When small becomes big

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Before diving into the subject of this article, I would like you to sit back and think carefully about your trading.

Ask yourself what kind of trader you want to be, how you envision your daily trading activities and what you will do to become consistently profitable in this most challenging yet rewarding career … 

Yes, I agree that this is not the usual way for me to start an article, but as I have said many times before, most people trying to be consistently profitable by trading Forex have failed to think about these ideas and thus put themselves in jeopardy. Most of the aspiring traders I taught in class and during XLT had big dreams of sustainable profits and a better quality of life, hoping to get it all through trading. Everyone has a right to be successful, and I have never denied this possibility. However, before success comes, any newcomer to the Forex market must not only get the right education, but also try to understand the real truth about the markets. Any professional trader today knows that consistent profits are primarily the result of understanding consistent risk. Only by protecting our capital and controlling losses can we ever hope to ultimately make a profit. We have all heard an important lesson, “Win a lot, lose a little.” In the real world, this is easier said than done. Let me explain.

Remember the questions I asked you at the beginning of the article. You may have already answered these questions for yourself, usually these answers apply to everyone. You know that most novice traders think intraday trading is the best way to make money systematically. They immerse themselves in “buying and selling throughout the day,” systematically taking profits for an hour or two a day. They think that by overloading their position size they are getting the most bang for their buck. Maybe by accidentally trading, being wrong here and there, they hope to get more profitable trades than unprofitable ones in the long run. This sounds great in an ideal world, but we all soon realize that the market is far from ideal. If we are unable to investigate the psychology behind these thoughts, then we must admit the fact

Novice Forex traders are doomed if they think it’s easy to be consistently profitable with just one intraday trade. The spot Forex market was not designed to be the best market for intraday trading due to spread fees and may in fact be one of the most volatile markets. I often hear the plaintive grumble of students about hitting stops during a spike or multiple failed entries and watching the market move in their direction after they stop trading. Instead of fixing this problem, they repeat it over and over again in the hope that it will change, but this rarely happens. The main reason for repeating these mistakes is the beginner’s belief system, which assumes that if they don’t make money in the market every day, then they will never have a chance for a good life. While they recognize that swing and position trading can offer greater rewards, they mistakenly think that there are not many opportunities out there to be successful.

The reality, however, is that small time frame charts seem to offer more entries and trades, but they also fool beginners by generating too much noise and numerous false signals. By paying attention to the big (whole) picture, a trader can dramatically increase their probability of success and improve their returns because the signals generated are clearer and the potential profit target is much larger. Let’s take the recent EURUSD price movement as an example:

$ IMAGE $

In this hourly EURUSD chart, we can see momentum of a sustained downtrend. Anyone looking to take a high reward, low risk trade by joining a trend in this market could look for a short entry. As the price bounced back to the resistance / support area at 1.4660, we were given the perfect opportunity to sell with a stop loss above the highs at 1.4700. The first target could have been support near 1.4580, which would give a good reward to risk ratio of about 2: 1 on hitting the first target. Now is the time to establish a position and forget about it, letting the market do its job.

Alternatively, we could rescale the graph to 2 minutes to look for another, more concise input:

We will now “feel” the benefit of going down to a smaller time frame so that the trader can execute the trade with a tightly tight stop of about 10-15 pips, as opposed to 40 pips on a 60 minute chart. This in turn also provides the trader with the opportunity to triple his position, which gives a much better return if the trade were successful. In reality, for a beginner, it can be much more costly than originally anticipated. Due to the fact that the 2 minute chart creates a lot of noise and emotion for the trader, there is a temptation to quickly move your stop loss for fear of losing a small profit. This often results in too early exits and small profits that are useless in the event of a losing streak. A smaller chart can also tempt a novice trader to enter trades too early.

A longer time frame makes the process much less emotional and can often provide the trader with entries and exits. If you do not explicitly take and manage the trade, you are giving the market more time to work for you instead of interrupting it. By moving away and filtering out the noise, you will more often see good results, like below on EURUSD, where the decline has gone beyond 350 pips, which is not bad for a 40 pips risk, of course, if you gave the trade some room to breathe.

Another major factor that we ignore is the cost of many failed trades. While it might seem that a 10 pip stop loss is disciplined and helpful in the risk management process, in fact it might be more harmful when the market goes against us. If you increase your position size with a tight stop, then in reality, every time you lose, you will not be losing 10 pips, but many times by 10 pips. Three 10 pip stops in 3 positions are a 90 pip loss. This is a quick way to drain your account.

The best thing you can do is slow down the pace of your trading, which will give you a genuine opportunity to become consistently successful. Almost all professional traders I have met benefit from swing trading, and day trading is a small addition for them, but not vice versa. While it may be tempting to use an extremely small stop loss and a larger position size to generate more intraday profits, in my experience it is much better practice to enter a trade with a smaller size and let the trade move. Technical analysis is not a beautiful art and never will be. You must allow time to do its job, while you are in steady profits, you can give profits the opportunity to grow. There are better things in your life than sitting at your computer for 10 hours a day.

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