter a trade. The second you give your method complete control over your decision making process your chances of success dwindle.
What is a Traders Job?
We have already established that the job of a trading method is to suggest trades to a trader. The easiest way to understand a trader’s job is to stop thinking of yourself as a trader and start thinking of yourself as an information gatherer.
Your trading methods purpose is to provide you with information. So for example my trading method consists of three main forms of analysis:
- Candle patterns.
- Support and resistance lines and areas. (s+r lines)
- Trend lines.
I think of each of these forms of analysis as pieces of information. My trading method, which uses those three forms of analysis, is really just a tool I use to gather information. My job as a trader is to interpret the information and assess whether I should enter a trade or not.
If I see an indecision pattern forming on my chart, like the one above, it means my candle patterns are telling me a long reversal is possible. I would then look at the other two forms of analysis I use, s+r lines and trend lines, to see if they support what the candles are telling me.
Looking at the image above there is a major s+r line in the way of my trade (green line), so I may not take the trade. What’s the point of entering a reversal trade if it is likely to be blocked by a major resistance point?
Many new traders stick too closely to their trading method. Instead of gathering and interpreting information they blindly trade the moment their method indicates a possible trade.
What’s The Solution?
Inside every human is a very powerful organ called a brain. The solution is to simply use your brain when you trade. Instead of trading by mindlessly following your trading method start to question what you see. It is human nature to ask questions and you should not suppress it in your trading.
Your trading method should be used as a tool to gather information. The final decision to enter a trade should be made by you, after you assess the information.
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