7 Things that you need to know before going live
This is probably the question that I get asked the most… well, actually the second one, the first one is always related to the entry system and stuff…
But this one is probably the most important one:
When should I start trading real money?
The fast answer is: when you get consistent results on your demo account.
But what does it mean?
You know its about getting a positive amount of pips month after month, using the same methodology, but what do you need to do or what do you need to think in order to get there…
Well, that’s what this article is about…
Now, you must know that this is just a guideline, when it comes to trading there are no hard truths. But I have a hunch that if you follow most of the items below, you’ll be alright.
So here it goes.
#1 You don’t desperately need money
Sometimes I get emails like this one:
“Hey Raul, I lost everything, I’m in debt and desperately need to make money because…”
If that’s your case, stay away from trading anything (Forex, stocks, futures, commodities – I mean anything).
If you do keep trading, I guarantee that you will be in a worst position (well, there are no guarantees in trading, but I could say that with an accuracy of 99.99999%).
And I’m going to tell you why.
When you trade, you need to be emotionally fit. Trading is about taking the right decisions at the right time. And you know that when you desperately need money, you are not going to make the right decisions.
You are just going to make decisions based on your most recent needs, not on your long term interests. You might get lucky at the beginning, make a few bucks here and there, but as I said, at the end, trading is about taking the right decisions.
And for the same reason, its not recommended to trade when you are going through difficult times in your life (i.e. divorce, etc) or when you are sick (i.e. caught a flue, etc). For the same reason, because you are not going to be mentally fit.
If you are not mentally fit you are not going to take decisions on your best interests, but purely based on emotions, and that’s not a good thing for traders.
Ok, so, what should I do if I desperately need money?
Look for a regular job, do something else, and try to regroup. Once you are out of debt, and don’t “need” money, come back to trading.
What if I’m sick or going through difficult times in my life?
If you are already trading a live account, open a new account with very limited funds, and trade very small positions, that should be enough to satisfy your trading needs.
If you are demoing, dont worry, keep on demoing, I wont tell anyone.
#2 You know that trading isn’t that easy
Remember the first time you heard about trading?
I looked at the chart and thought to myself, How difficult could it be to buy here, sell here, sell again here, etc?
At that time (more than 11 years ago) most brokers weren’t regulated, and most of them advertised how easy it was to make money in Forex…
Oh boy, what I was getting into…
Even today, after all those years of experience, when I get in front of those charts, I still dont know what the heck they are going to do (I only trade based on probabilities).
So let me tell you something, if you are new to trading, and you are here because you think trading is easy… stop reading this, and think about it twice.
If you are going to keep trading, you need to know that you need to work hard, you’ll need to practice and only with experience you will get results. But its not easy and it will take some time before you get there.
Are you prepared to take that?
If you are an experienced trader, and you still think trading is easy, stop reading this, closed all your opened trades, and forget about trading forever.
Yep, you heard me, forever!
I’m just trying to make this faster for you…
Ok, if you are reading this, means that you understand that trading is not easy… good for you!
It’s going to save you a lot of money and time.
I’m not trying to be harsh here, I just want you to know that everything that is worth it in life, requires hard work! And trading is no exception to the rule.
You can be your own boss, you can travel and spend more time with your family, but you need to work hard in order to get there.
And when you get there… it will be well worth it!
I just want you to be prepared.
So before trading your real account, you need to know that trading isn’t an easy task. You need to study, practice and only with experience you will get the results you are looking for.
#3 You stopped looking for new strategies/technical indicators
If you have read a few of my articles and analyses you’ll know that I dont use technical indicators, but this is not about using technical indicators or not.
This is about stop looking for the perfect strategy or system.
At some point in our careers as a trader, yes, it makes sense to try stuff like:
- Technical indicators
- Fibonacci or Elliot Waves
- Scalping, swing trading, long-term trading
- Set and forget strategies
Because you are new to trading you need to find the tools, the strategy, the type of trading that makes you feel comfortable with.
But at some point, you need to stop, you need to focus in a system/methodology that makes you feel comfortable and confident with and stop adding new stuff.
It never ends, there’s always a new indicator, strategy, methodology that might sound promising… but if you keep testing and testing and testing new stuff you’ll never graduate from any methodology.
And what do you want to be: A trader or a strategy tester?
Think about it… you could save yourself a lot of time.
I’ve seen traders spend several years of their life testing stuff, and they add a new indicator “just as a filter…” they say… And the months keep running, then someone introduces them to a new scalping system, they test it, and again, then they add another indicator, and the months of testing turn into years, etc. ufffff
So please, if you have been testing new stuff for a while, please stop now.
Just focus in one methodology, try to master it. If you don’t get the results you were looking for choose another one, but one at a time, until you find a system or methodology that fits your trading style, risk profile and you feel comfortable with it.
So before trading your real account, you need to make sure that you have been trading the same strategy for a while on your demo account. And of course, getting good results.
#4 You need to be willing to take risks
Sometimes small changes lead to big results…
And this is the kind of those “small” things that can have a great impact in your trading results.
Here is a story you might be related to…
You go to the mall to buy a T-shirt… Once you get to your favorite store and see a few t-shirts, you decide to take the one in blue…
Once you get to the cashier, you tell him:
I want to take this t-shirt home but I don’t want to pay you for it…
Doesn’t make sense, does it?
That’s exactly what happens when you open a trade and you are not willing to lose.
When you go out to buy a t-shirt you pay something because you think you are going to get something more valuable than the money you are paying for.
When you open a business, you need to invest in resources first and you know that after a while, you are going to make that back. But there is also the possibility that you never make your money back.
So why is it that we think so differently in trading?
Hey Raul… this is nonsense, I’ve already accepted my risk.
- Why do you move your SL to soon?
- Why do you hold your losses for so long?
- Why do you take profits to soon?
- Why do you trade with no SL at all?
I think you’d like this story more
This one is about a trader (perhaps you?)…
This trader doesn’t move his SL too soon, because he knows that he needs to give the market some room to breath. Otherwise he could get stopped out, and then see the market move in the intended direction… and he knows that it is not a very pleasant experience…
As soon as this trader see no point in holding his trades, he gets out of them. He accepts the fact that it wasn’t the right time to trade it, moves on and keeps looking for more trade opportunities (perhaps in other currency pairs?).
This one is also a trader that doesnt take profits too soon. He knows that he needs to take advantage when the market moves in his favor. In fact, instead of taking partial profits, he thinks about adding to his trade (of course, provided that he gets a new signal based on his system).
And he always uses SL orders. Why? Because he knows that if he doesnt use a SL order, and the market does unexpected things… het could wipe out his trading account with just one trade. And that’s not fair, he has been working and trading so hard to take his trading account to where it is right now.
I thought you’d like this story more… What do you think?
The best thing you can do for yourself as a trader
I want you to stop thinking about your entry system, about the way you analyze the market, about trade management and I want you to think about RISK…
- Accept the fact that every time you place a trade, the market has the possibility to move against you.
- Accept the fact that sometimes the market moves in unexpected ways and there is nothing we can do about it.
- Accept the fact that you are going to lose some trades, you just need to limit the downside.
- Accept the fact that trading is a probabilities game. You just need to make sure to make them play in your favor.
Anatomy of a trade
This is what the thinking process of a trade should be.
You open a trade and decide to risk 40 pips for the possibility to make 100 pips.
What you are saying here is that you want to make 100 pips, and you are willing to lose 40 pips for the possibility to make those 100 pips.
You see? You are risking 40 pips…
Now, sometimes it makes sense to take partial profits, or to trail your SL level, etc. But everything should be in your trading plan.
So if you are going to move your SL level, do it because of a sound reason, not because you dont want to lose.
Same thing when you want to take partial profits, but please do it based on your trading plan, not because you “think” the market will do this or that.
For some traders (specially newbies) it makes sense to set and forget about your trades. Or even advanced traders that cant handle emotions might find it useful.
But please next time you open a trade, be willing to lose.
Again, it seems like a small thing… but it can have a great impact in your trading results.
I can tell you this is the one of the things that had a great impact on my results, and I bet it can have the same impact on yours.
Think about this… because if you are not willing to lose, then trading might not be the best for you.
#5 Use both, price action and Support & Resistance levels
Have you ever wondered whats the best way to determine the trend of the market?
There are plenty of tools, indicators, etc including:
- Technical indicators such as RSI, MACD, Momentum, etc
- Fibonacci retracements and extensions
- Elliot Waves
- Gann cycles
- Other tools
You name it… Some of them are pretty subjective, and some other techniques are good.
But the question remains, among them all, which one is the best?
I don’t know about you, but I think trading is not a game, and I rather use something objective…
So to determine the best tool, I’d recommend you to take the following considerations. Make your strategy:
- As objective as possible (there will always be a certain degree of subjectivity)
- As simple as possible (KISS principle)
Once your strategy (or system) these two characteristics, you’ll have a system with a very good profit potential :)
Ok, so now, want to know what my take on this? What is as objective and simple as possible?
You guessed it.
Support and resistance levels plus price action.
In todays article, I’m going to show you how you can use support and resistance levels plus price action to make a chart talk to you, to show you how to convert a chart like this one:
Into actionable and reliable trading advice.
Like gold for traders
From my point of view, using support and resistance levels plus price action is the best strategy to determine the direction of the market, its simple, objective and reliable.
And guess what? That is exactly what our job is as traders: knowing what the market is likely to do its like gold to us. With this information we are able to:
- Determine what currency pairs to trade
- What direction to trade them
- Where to set your SL and TP levels
- When you are going to stop looking for trades
- and more
Quite important isn’t it?
Now, have you noticed I haven’t talked about the entry system or entry signal?
The reason for it its because it doesn’t matter what strategy you use to find your entries. Seriously.
As long as you have a good strategy to determine the trend of the market, you can use what ever you like the most as your entry system: now you can use technical indicators, Fibonacci, Elliot Waves, etc.
See my point?
It is more important to know what the market is likely to do, than the entry system.
Ok, as every post, I try to show you what I mean with actionable advice, so I’m going to build a case to trade the AUDUSD…
Support and resistance levels
Support and resistance levels are objective because there is no guesswork to do.
It’s not like: “I think there is a resistance level right here.” it’s more like, there is an important level or it isn’t and important level, as simple as that.
Here are the rules to draw perfect support and resistance levels:
1 – The market needs to get rejected at least twice from the level
2 – The more rejections the level has, the more important it becomes
3 – Most recent rejections are more important than less recent rejections.
As clear as water?
Since we are trying to determine the direction of the market, we need to focus on the long term charts.
You can use the 4 hour charts, the daily chart or even the weekly charts. (If I was trying to find my entry level I’d focus on the short term charts, right?).
Here is the AUDUSD daily chart
Clear support and resistance levels huh?
So, what can you say about the above chart?
Support and resistance levels are showing us exactly at what levels the market might change direction.
It doesn’t matter what happened before though… The real question we need to answer is this one:
What can I do right now with this information?
Ok, since the market has been rejected from this level before, the market might get rejected again. Could be because of the same reason or not. I don’t really care, what really matters is that the market is likely to get rejected again from the support level around 1.0173
This is the type of actionable advice you need to get from this analysis.
But it doesn’t stop there, support and resistance levels can tell you more valuable information.
For instance… lets say the market gets rejected from the support level (1.0173) and it continues its way up.
For how long would I hold my trades or for how long would I keep looking for long opportunities?
Until the market reaches the next LT resistance level which is at 1.0573.
Ok, so you now have a lot of actionable information about the AUDUSD:
- You know it is likely to get rejected from the support level
- You’ll look for long opportunities until it reaches the next resistance level
And, what if the support and resistance levels aren’t as clear as the chart above?
Of course you’ll find that sometimes aren’t as clear as this one, but that’s the point. We are doing this whole thing to determine: what currency pairs to trade right?
So if it is not as clear as this one, just forget about trading it, and try to trade some other chart (currency pair) with clearer support and resistance levels.
Our job as traders is not to trade the same pair every day, but to trade the pairs where you have a clear idea of what they are likely to do.
If it doesn’t, feel free to leave a comment below.
Now, lets isolate price action and see what the market is actually telling us:
See those green squares?
Well, on each one of them, the is some kind of pressure, upward pressure around the bottom of the range, and downward pressure around the top of the range.
Lets see what the green blue square is telling us so you know exactly what I mean by pressure:
It looks like the market didn’t like the level it was trading before, and reacted with a strong upward move.
So the market first goes down [candlestick 1] (sellers take control over the market) but then at some level, it starts to move up [candlestick 2] (buyers take control over the market) with even more strength then the downward movement.
This means a lot to the market. It means that the market is not yet ready to trade at lower levels, once the market gets at those levels it attracts plenty of buyers (or just a few with deep pockets) making the market turn around.
Now again… What can I do right now with this information?
Well, if the market it’s not ready to go down, it only has two possibilities left: either it stalls around there, or it goes up.
So you know that “if” you are going to do anything with the AUDUSD, it is going long. I say “if” because we need to confirm this with the short term chart to start your trade.
And this takes us to…
Using both S&R plus price action
This chart is worth a thousand words:
So you now have clear support and resistance levels plus well identified levels with upward and downward pressure.
Support and resistance levels tell me when the market is likely to change direction
Price action tells me when the market might be ready to change direction.
If we combine both analysis, we get to a very interesting conclusion:
The market is likely to change direction right now.
Now, you need to remember something, we are not talking about market entries right now, that is out of the scope of this article. But I’ll address it in the coming weeks.
#6 This is how you deal with emotions
Some traders say that once you get rid of emotions, you will trade with successful results.
Well, let me tell you a little secret:
You cant get rid of emotions.
They are part of us, they are what make us humans, they keep us alive.
So what we need to do instead, is to make them work on our favor.
We need to have fear, but to trade outside of our system, that’s what we need to have fear of.
Emotions are part of trading.
The best way to make your emotions work in your favor is to have a system that fits your trading style, risk profile, time availability, etc.
This way you’ll feel confident and comfortable trading with it, therefore you’ll have no problems trading it with your discipline.
Do you know what around the corner after trading with discipline?
You guessed it, consistent results.
That’s the reason you need to make sure to trade a system that you feel confident & comfortable with.
Otherwise it will be very difficult to trade with discipline and you will not get consistent results.
So again, it’s not possible to get rid of emotion, we just need to learn to work with them.
#7 You have an answer for each one of the following questions
It’s easy to get lost in forex.
There are tons of technical indicators, systems, methodologies, frameworks, etc. No wonder why it is so difficult to come up with system/strategy you feel comfortable with…
Comfortable? Why do I have to feel comfortable with my system/strategy?
Your job as a trader is to be consistent right? Well, in order to be consistent you need to trade with discipline, and believe me, there is no way to trade with discipline if you don’t feel comfortable with your trading.
Ok, now to the important stuff…
As I said, there are plenty of tools we can use to trade forex, some of them are easy to use, but most of them are complicated and difficult to understand.
All these information, strategies, indicators, etc available make us forget about what our main goal is, which is to make money (not to use the last indicator/Strategy, etc).
We need to go back to the basics, and to do this you need to ask yourself these 4 fundamental questions:
- When to trade and when to stay away from the market
- What currency pairs to trade
- When to cut your losses
- When to let your profits run
The answer of each one of them will give you a fresh perspective of the market, a new and simpler way to trade forex.
So, do me a favor and just for a few minutes, forget about your strategy, your system, and everything about your methodology to trade forex.
Lets focus in the answers to these questions with no bias.
Are you with me?
When to trade and when to stay away from the market
You want to trade forex when the market is clear, when you have good opportunities, when the odds of the market going one way are higher than going the other way.
You cant just open your 5 minute chart and take your trade regardless of what other timeframes are doing.
So you need to do your analysis, and determine what is the market likely to do. Analyze different timeframes and if all they agree, then go ahead a take your trade. If you have conflicting signals, just let it go, I’ll guarantee you’ll get more opportunities.
By doing this you will get rid of the 2 most important mistakes in forex:
- Trading a currency pair that should not be traded
- Not trading a currency pairs that should be traded
You see what I mean?
Key takeaway: do your analysis and trade only when the market has a clear condition, when it has clear support and resistance levels. On the other hand, when it is not clear that the market is likely to do, just forget about it, you’ll get more opportunities, its not like the market will stop giving trade opportunities for ever.
What currency pairs to trade
A common mistake traders are likely to make (specially beginners traders) is to focus in just one currency pair.
If you focus on just one currency pair, you will force yourself to take trades when the market is not ready to be traded.
And believe me, it doesn’t matter what system you use, you could have the best system in the world, but if you trade the wrong currency pair, you are not going to make it.
I mean, when you are just starting out with your trading career, it’s all right to focus in one currency pair, so you don’t get overwhelmed with all the information.
Just make sure to add more currency pairs as you get more experienced.
Also make sure you are selective about the currency pairs, you also need to get to know the personality of each one of them, for instance: the AUD and NZD are slow currency pairs (you cannot expect big intraday movements), GBP and CAD are the ones that react the most to their fundamentals, and so on.
Key takeaway: Focus on more than one currency pair and trade the one that has clearer market conditions, clearer levels, etc.
When to cut your losses
There is a common saying: take care of your losses, your profits will take care of themselves.
I couldn’t agree more with that. You need to take care of your losses, cut them fast, and forget this way of thinking: the market will eventually turn around…
When the market doesn’t behave as you expected it to behave, the best thing to do is to cut your losses, run and focus on other opportunities.
And the million dollar question is: Where should I set my SL level?
There is no generic answer, every trade is different, every system is different, heck even trades within the same currency pair are different…
But there is a general rule you can follow: close your trade once the primary reason you entered is no longer existent.
You see what I mean?
So we need to adapt and see the nature of your trade, then decide when to get out of the market.
For a breakout trader: if you trade breakouts, you should place your SL level below/above the breakout level. If the market breaks back that level again, the primary reason you entered is no longer valid.
For retracement traders: if you like to trade retracements, focus on the retracement level, and place the SL level below for longs and above for short those levels, if the market breaks back those levels, the primary reason is no longer existent.
For MA crossover traders: if you like to trade MA crossovers, well a crossover on the opposite direction will signal to close the trade.
These are just a few examples, if you need any help with your specific strategy, please leave a comment below.
Key takeaway: set your SL levels at a level the primary reason you entered the market is no longer existent.
When to let your profits run
This the most difficult of them all and probably the second most important of them all.
Traders (I mean all human beings) have a natural tendency to close positive trades as soon as possible because we think that the amount of pips is already ours (it happens to be just the opposite when the market goes agains us, we have a tendency to believe that it is not ours and the market will eventually turn around, so we hold them).
Do you agree with me?
How many times you have closed your trades for a small gain, only to see the market continue in the same direction for many many pips?
We need to stop that. And I have a way to do it with only two simple steps:
- You need to have a clear plan – You need to have a well defined plan, and follow it! You know its the only way to get consistent results.
- See what the longer timeframes are up to– Try to spot the market swings in a longer timeframe, if you find it clear, set it based on that timeframe.
Another possibility is to trail your stop loss level, but please make sure to give your trade enough room to trade ok?
Key takeaway: Use longer timeframes to help you determine your take profit levels. Also consider trailing your stop loss level.
You might have the wrong impression about professional traders
A professional trader is just like a regular trader, there is no difference.
If you were thinking that a professional trader is some that trades with no emotions, you are mistaken. A professional traders knows how to deal with them.
He still has this burning desire to take profits earlier, or hold his or her losses for longer… The only difference is that professional traders follows his or her plan.
That’s what it all comes to. A professional trader knows that his only chance to succeed is to follow his plan. He doesn’t even want unexpected gains, they dont care about them, because there is no way to replicate them into the future.
If you were thinking that a professional trader uses sophisticated software and algorithms to forecast the market, you are mistaken.
Most professional traders use simple strategies and systems. They know that the simpler the system, the easier it will be for them to take decisions.
Yes, some of them use algorithms, but they know that they need to adapt to the market conditions, therefore they always take the final decision to open a trade.
If you were thinking that a professional trader doesn’t make mistakes, you are mistaken. We are all humans, and therefore we all make mistakes.
The only difference is that professional traders learn from them, they get something out of every single mistake.
So please make sure you follow the above guidelines before you begin trading your real account.
Do you agree with the aspects above?
What other things you think are important before trading a real account?
Please let me know what you thought about the article, or anything else you would add?