There are many trading strategies available on the internet. But how do you know if a trading strategy is profitable or not?

A trading strategy is considered profitable if it has a positive result in backtesting and/or forward testing. The results have to meet the return requirements of the trader, and go through a series of filters to be sure that the results are an accurate representation of real world trading conditions. 

That's a mouthful, so I'll break down everything in this tutorial.

I'll get into how to define a profitable strategy and how to do the testing to figure out the performance of a trading strategy.

Then you'll put those 2 elements together to find out if a trading strategy really is profitable or not.

Backtesting

The fastest way to figure out if a rules-based trading strategy is profitable is to backtest it. 

Backtesting can be done in any trading market.

When you can see that a trading strategy has a profitable track record over a long period of time, that's the best indication that a strategy is likely to work now and in the future.

Some people think that you need to know how to code a computer program to backtest.

That's simply not true.

You can do both manual and automated backtesting.

Anyone can backtest.

This software makes manual backtesting easy.

You can also use free charting platforms to backtest.

It's just a matter of which one is easier for you.

All profitable traders look for trading strategies that have a historical edge in the markets. 

Once you've proven that a strategy would have been profitable in the past, you'll also have key data on how that strategy performs.

You'll know things like…

• The maximum number of losing trades in a row
• The average monthly return
• The biggest drawdown
• Market conditions when the strategy works and when it doesn't
• And more

All of these data points allow you to make important decisions about the trading strategy, which I'll get into more detail later in this tutorial.

Think about cars…

We all know that certain makes and models of cars last a long time and others break down quickly.

The reason we know this is because we have historical data that shows the reliability of these cars.

For example, Toyotas are generally very reliable cars.

On the other hand, Fiats are notoriously unreliable. So much so, that many people say that Fiat stands for “Fix It Again Tony.”

If you purchased a car from a company that just started producing cars last year, you wouldn't know how reliable those cars are because they don't have a track record.

So you're taking a big risk.

In a similar way, you need to know the track record of a trading strategy before you risk real money. 

Again, backtesting is the best way to do that.

If you've never backtested before, this beginner's guide will show you how to get started and the best tools that you can use.

Backtesting also gives you one of the most important traits that a trader can have…resiliance. 

When you take a trade, you have a high level of confidence of your probability of having a winning trade.

You won't know exactly how each individual trade will work out.

But you'll know that if you take a lot of trades, X% of your trades will be profitable. 

The fastest way find that X% probability and your expected return is through backtesting.

Knowing the backtesting statistics of a trading strategy also helps you when you're on a losing streak.

All trading strategies will have a losing streaks, but you want to be able to separate a normal losing streak from a situation where your trading strategy may have stopped working.

For example, let's say that you had a maximum of 7 losing trades in a row in your backtesting.

That's normal for that strategy.

But when some traders start trading live, they freak out when they have 3 losing trades in a row and think that their system is broken.

If they have backtesting data and they reviewed their maximum losing trades in a row, they would realize that 3 losing trades in a row is well within the normal parameters of the strategy.

There's nothing to be worried about.

The same thing goes for the other data points you get in backtesting.

Therefore, having this data gives you the confidence to keep trading when you hit a rough patch. 

Forward Testing

Another way to figure out if a trading strategy is profitable is to forward test it.

This basically means that you open a demo account or “paper trade” to build a track record on a trading strategy.

Never risk real money when forward testing. 

The primary advantage of forward testing is that you'll know if a trading strategy works right now, in real-time.

On the downside, it can take a long time to collect enough data to determine if a trading strategy works or not.

I see so many new traders making the mistake of forward testing a trading strategy that they just learned, with real money and a full-sized account.

They believe that a trading strategy works because someone told them that it works.

Then they wonder why they lose money.

Never take someone's word that a strategy works, always test and verify.

If you're only going to forward test, then you need to have enough trades to give you confidence that a strategy is profitable.

Some people online say that the minimum number of trades that you need to have a properly tested system is 100 trades.

That's not true.

I talk about how to figure out the minimum number of trades in this video.

The video talks about backtesting, but the same concept applies to forward testing.

Alright, once you have a number of trades that you're comfortable with, then it's time to move on to the verification stage.

Double Check the Results

Once you have data on your trading strategy and it's profitable, then it's time to take a step back and consider if you're missing anything.

There can be assumptions that you made in testing that would not carry over to live trading.

Broker Quotes

For example, if you use data from Broker A, then you start trading live with Broker B, you might get very different results.

The reason is because the Forex market is decentralized.

So each individual broker has slightly different price quotes.

Historical data will affect lower timeframe strategies more. The slight difference in quotes usually won't have a huge effect on trading systems on the daily chart or above.

But shorter term trading strategies are more sensitive to differences in quotes because the margin for error is much smaller.

Stop losses and take profits are smaller and therefore, any deviation in price will have a larger effect on the profit and loss of every trade.

Spread

Another common thing that people overlook in testing is the spread.

This is especially true in backtesting.

If you don't factor in the spread on every trade, your strategy will look much more profitable that it would actually be in live trading.

You might think that this is common sense, but you would be surprised at how many people overlook this.

But don't stop at these 2 examples. Think of all of the things that could be different between your testing and live market conditions.

Once you're satisfied that your testing results are a good representation of live trading conditions, then it's time to ask yourself an important question…

Figure Out YOUR Definition of Profitable

Now we get into the big question…

What's your definition of profitable?

That might seem easy to answer, but it's not.

I'll start with an extreme example to illustrate my point.

Let's say that you backtested a trading strategy over a 20 year period and it made a total of 5%.

So if you started with $10,000, your total profit would be $500, or an average of $25 pear year.

Is the trading strategy profitable?

Of course.

But is it profitable enough to make a living on?

No way.

Therefore, I would not consider that trading system profitable.

I would lose money on that trading strategy, when I factor in the profit that the system produces in relation to the amount of time that I would have to spend on it.

So there are a few elements to consider when creating your definition of profitable.

• Average return per year
• Amount of time you'll spend trading the system
• Drawdown
• Risk of ruin
• Real world performance

It's all a matter of what's important to you, how much risk you're willing to accept and the return you want to make.

Everyone would love to make 800% per year, but could you handle the risk that came with that return?

For most people, the answer is no.

That brings us to another important question…

How Much can You Realistically Expect to Make Per Year in Trading?

When you first get into trading, it can be tough to know what's possible in terms of consistently and return per year.

So the best way to figure this out is to look for as many data points as possible.

Listen to interviews with professional traders.

Take a look at track records of trading systems that are similar to the one you're testing.

That will give you an idea of what's possible and probable.

…and it will give you more confidence.

Final Thoughts

That's the complete guide on how to figure out if a trading strategy is profitable or not.

As you can see, the idea of “profitable” is very much a relative term. 

What you think is an acceptable level of profit could be very different from what I consider acceptable.

You also have to factor in the risk and consistently of the strategy.

So first define the amount of profit you want get out of your live trading strategies.

Ask yourself if that number seems realistic, based on what you've seen from live trading results of similar strategies.

Then test the trading strategy so you have as much data about the strategy as possible.

From there, simply compare the results of your testing with what you feel is an acceptable return.

In real world trading, there is no magic profit number.

It's up to you to make the call.

If a trading strategy meets your criteria, then the next step is to open a small live account and start trading the strategy.

Trade the strategy for a few months to see if your live trading results are similar to your testing results.

Only move the strategy into a full-sized account after it performs well in the small account.

Alright, that's your blueprint, now get to work!

The post How to Know if a Trading Strategy is Profitable appeared first on Trading Heroes.

Profit and loss in Forex trading is calculated in pips, which can be a little confusing to beginners. So in this post, I'll show you how pips work and how to calculate profit and loss in pips.

A pip is the smallest price move in the Forex market. It is short for “price interest point.” In currency pairs that don't have the Japanese Yen in it, 1 pip is a 0.0001 change in the price of the currency. When the Japanese Yen is one of the currencies in a pair, 1 pip is a 0.01 change in the price. Smaller price changes are called pipettes. 

This video will give you more examples on how calculate your profit and loss in pips.

How to Calculate Profit and Loss in Pips

Calculating your profit and loss on a trade starts with calculating the number of pips that you've made or lost.

Here's how you do it:

Step 1: Subtract the Open From the Close

To illustrate how this works, I'm going to use a theoretical example trade:

• Long
• EURUSD
• Open price: 1.18443
• Close price: 1.18555

The price you start with will depend on if you went long or short.

If you opened the trade by going long (buy), then you'll start with the trade close price.

When you open a trade with a short (sell), you start with the trade open price.

Then subtract the other price to get your profit and loss in pips.

So in our example above, since that trade was a long, I'll start with the trade close price: 1.18555

Then I'll subtract the open price: 1.18555 – 1.18443 = 0.00112.

Since that's a positive number, that means the trade was profitable. This makes sense, since the close was higher than the open, on a long trade. A negative number means that you have a losing trade. 

I know this is probably obvious to you.

But there will be people who ask why I start with the close for a long and the open for a short.

So I'm including that information to make this a complete tutorial for beginners.

Step 2: Multiply by a Constant to Get Number of Pips

Alright, since this is a non-JPY pair, we multiply the number by 10,000 to get the number of pips: 0.00112 X 10,000 = 11.2.

So on this trade, there was a profit of 11.2 pips. 

When dealing with JPY pairs, you would multiply by 100 in the last step to get the number of pips profit or loss.

That's it!

What's a Pipette?

A pipette is a fraction of a pip, 1/10 of a pip, to be exact.

Many brokers quote prices in pipettes to help give their customers tighter spreads.

For example, if a broker used only whole pips, the spread on the EURUSD could only be 1 or 2.

But with pipettes, they can provide a spread of 1.5 pips, potentially saving you 0.5 pips on every trade.

Another way to think of a pipette is like a fraction of a penny in the US stock market.

The smallest price move in a stock is 1 penny.

However, in 2005 the SEC created Rule 612. This rule states that stocks worth less than $1 have to be quoted in minimum increments of $0.0001.

So this fraction of a penny is similar to a pipette, which is a fraction of a pip.

How Many Pips a Day is Good?

This is a common question among new traders and I understand where they are coming from.

However, setting a pip goal is not useful in real-world trading.

Here's why…

What really matters in tracking your trading performance is your percentage gain or loss per trade. 

Dollar amounts don't matter, pips don't matter and number of trades don't matter.

All that matters is if you're managing your risk correctly by taking the right trade size for your account.

For example, let's say that you made 50 pips on a trade and you have a $10,000 account.

Well, how much money is that?

What percentage of your account is that?

There's no connection between those 50 pips and your $10,000 account.

However, when you calculate how much you gained on that trade, then you can start to understand how much of an impact that trade had on your account and if that was a good amount to risk, based on your backtesting.

So in order to find out your percentage gain on your account you would do the following: 

(pips profit or loss) X (cost per pip, per lot) X (number of lots) = $ profit or loss

Your trade might look something like this…

(50 pips profit) X ($0.10 per pip, per mini lot) X (10 mini lots) = +$50 profit

Then divide the profit by the total account balance to get your percentage profit:

$50 / $10,000 = 0.5% profit.

Now we can see that 50 pips of profit was actually a very small gain, in relation to the total size of the account.

So you might want to risk more on future trades.

But always backtest before making changes to your strategy.

Conclusion

So that's how pips work in the Forex market.

They are the starting point for calculating your profit and loss on a trade, but they are not an important metric when tracking performance.

I can always spot someone who doesn't actually trade when they create a trading journal or trading report that tracks pips

If you want to improve your trading, stick to tracking your percent gain or loss.

That's the most important metric. 

The post What is a Pip in Forex Trading? appeared first on Trading Heroes.

Forex lot sizes can be confusing when you're first starting out. But not to fear, this post will show you how they work.

Lot sizing is a little different in Forex, compared to other markets, but once you figure it out, it's actually quite simple.

I'll also show you why lot sizing is very important in trading and how to choose a broker based on the lot sizes they provide.

The Hierarchy of Success in Trading

Before I get started on lot sizes, it's important to understand why lot sizes are important. 

They are important because they are major element of risk management.

Success in trading is determined by prioritizing the following elements of trading…in this order of most to least important.

1. Trading Psychology
2. Risk Management
3. Trading Strategy

However, most beginning traders have a priority list that looks like this:

1. Trading System
2. Trading System
3. Trading System
4. Trading System
5. Trading Psychology/Risk Management

…and that's why most aspiring traders fail.

Risk management is much more important to your success than your trading strategy, so pay attention to your risk per trade and your lot sizes.

This video will explain how Forex lots work.

What is a Pip?

You'll need to understand the concept of pips in Forex to calculate risk, so I'll cover that briefly before we move on. If you understand this already, feel free to skip down to the next section.

There are basically 2 types of price quotes in commonly traded Forex pairs.

• Pairs with Japanese Yen in the pair
• Pairs without Japanese Yen in the pair

Yen pairs are quoted in 2 or 3 decimal places. The 2nd decimal is a full pip and the 3rd decimal is a pipette, or fraction of a pip. It's like a fraction of a cent in stock share prices.

Pairs that don't have Yen in them are quoted in 4 or 5 decimals. The 4th decimal is the full pip and the 5th decimal is the pipette.

Here are 2 examples of how you would calculate pips for each of the types of pairs.

Currency Units by Lot Size

Minimum lot sizes are easier to understand in other markets because it's usually 1.

Here are a few examples:

• 1 Share of stock
• 1 Futures contract
• 1 Options contract

But in Forex, there are some preset “packages” of lot size units.

These are the lot sizes that are available in Forex:

• Standard Lot: 100,000 currency units (lot size of 1 in MetaTrader)
• Mini Lot: 10,000 currency units (lot size of 0.1 in MetaTrader)
• Micro Lot: 1,000 currency units (lot size of 0.01 in MetaTrader)
• Nano Lot: 1 currency unit (lot size of 1 in TradingView/Oanda, not available in MetaTrader)

This is great in theory, but what does it mean in live trading? Well, it might be easier to think of lot size in terms of profit/loss per pip.

Keep in mind that the value per pip will vary by broker and currency pair. But I'll use the EURUSD as an example because the pip value is generally pretty similar across all brokers, and it's usually a nice round number.

• Standard Lot: $10/pip
• Mini Lot: $1/pip
• Micro Lot: $0.1/pip
• Nano Lot: $0.0001/pip

How to Figure Out Which Lot Size to Use

To find out the correct lot size to use on each, you can use a lot size calculator like this one. Most brokers have one available.

If you can't find a calculator on your broker's website, contact their support and they can point you in the right direction.

In order to calculate the correct lot size, enter the information about your trade. In the margin field, enter the maximum risk that you want to take on this trade.

Remember that Oanda uses nano lots, so the number of units will be a little different than if you used a calculator that was built for MetaTrader or another trading platform. Use the table in the previous section to convert nano lots to mini, micro or standard lots.

For example, let's say that you have a $10,000 account and you want to risk 1% on a trade, which is a $100 of risk per trade.

Your calculator will look like this:

Since Oanda uses nano lots, the maximum trade size is 4,244 nano lots or 4 micro lots, if you round down. If you choose to round up, then you would take the trade with 5 micro lots.

Herein lies the issue with brokers that do not use nano lots. 

When a broker only offers mini or micro lots, then  you have to round up or round down. This means that you will be risking more or less than is optimal for your account.

Over time, this can have a detrimental effect on your account because you aren't risking a consistent amount per trade. So some winning trades won't make up for the losing trades.

How to Choose a Broker Based on Lot Size

Choosing a broker based on the lot size that they offer is pretty easy. Start by calculating how much money you'll be risking per trade. 

For example, if you have a $1,000 account and you want to risk only 1% per trade, then you'll be risking $10 per trade. Now go back to the pip value list in the previous section and how many pips that would be for the EURUSD, for each of the lot sizes.

This example would be as follows:

• Standard lot: $10 (risk per trade) / $10 (pip value) = 1 pip of risk
• Mini lot: $10 (risk per trade) / $1 (pip value) = 10 pips of risk
• Micro lot: $10 (risk per trade) / $0.1 (pip value) = 100 pips of risk
• Nano lot: $10 (risk per trade) / $$0.0001 (pip value) = 100,000 pips of risk

Then figure out the maximum number of pips you'll be risking on your trades. If you're day trading and only going to be risking 100 pips or less, then you could potentially get away with a micro lot account.

But if you will be risking more than 100 pips, then it's better to go with a nano lot account.

However, if you have a bigger account, like $100,000, then a micro lot account is probably a good size to trade.

You'll have to make your decisions on which lot size is right for you, but knowing the right lot size before your first trade will get you started on the right foot. 

First-In First-Out and Hedging

There are a couple of other terms that you may hear, in relation to lot sizes and entering trades in Forex. They can be a little confusing when you're first starting out, so I want to make you aware of them.

First-In First-Out (FIFO)

In non-US brokers, you can enter and exit positions as you please. This is the way that it should be.

However, if you have a US based account, you'll have to exit your trades in the order that you entered them. 

So let's say that you enter 2 Japanese Yen trades as follows:

• Trade 1: Long 2 mini lots
• Trade 2: Long 1 mini lot

If you have to follow the FIFO rules, then you would have to exit trade 1 before you exit trade 2. Some US brokers will also blend your trades, so you'll only see an average of the 2 trades, not 2 separate trades.

I'm not a fan of FIFO, but there are ways around it. You can read this post on how to do it.

Hedging

Hedging is when your broker allows you to hold both long and short positions in the same trading account.

Again, US based accounts cannot do this, but traders in the rest of the work can. There is a way around it, but some traders may not need it.

Final Thoughts on Forex Lot Sizes

Lot sizes are an important component of risk management. Understanding how your broker and trading style affect the lot you use is one of the first things that you should learn in trading.

If you use the correct amount of risk per trade, you'll be able to stick around longer and figure out the trading game. Use too much risk and you'll blow out your account and be forced onto the sidelines.

Take a few minutes to figure out your ideal lot size right now. 

The post Forex Lot Sizes Explained (Complete Beginner’s Guide) appeared first on Trading Heroes.

This might seem like an odd tutorial, but stick with me because it might not be what you think.

A common question that I've been getting is how to withdraw money from MT5. I thought that the answer was straightforward, so I would always respond with something like the following.

To withdraw money from MT5 contact your broker and request a withdrawal. Your broker will usually send you your money back via the method you sent it to them. 

But I found another answer to this question that might surprise you.

How to Deposit Money to Trade

Since this is a tutorial for beginners, let's start with the basics.

In order to start trading Forex, or any other market, you'll need to work with a broker. 

The broker gives you the ability to trade the market you want to trade. They do this by establishing connections to trading exchanges or liquidity providers, and setting up software that will allow you to execute trades via those providers.

MetaTrader 5 is one example of software that a broker could provide their customers. Other examples are:

• MetaTrader 4
• TradingView
• NinjaTrader
• cTrader
• And More!

If you're looking for a broker, be sure to see our list of favorite brokers.

Brokers can accept money in several forms:

• Money wire
• Check
• Money order
• Credit card
• PayPal
• Cryptocurrency
• And more

The method of payment that a broker accepts will be determined by their company policy and the laws of the countries they operate in.  

What Usually Happens With Your Money

When you send money to a legit broker, they will put your money into their bank account and give you access to trade that money on their chosen trading platform (MT5, MT4, TradingView, etc.).

If you want to withdraw money from your account, you simply contact the broker and request a withdrawal. 

They will usually send your money back via the payment method that you used to send it to them. In some countries, they are required to send your money back using the original funding method.

What People are REALLY Asking

Alright, that's straightforward.

So I was wondering why so many people were asking me this question and why so many of them have never heard of a broker before. 

Well, it turns out that there is more to that question than I realized. Here's what some of those people were really asking…

Some shady groups out there tell people that they will manage their money by putting the money into MetaTrader 5.

Now since you already know that you need a broker to trade, and that MT5 is nothing more than trading software, then obviously money cannot be deposited directly into MT5. 

What these groups do is they put the money into their own personal bank accounts, but tell the investors that the money is “in MT5.” 

Since the money isn't deposited with a known bank or regulated broker, the investor has nobody to complain to and the money is gone.

Something similar appears to be happening in this scam. There was another scam back in the day that gave real bank information and they got caught. So saying that the money “gets deposited to MT5,” looks like a way to get around providing any kind of identifying details.

How to Research a Broker or Money Manager

So before you hand your money over to any money manager or broker, do some basic homework:

• What results have others had with them in the past?
• Is that group regulated in the country they operate in?
• Does their social media look legit?
• Check out their website, did they use Google Translate to write it?
• Are there any YouTube videos about the broker or money manager?

Be sure to watch the video above for more tips.

If there isn't any information on the broker or money manager, steer clear.

Remember that there will always be negative reviews about organizations/individuals in the trading space because many customers have unrealistic expectations of how much money they can make in trading. Then they blame their broker or money manager when things don't work out like they thought it would. 

But that aside, does it seem like the organization operates with integrity…or not?

Test Them Out First

Even after you've done a lot of research, never put all of your money in at once. Put in a small amount, then try to withdraw some of it. 

This is the best way to test to see how easy the withdrawal process is and if you can actually get your money back.

Final Thoughts

So those are some things to think about when you first start out in trading.

Withdrawing money from a broker is usually a very straightforward process. But if shady individuals tell you that they will deposit your money directly into MetaTrader 5, always be sure to get clarification.

The post How to Withdraw Money From MetaTrader 5 appeared first on Trading Heroes.

This tutorial will help you understand what a Forex broker is and how they can help (or hinder) your trading career. It's a perfect article if you're just getting started in Forex and want to learn very basic concepts.

A Forex (foreign exchange) broker is a financial services company that holds your money in their account and gives you the ability to use that money to buy and sell currencies, so that you can potentially profit from the trades. Brokers provide customers with access to liquidity providers, which are the “exchanges” where the currency pairs are actually traded. Some brokers may also take the other side of a trade, in order to help you get your trade filled. 

Now let's get into the details of how brokers work and why you need them.

What Does a Broker Do?

In the simplest terms, a broker gives you access to trade the markets. 

You send them your money, they deposit your money into your brokerage account and you can start trading Forex with that money.

When you want your money back, you ask them to withdraw your money and they return your money to you.

The Different Types of Brokers

In Forex, there are basically 2 types of brokers: 

• Dealing desk, also known as market maker
• Electronic Communication Network (ECN), also known as a “non-dealing desk” broker

Each type of broker has its benefits and downsides. 

A dealing desk broker takes the opposite side of some customer trades, if they cannot find another trader to match your trade with. When a reputable dealing desk broker takes your trades, they play fair and generally allow you to take a trade that you may not have been able to get at an ECN broker.

One big upside of a dealing desk broker is that they can take less of a fee per trade than ECN brokers, especially for traders with small accounts.

ECNs are generally thought of as more “fair” because they do not take the other side of customer trades. They simply match customer orders with each other.

These brokers usually charge a commission on every trade, and offer a lower spread, which benefits traders with larger accounts.

The downside to ECNs is that they might not be able to match your order with another trader on the opposite side and they may end up canceling your order. Since they don't take trades themselves, they cannot step in and take the trade.

There's no right or wrong answer when choosing between a dealing desk or non-dealing desk broker.

It all depends on the brokers available in your country and what makes sense in your situation. 

What is a Liquidity Provider?

A liquidity provider is a company that provides access to trading markets. These trading markets can include banks and large institutions.

Brokers have connections to multiple liquidity providers, which allows them to find the best prices for their customers. 

Liquidity providers do not take on retail (independent) traders like you and me because they only want to be in the business of providing market access.

They leave it up to the brokers to find retail customers and deal with customer service.

Examples of Forex Brokers

Here are some of the biggest brokers, at the time this article is being written.

• Oanda
• Pepperstone
• Forex.com
• Saxo Bank
• Dukascopy
• Scandinavian Capital Markets
• See our recommended brokers

Some brokers specialize in working with customers in only certain parts of the world, so do your research and find out which brokers are the best option where you live.

How Do Brokers Make Money?

There are 2 ways that brokers make money. They can charge a bid-ask spread and/or charge a commission on every trade.

The bid-ask spread is the difference between what you can buy a currency pair for and what you can sell a currency pair for.

You buy at the bid and sell at the ask.

So as soon as you buy a currency pair, your account immediately shows a small loss, because you have to sell at the ask price, which is lower than the buy price.

…and vice versa if you sell a currency pair first.

A commission is a flat fee on every trade. 

Usually dealing desk brokers only charge a spread, but the spreads are wider than at ECN brokers. ECN brokers generally provide smaller spreads, so most also charge a commission to make up for the small spread.

For traders with larger accounts, the additional commission can still come out cheaper than paying the larger spread with a dealing desk broker.

Avoid brokers that charges you a monthly fee or an expensive withdrawal fee (beyond a basic transaction fee). Reputable brokers usually won't charge these fees.

Also avoid brokers that charge a monthly inactivity fee. This is a fee that you have to pay if you don't make a certain number of trades per month.

Some brokers will also offer other products and services for sale to create income.

Forex Leverage Explained

Most Forex brokers allow you to trade with leverage. 

Leverage is a good thing to have in Forex because if you traded without it, you would barely make any money on your trades.

Most currency pairs move in the equivalent of pennies in US Dollars per day. Therefore if you did not have leverage, you would only make (or lose) a small amount on every trade.

However, if you trade with leverage, every currency unit in your account, $1 for example, would control many times that amount of currency.

For example, if you trade with 50:1 leverage, every dollar in your account now controls $50 of currency. If you put on a trade using $100 in your account, you now control $5,000 worth of currency, at 50:1 leverage. 

If the price goes against you by 10%, you would lose $500, much more than the original $100 in your account.

Obviously, the trade could also go in your favor, leading to a big gain.

But if you did not use leverage, you would only gain or lose $10 on the same market move, because your profit or loss would only be calculated on the original $100. 

Therefore, leverage amplifies gains and losses and should be used responsibly.

That's a very simplified version of how leverage in Forex works, but you get the point.

Broker Regulation

One important thing to consider when choosing a broker is if a broker is regulated or not. Make sure that they are registered with the regulating organization in the area you live.

There are several dodgy, unregulated, fly-by-night brokers that come and go every year. Here's an example of one.

Here are a few examples of regulating organizations around the world:

• Commodity Futures Trading Commission
• National Futures Association
• Swedish Financial Supervisory Authority
• Financial Conduct Authority
• Danish Financial Supervisory Authority
• Finantsinspektsioon
• And many more!

These organizations provide varying levels of protection against fraud and broker bankruptcy. So be sure to understand how things work in your country.

Find the organization that regulates brokers in your country, then only deal with brokers that are on their “approved” list. 

Can You Trade Forex Without a Broker?

Technically, yes.

You can take your physical currency and find someone who is willing trade it for another currency. Then you would have to another person who is willing to trade that currency for your original currency, in order to realize your profit or loss.

So in a practical sense, it's not possible to trade Forex without a broker. 

Even if you go to a bank or an exchange window at a store, they are acting like a broker, but they won't give you leverage.

Since you aren't getting leverage, it won't be worth your time.

Therefore, just open an account with a Forex broker…it's much easier.

What's the Best Forex Broker?

The best Forex broker will really depend on where you live and how much money you have to trade. 

There is no one best Forex broker for everyone. 

As I mention here, beginning traders with a small account are probably better off starting with a nano lot, market maker broker.

If you have a larger account and you're consistently profitable, then an ECN broker is usually a better option.

Keep in mind that all brokers will have negative reviews against them.

This is normal.

There are many people who try trading because they think it's easy. When they realize that it's not that easy, they start blaming everyone for their losses…especially their broker.

So try to read between the lines to find out of a review is credible or not. Is the reviewer bringing up a valid point about the broker, or are they just someone who doesn't want to take responsibility for their poor trading results?

Once you find a broker that you feel is good, open a small account and start trading. It also helps to try to withdraw some of your money to see how easy the process is. You can always put it back later.

Conclusion

So that's what a Forex broker is and how they work. In future articles, I'll get into the details on how to select a broker, how to fund an account, and much more.

If you're a beginner and have a question about Forex trading, feel free to contact us and ask a question.

Also take our free beginner's course to jumpstart your trading education.

The post What is a Forex Broker? appeared first on Trading Heroes.

This is a question that I got from one of my subscribers, so I'll answer it here.

Paper trading is a good exercise for beginners, but you don't want to be stuck doing it for too long…or stop before you're ready.

So let's take a look at how to find the right length of time to paper trade.

Traders should paper trade until they can meet or exceed their monthly percentage return goal, averaged over a 4 month period. For example, if a trader has the goal to make 2% per month, then the trader should make at least 8% profit, over a period of 4 consecutive months. Traders that are using a longer-term swing or position trading strategy should consider paper trading for 6 months to a year because there will be much fewer trades. 

Now let's take a closer look at what paper trading is, how get started, and how to set goals.

What is Paper Trading?

Paper trading is when a trader takes simulated trades, with the goal of learning how to become a consistently profitable trader.

Before computers were widely used, traders would write down their simulated trades on paper, thus giving it the name “paper trading.”

Now many brokers in the stock, options, futures and Forex markets offer online paper trading accounts.

They are also known as demo accounts.

These accounts allow traders to execute trades as if they were trading with real money.

The website keeps track of the trades and the trader can see the profit/loss from each trade.

This makes it easy to test strategies and learn the mechanics of placing trades, without risking real money.

Set a Paper Trading Goal

The first step in effective paper trading is to set a goal. If you don't have a goal, you won't know when you should stop paper trading. 

Some traders say that you shouldn't have a goal, because that will affect your trading psychology.

I disagree.

Not having a trading goal is like saying a Formula 1 driver shouldn't have a target lap time.

…or a competitive weightlifter shouldn't measure how much they are lifting.

You need to have a target.

Yes, it's true that you won't hit that exact target all of the time, and you shouldn't get too wrapped up in hitting that target every month.

But you should have a good idea of the average return of your trading strategy. 

So the next question becomes: What should your first goal be?

There are many legitimate ways to answer that question, but I feel that you should start small and build from there.

Pick a small number like 1% a month, 3% a quarter or 12% a year.

If you can average 1% a month consistently, you can probably make more by adding more trading strategies, timeframes or markets. If you can't hit that small number however, then it's impossible to every earn more.

Define Your Strategy

Next, write down your exact trading strategy and prove that it has an edge.

You can prove this by jumping right into paper trading with play money, but a better way is to backtest it to see how it would have worked in the past.

I've created a simple trading plan worksheet here. Print that worksheet, fill it out, and you'll have a complete trading plan.

You can also use a simple Google Doc, Evernote…or whatever works best for you.

The key is to write it down and follow the rules every time you take a trade. Keep your trading plan next to your computer, or open it on your computer before trading. 

Once you have a trading plan, now it's time to open a paper trading account.

How to Open a Forex Paper Trading Account

In order to open a paper trading account in Forex, simply go to the website of the broker that you'll be trading real money with, and open a demo account.

When you visit a broker's website, there should be a link to open a demo account.

Follow the instructions on how to setup the trading platform and start paper trading. The process of opening an account usually only takes a few minutes.

From there, it will take some time to setup the trading software. Brokers will use trading software like MetaTrader, TradingView, or have their own proprietary platform.

This will also give you the opportunity to master the trading software and test out the broker's customer service team.

Most brokers will allow you to adjust the amount of money in your demo account, so you can trade with numbers that are realistic to your situation. If you want to have a demo account that doesn't expire, consider using Oanda.

To see a list of Forex brokers that I recommend starting a demo account with, go here.

How to Open a Stock Paper Trading Account

There are different paper trading platforms for stock trading available, but a good one to start with is Thinkorswim by TD Ameritrade. They offer a paperMoney account that will allow you to demo trade stocks.

I've found the Thinkorswim platform easy to use, and it's great for both new and experienced traders.

Is Paper Trading Accurate?

It depends on which market you're paper trading. 

In my opinion, Forex is the best market to paper trade. Almost all brokers offer a demo account, where you can simulate live market conditions. 

Since Forex is so liquid, a demo account is a very good approximation of how you will do in a real-money account. So I consider Forex the most accurate market to paper trade in.

Paper trading in other markets like stocks, options and futures, can be less realistic because certain stocks or contract months can have low liquidity. When there's low liquidity, you are much more likely to see slippage in a live account, or not be able to get your trades executed at all.

Therefore, paper trading in stocks, options and futures can be less accurate. But you should still do it because it's a great tool for learning how to trade. 

How Do I Know When I'm Ready For Live Trading?

Once you can hit your paper trading target, now it's time to make a decision if you want to jump into real-money trading or not. Only you can make the call on when you should start risking real money.

One thing to consider is your personality type.

There are 2 ends of the personality spectrum to consider before stepping up to live trading:

1. Are you someone who tends to be very impatient? If yes, then you should probably paper trade for a couple extra months to be sure that you are ready.
2. Are you someone who tends to over-think things and always wants to get “more information?” If yes, then you should probably jump into a small live account as soon as you can hit your target average monthly return over 4 months. Otherwise, it can be easy to get stuck in the cycle of trying to learn more.
3. If you're in the middle of the spectrum, then be honest with yourself and ask if you're truly ready to start risking real money.

These are only general guidelines, based on what I've seen over my 13+ years of trading experience, and talking to traders from all over the world.

Do what you feel is right for you. 

Conclusion

The amount of paper trading time that's required to master a trading strategy will vary greatly by trader.

We all have very unique personalities and there's no one-size-fits-all formula for how long you should paper trade. 

However, if you follow the guidelines above, you will get to a point when you will know that you're ready to stop paper trading, and start trading real money.

When you feel like you're ready to risk real money, start with a small account. There may be unforeseen psychological challenges that you may have to get used to.

Also read my Forward Testing Guide for more tips on how to do effective paper trading.

Finally, believe in yourself and that you will know when the time is right for you to stop paper trading. Take control of your personal power and don't give it away to someone else by blindly following what they tell you. 

Let your data and common sense show you the way. 

The post How Long Should I Paper Trade? appeared first on Trading Heroes.

One of the keys to success in trading is understanding when you should be trading, and when you should be on the sidelines.

This one thing alone can make a huge difference in your trading results.

The best times to trade Forex will depend on your trading style, lifestyle and personality. Traders who are looking for trending moves should generally trade during high volume periods. Regression to the mean traders should trade during lower volume periods. 

Let's take a look at times that are specific to Forex and how they can impact different traders.

I'll also discuss how your lifestyle and personality will determine the time that you should be trading.

Trading Sessions and Trading Styles

The first thing you need to understand about the best times to trade, is the times that the markets around the world are open. Some markets have higher trading volume, and others have lower trading volume.

This is because some countries are bigger financial centers and more trading occurs there.

As you look at the graph above, the highest volume periods are during the times that trading occurs in London and New York. So if you're looking for big moves, then you should be trading during the London and New York sessions.

If you trade during the Sydney and Tokyo sessions, then you'll have a hard time making money with a strategy that needs big moves to be profitable.

However, if you're trading a regression to the mean strategy or a strategy that relies on low volatility, then the Sydney and Tokyo sessions are usually a better time to trade. Trading during London and New York will chop you to pieces.

You can access the graph above here.

Be sure to set the timezone on the graph to your local time.

How Your Lifestyle Affects When You Should Trade

Next, consider all aspects of your current lifestyle.

A lot of the advice that you find online will tell you to trade during the London and New York sessions.

…and that's generally good advice.

But what if it isn't possible for you to trade during those times? 

What if you're usually sleeping or doing other important activities during these times?

For example, I live in the Pacific Timezone in the US. That's probably the worst timezone to trade Forex.

But I make it work.

Basically, I could stay up late to catch the London open and a little of New York, or get up really early and trade the entire New York session. But I can't trade both sessions in their entirety.

Since I'm more of a night owl, I've opted to stay up late.

Other traders who live in places like Australia, don't have to choose. Both the London and New York sessions fall within their daylight hours.

So find out when your ideal market conditions occur in your timezone. 

You might only be able to trade specific timeframes like the London open or the New York close.

On top of that, ask how your current obligations might interfere with your ability to trade.

Do you have to work during a certain period of time? Working and trading at the same time makes you ineffective at both. That's not fair to you, or your employer, so focus on one at a time.

Do you have to pick up your kids?

It's really difficult to trade on your phone, no matter how much you think it's possible.

So have have to make a decision to make.

Either move to a more favorable timezone, change your lifestyle, or work with what you've got.

If your trading strategy doesn't match your lifestyle, then it will take much longer for you to become successful.

How Your Personality Affects the Best Times to Trade

Finally, your personality plays a huge role in determining which trading strategy is right for you, and therefore when you should be trading.

You can learn more about how to figure out your trading personality here.

This is the most important factor in figuring out when you should be trading. 

Peak Performance Times

Are you more of a night person, or more of a morning person?

…or maybe an afternoon person?

This is an important thing to consider.

You should try to trade at a time that's within your peak performance waking hours.

Sure, this isn't always possible, but it will improve your results. 

Trading when you're tired is a recipe for disaster. So even if you're awake during a certain time, that doesn't mean that it's a good time for you to trade.

I used to think that everyone was the most productive in the morning.

As it turns out, that's not true.

We all have a chronotype.

This means that different people perform best at different times of the day.

Some do their best work late at night.

Others are freshest at 6:00 am.

To learn your chronotype, take this test. You might be surprised at what you discover.

Chart Timeframe

Another important question to ask is if you're better suited to swing trading or day trading.

…or maybe even position trading or scalping.

Before you answer that, take a look at what Larry Williams says about day trading versus swing trading.

I agree with what he says. It's better to start out as a position or swing trader, than trying to jump directly into day trading.

This is because day trading requires intense concentration and most people aren't able to sit down for a couple of hours straight. Either because of a lack of attention span or because of external obligations.

On top of that, for some traders, the dopamine hits that come with day trading can be addictive.

It's similar to the effect that drugs can have on the brain.

However, if you're super passionate about day trading, then you should focus on that.

But be aware that day trading really does go against how most of our brains are wired, and there's usually a steeper learning curve.

On the other hand, swing trading allows for more flexible scheduling, is easier to backtest and also allows for a larger margin of error. Five or ten pips doesn't matter as much in swing trading, as it does in day trading.

Trend or Countertrend

Some traders are better at spotting trending trades. Others are better with countertrends.

You may be equally good at both.

But you should also take into account what type of trade you're looking for, when choosing a time to trade.

Trending trades will usually happen during high volume periods.

If you try to enter during low volume periods, there usually won't be enough momentum to generate a trend.

Countertrend trades can usually be found during lower volume times.

Ideally, you should look to get into these trades just before volume starts to pick up.

That way, you can potentially get in with a reasonable stop loss and catch the momentum of a trending market.

Conclusion

Successful trading is not one-size-fits-all.

If someone tells you that a certain time is the best time to trade, then that's usually the best time to trade for THEM.

There isn't one best time to trade.

There's only a best time to trade for YOU.

Luckily, the Forex markets are open 24 hours a day, 5 days a week.

That means you have many opportunities to develop a trading strategy and time that fits you and your lifestyle.

Figuring that out will take some experimentation and testing.

This is what can make trading challenging.

But don't give up! Keep at it and use the tips in this post to help narrow down your options.

If you want more help with how to pick the right trading strategy for you, to download my free book.

The post The Best Times to Trade Forex appeared first on Trading Heroes.

There are a lot of Forex trading myths that are holding traders back. So in this post, I'm going to set the record straight on these topics and show you how these beliefs can prevent you from reaching your full potential.

If you find yourself resisting strongly against any of these myths, then that is usually one of the big things that's holding you back. It may take some time for you to come to terms with it.

But do your own research on the topic and find out for yourself.

1. Forex Trading is Easy to Learn

This is the biggest Forex myth of all. 

There are 2 parts to this one…

Some people on the internet perpetuate this myth and that's how it spreads. They have YouTube channels named “Forex is So Easy” and other such nonsense.

Unfortunately, some people will do that in all markets. They will tell you that real estate investing is easy or that making money on eBay is easy.

In reality, it takes a lot of practice and hard work. Successful Forex trading is no different from becoming world-class at any other skill.

There will be challenges and failures before you start to see success.

The other part is that Forex trading seems easy. At first glance it seems like all you do is learn a system and follow the rules.

Nothing could be further from the truth.

Learning to trade doesn't have to be extremely difficult either, but it's certainly not easy.

2. All Brokers Run Stop Your Losses to Make More Money

I'll get this out of the way up front…

There are some shady brokers out there who might run your stops intentionally. They're usually located on a tiny island somewhere, with a government that's easily influenced (with a big bag of money).

So it's your responsibility to do your homework on the broker you trade with. If you want a good place to start, here are a few great options.

For the most part, a regulated broker in a major financial center of the world, won't run your stops. It's not worth the risk for a few extra pips.

The traders who usually complain about their stop getting intentionally triggered are new traders who set their stops too tight.

If you want to sound like a rookie, then complain about your broker running your stops.

To find out who does run stops, read this post.

3. All You Need is the Right Trading Strategy

Even the most profitable trading system ever created won't work for you, unless it resonates with your Trading Personality.

If a trading educator is only selling a system and doesn't provide any psychology coaching, then understand that you are only getting a small piece of the puzzle.

It will be difficult to trade that system without the right mindset.

A success oriented mindset will help you overcome setbacks, deal with frustration and do the work. Without this type of mindset, you will simply give up.

4. Dealing Desk Brokers Trade Against You (and Cheat)

Again, there may be shady brokers in some parts of the world that do this. So do your research before sending a broker money.

Yes, dealing desk brokers will be the counterparty to some of your trades. Some new traders misinterpret that to mean that they are trading against you.

Although they do make money if you lose, they are actually helping you out by taking the other side of the trade.

When there is a fast moving market, dealing desk brokers can sometimes provide better fills because they are providing liquidity and assuming the risk.

Since ECN or STP brokers route all client trades into the market, there may not be enough traders willing to take the opposite side of some trades. That means that you may get a bad fill, or not get filled at all.

A dealing desk broker can provide more liquidity, which is better for the independent trader.

There are pros and cons to dealing desk and non-dealing desk brokers. Learn what they are and which one is right for you.

5. More Confirmation is Better

Have you ever seen a chart like this?

I hope that's not your chart

This is an example of a trader who is looking for the ultimate in confirmation. In other words, a 100% guaranteed winner.

First of all, if a trader is looking for this much confirmation, they probably won't take any trades because all of the indicators will never line up at the same time.

Second, this chart is so cluttered that the trader can't even see what the price is. It's hard to make decisions that way.

Third, there's no such thing as a guarantee in trading.

The vast majority of successful traders have a very simple strategy and are very good at applying it.

Which brings me to my next point…

6. Successful Forex Trading is Complicated

Successful traders use simple trading strategies. 

So stop trying to make trading more complex than it needs to be. 

Don't beat yourself up if you've been doing that. That's just how the human mind tends to work, we like to outsmart ourselves. Forgive yourself and get to work.

Be aware of your perception and find ways to change it. The best way to find out what really works is to start backtesting strategies.

You results will show you which is better…simple or complex.  

7. More Knowledge is Better

Some traders get stuck in education mode forever and never place a trade.

They are always after the next bit of information because they think that they don't know enough yet.

In my experience, there are 3 primary reasons for this:

1. The person sees trading as a purely intellectual pursuit. They don't actually want to risk money, and that's fine too.
2. The person has a lack of confidence. They think that they aren't good/smart enough to be a trader.
3. The person has a fear of failure. It's better to be good at trading knowledge, than to be bad at actual trading.

If you fall into category 2 or 3, then open a demo account and just start placing some trades. It's the only way to start developing skill.

A guitar won't play itself, you have to learn to play it.

Your trading account balance won't increase by itself either.

If you are in category 1, then cary on…

8. Trading Robots are an Easy Way to Make Money

Commercial trading robots (EAs) are completely worthless. 

If you don't know how a robot works, how do you know when it stops working? 

Most of the robots out there are over-optimized for a certain period of time. They do amazing in those types of market conditions, but they fail miserably when market conditions change.

On the off chance that you do get a robot that actually has a robust trading strategy, you'll probably turn it off at the first sign of a losing streak. Again, because you don't know how it works, you'll assume that it has stopped working.

Either way, robots are a recipe for disaster. 

However, if you have a trading strategy that works and you want to automate it, then a robot is a great way to leverage technology to help you make more money. Since you know what the robot is doing, it's also easy to see when it needs to be adjusted.

To automate an existing strategy, talk to one of the programmers on this list.

9. You Shouldn't Have to Pay for Trading Tools and Education

You kids are spoiled. 

Sheesh, I sound like someone's grandfather.

But it's true. When I started trading, almost none of this stuff was available.

Nowadays, there are so many fantastic, free trading resources out there that a lot of people think that everything should free.

Well, creating these products takes time and money and the creators have to get paid somehow. 

You wouldn't go to work at your job for free, right?

Then don't expect others to work for free either.

Thinking that people owe you something is also a poverty mindset. 

Sure, there are a lot of great free tools out there, use the ones that work for you.

But also be willing to pay for quality.

For example, MetaTrader is a great piece of free software. But I find that TradingView is much easier to use (especially on a Mac), so I'm willing to pay for it…as I talk about here.

Every once in awhile someone will comment on this video, saying that they like TradingView, but why does it cost money?

Blows my mind.

10. Psychology Doesn't Matter

Psychology is 90% of success in trading.

When you have the right mindset, you're able to overcome obstacles, find the right mentors and put in the effort necessary to succeed.

Traders that don't have the right mindset will blame others, trading strategies and their broker.

If you want to be a successful trader, then take responsibility for your trading and work on your psychology. 

11. Trading Lower Timeframes Will Result in More Profits

In my experience, a very small segment of independent traders are cut out to be day traders. As we discussed here, day trading or scalping can cause brain activity that is similar to using drugs.

Traders can get a high from the excitement, but once the adrenaline wears off, they find out that half their account is gone.

If you aren't getting the number of trades that you want in a week, then simply add more markets or strategies.

Moving to a lower timeframe requires more focus and most people don't have the time to sit at a screen for a few hours straight.

12. Successful Trading Depends on Eliminating Your Emotions

I don't know about you, but I'm not a robot.

Therefore, I feel emotions.

A key to success in trading is to work with your emotions, not repress them.

You know what happens when you repress stuff right? 

I think most of us know at least one person who went to a strict Catholic school in their youth.

…yeah, that's what happens. The repression tends to lead to overcompensation in other areas.

Instead, we should learn to work with our emotions.

Understand how you deal with wins and losses. Uncover the situations where are the most likely to take impulsive trades.

Even if you have a set of trading rules, they will all go out the window if you don't feel like following them.

The same thing goes for automated trading programs. Some traders think that computer programs will remove all of the emotion from trading.

That's not entirely true because you still have the ability to turn the programs on and off. If you let your emotions get the better of you, then that's when you will turn the robot off.

…and that's usually when it goes on a winning streak.

13. You Should Understand Exactly Why a Market is Moving

There are literally thousands of reasons why a market moves the way it does.

Independent traders are not privy to most of that information. Even people on the “inside” of these markets might not know what's really causing a market to move.

So it's useless to think that you can get all of the pieces of the puzzle, to be 100% sure when you take a trade.

But luckily, you can still do very well, even if you only have a few key pieces of information. Then take small losses when you're wrong and make big profits when you're right.

Learn what those key pieces of information are that work for successful traders and practice using them. It could be technical analysis, fundamental analysis or a little of both.

14. Successful Traders Shouldn't Sell Their Education

Let's say that you want to start a business…whatever sounds good to you.

Maybe a flower shop.

Would you work on that business for free?

Of course not.

Well, trading education is a business too.

So why do some people expect traders to work for free?

Those trading educators create products and should be paid accordingly, just like any other business.

The fact that those educators are also successful traders is irrelevant.

15. You Should Only Learn From Successful Traders

There's obviously value to learning from a successful trader. However, you should also consider if that trader is also a good teacher.

Those are two entirely different skills. 

History has many examples of elite athletes that failed as coaches. On the other hand, there are many legendary coaches, who never played at the level that they had their coaching success.

Also consider that your best mentor may not be a trader at all. If you work with someone who can improve your mindset for example, that might be all you need to succeed in trading. 

So keep your mind open to who you learn from. 

16. You Should Always Trade with a Stop Loss

I used to believe that all trades should have a stop loss.

Then I discovered hedging and I realized that there are some scenarios where you don't need a stop loss.

Sure, you should always control your risk, but you don't necessarily need a stop loss to do it.

I know of a few successful traders who don't use a stop loss. They manage their trades with a mental stop and they watch their trades very closely.

That works for them.

Find what works for you.

17. Successful Traders Predict Market Moves

You will see a lot of market predictions on the various Forex forums on the internet.

“I think the USDJPY will go up because of _______. ”

…or…

“The chart is forming a head and shoulders pattern, so I predict that the market will go down.”

…or my favorite…

“My gut tells me that the price is going to go up.”

Lazy people will also ask for market predictions.

That's not the way trading really works. 

Good traders react to favorable market conditions, they don't predict them. There's a subtle difference.

They understand when they have an advantage and only trade when the advantage is on their side. When there's no advantage, they stay on the sidelines.

If they are wrong, many are also willing to quickly reverse their position.

But new traders try to predict market moves and usually stick to those predictions until their account balance goes to zero.

18. Trading More Markets Means More Profits

Not necessarily. If you start trading 50 markets because you think that's the only way to be successful, then you might burn yourself out.

Sure, if you aren't getting enough trades a week or month, then consider adding more markets.

But don't add more markets just because you think that's the only path to success.

I know a couple of traders who only trade 1 or 2 markets and are very successful.

More is not always better.

19. A Talented Money Manager Will Make You Rich

Having someone else manage your trading capital is certainly a good option.

More often than not however, I've found that people find it hard to work with even the most successful money managers. 

This is because there needs to be a deep level of understanding between the client and the money manager. Many clients expect the moon, and when that doesn't happen right away, they pull their money out of the fund.

That's why this guy recommends that potential clients only invest in his fund when he's in a drawdown.

But if you take the time to get to know a money manager, understand what kind of performance to expect, and you're in it for the long run…then it might just work.

Conclusion

These Forex myths are repeated ad nauseam throughout the internet, so some new traders think that they are the truth.

But in most cases, they are completely false, and are extremely limiting beliefs.

My comments above will help you on the right path, and are the result of my experience in trading since 2007. But don't take my word for it, do your own research and find out for yourself.

The post 19 Forex Myths and Misconceptions appeared first on Trading Heroes.

When you are first getting started in Forex trading, it can be challenging to know how long to hold a position open and when you should close it out. So if you are wondering how long you should hold your trades, this tutorial will give you the tools to figure it out.

The length of time that you hold a Forex trade open will primarily be determined by your trading strategy, current psychology and status of the trade. While it is possible to keep a trade open anywhere from a few seconds, to a few years, most traders keep their positions open for a time period that is somewhere in between. 

Now let's take a closer look at the different factors to consider when keeping a trade open and examine a few specific scenarios. I'll also answer some frequently asked questions about how long to hold onto a trade.

How Long Can You Hold a Forex Trade?

Let's start by taking a look at how long it's possible to keep a trade open.

You can hold a trade for as long as you want, as long as your broker is still in business and you are able to fulfill the margin requirements in your account. This holding time can range anywhere from a few seconds to a few years. 

Holding a trade for a few seconds generally doesn't have a huge impact on your account, unless you are trading too big of a position size. However, you should consider two things before you hold a position for a long period of time. 

First, what is your total risk on this trade? If you have a trade open for a long time, that implies that you have a wide stop loss or no stop loss at all. 

Obviously, not having a stop loss is a recipe for disaster. Unless you are hedging, which is a form of a stop loss.

But if you have a big stop loss, consider how much of your account is at risk if that stop gets hit.

Will that be too big of a loss to easily make back later? If so, then consider reducing that stop loss to a reasonable amount. For beginners, this is in the range of 1-2% of your total account.

Second, consider the rollover (or interest) that you will lose on the position. 

When you keep a Forex trade open, you will either receive or pay interest. This depends on the current interest rates of the individual currencies in the pair, the amount of leverage you are using and the rollover rates set by your broker.

Your broker probably has a rollover calculator that you can use to estimate how much interest you will pay or receive.

Here are a couple of examples:

• Oanda
• Forex

If you cannot find a calculator on your broker's website, contact them directly and ask them what their current rates are.

Should You Hold a Trade Over the Weekend?

There are several different factors to consider before you hold a trade over the weekend. The biggest risk is that price will gap against you when the markets open at the start of the next week.

So if you're a scalper, then you shouldn't hold a trade over the weekend.

Your risk is just too great.

However, if you aren't a scalper, then consider these factors.

Reference Your Trading Plan, Data and Trading Journal

The most important thing to consider is your trading plan and what your data says.

Presumably, you have backtested and forward tested your plan and it has an edge.

If you haven't done that yet, then get started with that right now.

Another source of data that you should also look at is your trading journal.

This doesn't have to be complicated. You don't need a special journal for this.

It can be as simple as using a pen and paper to track your trades. Count how many trades you held over the weekend and the results.

That can help you make a decision.

What is Price Action Telling You?

Once you've looked at your testing and journaled trades, then it's time to look at your chart and let price action help you make a decision.

Does it look like the move will continue?

Does it looks like it will stall?

…or is it unclear?

Let's take a look at a couple of examples.

If you were in a short trade in the NZDCAD and this is what your chart looked like before the weekend, what would you do?

I think most traders would stay in the short trade because price has broken previous support and looks like it will continue to move down.

However, what if your chart looked like this, going into the weekend?

There's no clear direction on this chart. Price is in a range and hitting a local support level. This is an example of when you might want to get out.

Again, there are no set rules here. Looking at the price action is just one criteria to consider, and can be very subjective.

Therefore, if price action isn't giving you a clear course of action, here are more factors to consider.

Overall Market Volatility

Now take a look at the overall volatility of the market. In times of uncertainty, like during wars or global disease outbreaks, the markets can become very unstable.

This can lead to very erratic price moves that don't seem to have any rhyme or reason.

So if you are in that type of environment, consider closing your trade out before the weekend. You will probably sleep better and you won't be affected by the choppy moves that can happen when the market opens again.

Are There Any Big News Announcements Coming Out?

News events can create temporary price shocks, especially if they happen over the weekend. That's why it's a good idea to keep an eye on news events with an economic calendar like this one.

Use the filter and only track the high-impact events. They are usually the only news announcements worth tracking.

Not all traders use fundamental data to make trading decisions, of course.

But if you are on the fence about if you should keep a position or not, then looking at upcoming news events can help you decide.

You can even download mobile apps that will send you alerts on upcoming news.

How Profitable is the Trade?

Another factor that can help you make a decision is the profitability of the trade. If you are only profitable by 5 pips (or slightly negative), going into the weekend, you may consider closing the trade immediately.

Then you can get some rest over the weekend and look at it with fresh eyes when the market opens again. With that small of a profit or loss, there's a good chance that you can still get back in at your original entry price, without the risk of holding the trade over the weekend.

Now if you have a trade that has a 150 pip profit and it looks like the move will continue, then you might consider holding out for the additional profit. Even if the market gaps 50 pips against you on the open, you'll still have 100 pips of profit to play with.

Giving the trade a little extra space to fluctuate can lead to bigger profits.

Your Current Trading Psychology

A final factor that you should consider is your current psychology.

Are you in a big drawdown, and would another loss destroy your confidence? Then it might be better to close the trade out and start fresh next week.

On the other hand, if you are on a winning streak and your confidence is high, then it might be better to keep the trade open because it won't have a big impact on your psychology.

Don't underestimate the effect that a trade can have on your mindset. Even if there is a good technical reason to keep a trade open, maintaining your “psychological capital” is even more important.

Holding Positions Overnight

Should you hold positions overnight? That really depends on the timeframe that you're trading on.

If you're scalping or day trading, then holding your positions overnight can be a huge risk. It's generally not a good idea to hold for that long because there can be very illiquid times when price can spike and lead to big losses.

However, if you are swing trading or position trading, then holding your positions overnight is usually not a problem. Since you'll generally have wider stop losses, you usually won't be affected by illiquid periods.

Again, it depends on your trading strategy, but holding positions overnight usually isn't as big of a risk in Forex as it can be in other markets. 

Do Forex Trades Close Automatically?

Some new traders wonder if there is anything that would cause their trades to close automatically and prevent them from holding a trade for a longer period of time.

There are only 4 scenarios where a Forex trade will close automatically.

The first way that a trade will close automatically is if you set a stop loss or a take profit on the trade. 

This is straightforward.

If you set a level to get out of the trade, that will close the trade automatically. A trailing stop will also close your position automatically, by trailing the stop loss at a predetermined distance from your original stop loss level.

Next, a trade may close automatically if you're using an automated trading program like a MetaTrader EA or a TradingView script. 

If you want a program to manage your trades for you, a MetaTrader EA or TradingView Script are the best places to start. They will allow you to define specific scenarios when your trades will close.

You don't have to manage all of your trading with a program. You can use Incremental Automation to manage the parts that don't need your input, but still manually control the parts in which you want to have the final say.

Don't know how to code?

No worries, just find a programmer to make your idea a reality. You can get a free guide on how to do that, along with a list of programmers, here.

A third way that your trades will close automatically is if you don't have enough margin in your account. 

This is called a margin call.

Since the Forex markets make such tiny moves, using leverage is required to make a decent profit on currency trades. You are able to trade on margin (leverage) by borrowing money from your broker.

Your broker keeps a portion of your account on “hold,” as a deposit for the amount of money that you borrowed. If the available margin in your account runs out, you cannot trade anymore.

At that point, your broker will automatically close your positions, until you are able to fulfill their margin requirements. Contact your broker to find out how much margin you need to keep in your account.

Finally, your trades will close automatically if your broker goes out of business.

Yes, that may be obvious to you, but I point this out for a reason. Some new traders don't think about this when they are looking for their first broker.

If your broker isn't regulated, isn't well capitalized or engages in shady business practices, you could lose your entire account…overnight. That's why it's important do your homework on your broker and find out if they are reputable.

These are the brokers that we recommend.

Final Thoughts on Keeping a Forex Trade Open

That covers all of the things that you need to know about keeping a Forex trade open.

The easiest way to make a decision to have a trading plan or strategy.

When you have a tested trading strategy, you can reference the data to figure out the answers to the questions addressed above. Without this data, you are trading blind, or using “intuition” that may or may not be properly trained.

To learn how to test your trading strategies, this course will help.

The post How Long Should You Hold a Forex Trade? appeared first on Trading Heroes.

A lot of beginning traders think that they have to day trade because they cannot afford to set a bigger swing trading stop loss. The biggest risk of only day trading is that it can easily lead to overtrading.

In Forex, you can swing trade with as little as $500 and still take 2% risk per trade, or less. This allows aspiring traders to develop their trading skills, without risking a large amount of money. 

We will also compare the Forex market to what it takes to swing trade in other popular markets. Since it takes so much more money to swing trade in other markets, you may not believe that it's possible to have such a small swing trading account in Forex.

Let's take a look at the math of how this is possible.

The Math of Swing Trading with Nano Lots

Here's a theoretical trade that I'll use to illustrate the value of nano lots. This is an example of RSI divergence.

The risk on this trade is: 0.78083 – 0.77007 = 107.6 pips

Next, let's say that you risk 2% per trade. So with a $500 account, 2% risk is $10. 

That's the most you are willing to lose on this trade.

107.6 pips may seem like a lot.

However, when you trade with nano lots, you can trade for as little as $0.0001 per pip. The cost per pip will vary, depending on which currency pair you trade.

But let's just use that as an example.

So to risk $10 on this trade, you would divide the dollar risk by the number of pips:

$10 total risk / 107.6 pips of risk = $0.092 risk per pip

From there, you divide the risk per pip on the trade by the cost per minimum lot size, which is 1 nano lot:

$0.092 risk per pip / $0.0001 risk per nano lot per pip = 260 nano lots

That gives you a trade size of 920 nano lots. 

Take a minute to understand how powerful that is. 

A nano lot has a pip value of $0.0001!

This is several orders of magnitude less risk than a micro lot, which I will explain in a second.

So this is how you can have a tiny $500 account and still swing trade with only 2% risk. 

You can even trade a smaller account and only take 1% risk. 

What if you have a $100 account?

Well, if you risk only 1%, then that's $1.

If you took the same trade with 107.6 pips of risk, you could still take the trade with 92 nano lots! 

Even though this amount of money won't change your life in a significant way, it will get you in the habit of taking the right amount of risk and allows you to practice your trading strategy.

That's super important. When you use the right process on a small account, that will build the habit that will be very helpful in a larger account.

I know what you are probably thinking. This can be a lot of math to do manually, especially if the market is moving and you have a few trades to execute. That's why I love using TradingView.

Their trade entry screen does all the calculations for you, which makes it super easy. You can learn more about TradingView here.

The Math of Swing Trading with Micro Lots

Now let's compare taking that same trade, in the same account, but trading with micro lots. This is the smallest lot size at most Forex brokers.

It's 1,000 units of base currency and when you trade a micro lot, you gain or lose about $0.10 per pip. Again, the cost per pip will vary, depending on which currency pair you trade.

But for illustration purposes, let's just say that each pip is worth $0.10.

In a $500 account, with 2% risk, you are still risking $10.

However, with micro lots, you have a maximum stop loss size of 100 pips to only risk 2%.

$10 total risk / $0.10 per pip = 100 pips

Therefore, you would either have to pass on the trade, or take a lot more risk.

For this trade, you would have to trade 4 micro lots, which would mean that you would be risking about 8% of your account on the trade. 

It won't be too many losing trades like that, before you blow out your account. 

So if you open a $500 account and trade micro lots, that's actually very risky. However, if you use nano lots, you can take the right amount of risk relative to your account size.

…and the longer you hang around in trading, the more you will learn and the better you will get.

Swing Trading Forex vs Stocks

It's also useful to compare swing trading Forex to swing trading stocks, because the account size requirements are very different.

The first thing to consider when trading the US stock market is the Pattern Day Trader (PDT) rule.

Yes, we are talking about swing trading in this post, but if your swing trades don't work out and they turn into day trades, then the PDT rule will affect you. You could get stuck in a situation where you see a perfect trade setup, but you cannot take the trade because of PDT restrictions.

Therefore, it's useful to have more than $25,000 in your account, even if you are swing trading.

Even if you are super cautious and avoid the PDT rule, a small account will limit you to only a couple of trades at a time. If you only have $500 in your account, you can only really have one trade on a time.

…and consider commissions.

Most discount stock brokers will charge about $7 per trade. There are more “no commission” brokers like Robinhood coming out, but you are still going to pay a little spread with these brokers.

But for the sake of example, let's say that you are paying $14 per trade. That's 2.8% of a $500 account. It's going to very hard to turn a profit when you are already in a decent hole at the start of every trade.

So if you want to swing trade stocks, you will need at least $2,000 in your account, and a $10,000 account would be a much safer starting point. Since stock prices can vary a lot, it's better to be prepared with a bigger account.

Swing Trading Forex vs Futures

If you thought that the requirements to trade stocks are high, then swing trading futures requires even more capital. For example, let's take a look at a mini futures contract.

A popular one is the S&P E-mini. These are the specs from the CME website.

The important number here is the dollar value per tick. A tick is the smallest movement in that market, like a pip in Forex.

You're making or losing $12.50, every time the market moves!

In order to swing trade a market like this, you will need to have at least $50,000 in your trading account and more is better.

How Much Money Do You Need to Swing Trade For a Living?

This is the real reason you Googled this question, right? 

So before I end this post, let's examine how big of an account you would need to swing trade for a living.

If anyone tells you that everyone needs $X to trade for a living, they don't know what they're talking about.

There are many variables that go into determining how much it takes to swing trade for a living, so it's impossible to have a blanket number that will work for everyone. 

Here are the primary things to consider:

• Your base living expenses
• The lifestyle level you want to maintain
• Who else are you supporting?
• How much do you want to put into savings every month?
• What are other expenses that you would incur by trading full-time (medical insurance, etc.)?
• The reliability and return of your trading strategy
• How will you handle a trading drawdown?

The best thing that you can do is to have a reliable income, while you are learning to trade. Build your savings with your trading profits. 

Once you are able to make 2-3 times your current income with trading, you can consider swing trading full-time. When it become obvious that you are losing money by going to work, then it's probably time to quit your job and trade.

…or maybe not.

You can always keep your job or even work a part-time job to have a reliable source of income. It just depends on your goals, what you feel comfortable with, and your other obligations.

The best place to start is by tracking your expenses. Remember to add some padding to account for emergencies. You may not realize how much you are spending.

On the flip side, you might not realize how low your monthly costs are. If this is the case for you, it will be much easier to replace your income with trading.

Conclusion

Swing trading can give traders freedom to only check the charts a few times a day. But many beginners are under the impression that they cannot swing trade because their account is too small.

While this might be true in other markets like the stock and the futures markets, Forex is unique in that you can trade nano lots and still take the correct amount of risk for your trading psychology, trading strategy and account size.

The post How Much Money Do You Need to Swing Trade? appeared first on Trading Heroes.

Out of curiosity, I Googled this question because I wanted to see why people prefer trading Forex or stocks. The top search results for this question were completely ridiculous. So I decided to write a real answer to help you make an educated decision about which market is better for you.

The market that's easier for you to trade will depend on:

• Personality
• Lifestyle
• Knowledge
• Interests 

In reality, one market isn't universally easier to trade than the other. They both require study and practice to master. When someone tells you that a market is easier to trade, they are usually speaking about their personal preference…or they have something to sell you. 

That said, one market may be easier for YOU. 

So let's dive in and take an objective look at each market, so you can figure out which one will be the best fit. Even though this is a Forex-focused website, the bottom line is that I want to see all traders succeed…regardless of which market they trade.

Pros and Cons of Forex Trading

Pros

Limited Number of Currency Pairs

Just focusing on a few markets every week is appealing to some traders. For some people, this is the biggest reason to trade Forex.

You don't have to setup a screener or comb through hundreds of stocks every week.

Market is Open 24/5

There can be plenty of opportunities to trade, regardless of where you live. Of course, the most price movement comes during the London and New York sessions.

But there can be opportunities to trading in the Asian session too.

This gives you a wide range of times to find trading opportunities.

Low Transaction Costs

Most Forex brokers make money on the small spread and don't charge a commission. This amount is tiny, compared to the commissions you pay at an online stock broker.

So if you will be starting with a small trading account, Forex can be the better choice.

No Pattern Day Trader (PDT) Rule

In the stock market, the PDT Rule limits small account traders from making more than 4 intraday trades, within a 5-day period. In order to trade more than 4 intraday trades during that timeframe, you need to have at least $25,000 in your account.

There's no PDT Rule in the Forex market. You can take as many day trades as you want.

Higher Leverage

You can get as much as 100:1 leverage at a reputable Forex broker. This allows you to put less money in your trading account and keep most of it at a bank, where it's much safer.

Even US brokers that only offer 25:1 leverage still give you more leverage than stock brokers.

When you have the ability to leverage your money, you can grow it faster.

Small Lot Sizes

If you trade nano lots, you can take the right amount of risk, even with a tiny account. Forex brokers also provide micro, mini and full-sized lot sizes.

One of the reasons that the success rate with small trading accounts is so low in most markets, is because the minimum lot size is huge, relative to these small accounts.

For small account traders, his makes Forex a more viable option than most futures markets and can be a better option than putting your money in the stock market.

Low Account Minimums

You can open a stock trading account for as little as $100 at some brokers. Obviously, you won't make a full-time income with such a small account, but it can help you get started and learn the basics.

Cons

Market is Open 24/5

Although this is a potential benefit, it can also be a downside. For some traders, this can lead to overtrading. They think that they have to trade, just because the market is open.

Limited Number of Pairs

If you like the thrill of searching through thousands of stocks, the you might find Forex boring. You will be looking at the same number of pairs on a daily basis.

Higher Leverage

New traders can have a tendency to use too much leverage and blow out their accounts. If you don't understand how to control risk, then higher leverage is dangerous.

Currencies Can be Harder to Understand

There are so many factors that affect currency prices, that it can seem daunting. For traders who like to make fundamental (based on economic data) trading decisions, the Forex market can be a little overwhelming.

Pros and Cons of Stock Trading

Pros

Stocks Can Be Easier to Understand

For some traders, it's easier to understand what a company does. This makes the research process more logical.

You look at financial statements, research the products and see how the sector is doing.

Thousands of Stocks to Choose From

If you like the thrill of digging through a ton of stocks to find a few hidden gems, then stock trading may be easier for you.

For some traders it can be like a treasure hunt.

Since there are so many stocks out there, there's a very good chance that something will be tradable. 

Low Account Minimums

You can open a stock trading account for as little as $500, at some brokers. This allows you to get your feet wet and understand the mechanics of placing a trade.

Cons

High Transaction Costs for Small Accounts

If you have a small account and are only trading a few shares, then the commission on each trade will be large, relative to your account size.

For example, let's say that you have a $1,000 account and buy 10 shares of a $25 stock, and your commission is $7 per side ($14 total). The commission ends up being 5.6% of your total position size.

Your stock will have to go up to $26.40 before you start making a profit. This puts you in the hole from the beginning.

Market is Only Open During Certain Hours

If you are in a timezone where the stock market is open at an odd local time, it can make it much harder to trade. Trading when you are tired can lead to mistakes and poor decisions.

Pattern Day Trading (PDT) Rule

As mentioned above, if you want to be a serious day trader in the stock market, you need at least $25,000 in your trading account.

This can be a lot of money for some traders, especially when you are first starting out.

Since most new traders blow out their first account anyway, this is also a lot of money to put at risk.

Things to Consider About Your Personality and Lifestyle

Now let's get into some of the other factors that you should take into account when determining which market may be easier for you to trade.

A big one to consider is your timezone.

For example, in Hawaii the New York Stock Exchange opens at 4:30 am. I'm a late riser, so when I lived there, that didn't work for me.

Of course, I could have just position traded stocks. But I knew that I was missing out on a lot of opportunties when the market opened, so I decided to trade Forex instead.

In Hawaii, the London session opens at about 9 pm Hawaii Time, so that was perfect for me. That's one of the reasons that I chose Forex trading.

Also consider which market will work better with your personality. 

Do you enjoy the stock research process? For some traders, it feels like a treasure hunt. If you see it as a game, you will be more likely to succeed.

For others, researching stocks is a chore. In that case, Forex might be a better option because you have a limited number of currency pairs.

Your trading personality will play a huge role in your success.

How much time do you have to trade? 

Think about how much time you have to trade. Do you have to pick the kids up from school?

Be realistic about your available time.

Things to Consider About Your Knowledge

Next, consider your experience and knowledge.

Do you know a lot about a certain industry? Maybe you have a lot of insights into cyber security or corn growers.

I'm obviously not suggesting that you do insider trading because that's illegal. But if you know an industry really well, then you will be one of the first people outside these companies to know about news events and new products.

So use that to your advantage. 

It can be a lot easier to trade stocks when you have in-depth knowledge of an industry. 

The same thing goes for Forex. If you used to work at a bank or you used to hedge currency fluctuations for a company, Forex might be an easier market for you to trade.

Things to Consider About Your Personal Interests

Finally, which market are you more interested in?

If you like trading a certain market, it will be easier for you to do the work necessary to succeed.

Do you like finding out about individual companies, researching their products and digging into their financials?

…or do you prefer working with a core group of currencies, so you know them really well?

Don't underestimate the power of interest and enthusiasm.

It can take you a long way. 

Can You Make More Money in Stocks or Forex?

That's the real question, right?

In reality, there's potential to reach your trading goals in either market.

There are no “easy” markets in trading.

They are all challenging and require the same amount of practice, skill and discipline.

Both markets require you to manage risk, develop your skills and have a proven trading strategy.

What can make the process easier is if you actually enjoy trading that market and it aligns with your personality.

…or maybe you don't have to choose.

Trade both!

If you have any questions about Forex vs Stocks, leave a comment below…

The post Is Forex Easier Than Stocks? Not for These Types of Traders appeared first on Trading Heroes.

Why is it STILL so hard to figure out consistently profitable trading? 

You've read all the blog posts.

…and watched all the YouTube videos.

After talking to hundreds of professional traders over the years, and doing everything under the sun to upgrade my trading psychology, I've come to understand that there's a fundamental and repeatable process behind becoming a successful trader.

I've never seen this roadmap published anywhere online, so I've created one for you.

If you prefer the text version, it's provided after this video.

Like most things in trading, the roadmap is deceptively simple. Remember that simple and easy are two very different things.

Sure, there are some great guides out there that give you pieces of the puzzle.

I've read most of them too.

However, if you want to understand the entire process from beginning to end, then here it is…

The Consistently Profitable Trading Flowchart

Alright, here's the roadmap.

I'll let you take it in for a minute, then I'll explain it in greater detail.

When people are learning to trade, most of them go from: Create a Trading Plan > Add to Toolbox.

That means that they watch a YouTube video, then open a real-money account and trade it live.

I've done that too, I'm not judging.

But then they proceed to lose money…and wonder why.

Well, it's because they skipped all of the steps in between!

Worse yet, they give up on the trading strategy and learn another one….and another…and another.

They just bought a ticket to ride on the Trading Silodrome.

Here's how to avoid that…

Step 1: Understand Your Trading Personality

Before you even begin with the roadmap above, it's super helpful to understand your Trader Personality Profile.

If you are the type of person to overanalyze these types of things, just do your best and go with it. Understanding 60% of your trading personality will get you infinitely further than obsessing over getting it 100% right…and never starting!

Once you have a trading personality profile hashed out, then you are ready to begin with your trading plan.

Step 1: Create a Trading Plan

Now let's dig into the roadmap/flowchart.

The first step on the flowchart is to Create a Trading Plan.

Learn a trading plan that works with your Trader Personality Profile.

Many traders fail because they may understand their trading personality, but then they jump on the bandwagon of the last trading strategy that they saw on YouTube. 

For example, they may be best suited to swing trading, but they get all excited about the latest day trading strategy they saw…and create a day trading plan.

Doh!

If day trading doesn't match your temperament and lifestyle, then you are probably going to fail at it.

Strategies are available everywhere, most of them for free. The dirty little secret in trading success isn't the trading strategy itself.

…as most educators want you to believe.

The secret to trading success is finding strategies that match your personality, then following a repeatable process that helps you master that strategy…or figure out exactly why it won't work for you.

So now find a trading strategy that works with your personality. We have published some here, but you can use any strategy that you found online.

Just Get Started

Seriously, just learn the trading strategy and write down the rules.

Get your free trading plan worksheet here.

You are only testing at this point, so don't worry about making the plan perfect or profitable. You will learn as you go.

Once you have a concrete plan written, then it's time to start testing.

Set Your Goal

…but before you get to work, set a goal for how much you want to average per month with your trading strategy.

There's no “realistic” value here, but remember that it's much, much, much harder to develop a trading strategy that makes an astronomical return every month.

Like Biggie said…

“Mo' money, mo' problems.”

Now I don't necessarily believe that, in the way that he meant it, but there are certainly a set of different challenges when you are trying to make a lot of money quickly.

The primary one is you need to risk more to make more.

…and most traders cannot stomach those large drawdowns. Could you stomach an 80% drawdown to make 500%?

Most traders cannot.

If you don't know where to start, aim for an average of 1% per month. 

Also keep in mind that you may not be able to hit that goal with one currency pair. But if you trade 20+ currency pairs, then that can add up.

You can also use other techniques, like pyramiding, to boost the profits of profitable trading strategies.

The key is to get to a profitable trading strategy as quickly as you can.  

Alright, moving on…

Step 2: Backtest the Trading Plan

Some trading strategies cannot be backtested. If that's the case for you, then move on to Step 3.

But if your strategy can be backtested, fire up your favorite backtesting software and start testing. If you have never backtested, you can read our free beginner's guide here.

You can use a variety of software to backtest and you can do either manual or automated testing. Just pick the one that works best for you.

Here are a few backtesting tools that you can use:

• NakedMarkets
• Forex Tester
• TradingView Bar Replay (with an Excel sheet)
• Metatrader 4 and 5 (with an Excel sheet)

Remember to test it EXACTLY as it's written on the plan. There's no “freestyling” it.

You need to know how well that plan works.

That won't happen if you keep changing up the rules!

This is another common failure point when people are learning to trade. 

Don't fall into this trap…stick to the plan.

Test one currency pair on the timeframe that you plan to trade live.

Work on only one trading strategy at a time.

Step 3: Review Your Backtesting Results

Sweet, now you have some data to look at. It helps to look at it with other traders.

Do the results line up with your goals?

If not, tweak your trading plan and test again.

…and again.

…and again.

…until you have something that is in line with your goals.

{Gasp} am I actually suggesting that you have to do work?

Yes.

Trading is not as easy as most people on the internet make it out to be. 

Much like a professional athlete, you need to put in the practice time.

Once you have something that works for you, then it's time to do some Beta trading…otherwise known as Forward Testing.

Step 4: Consistently Profitable in Forward Testing?

Now you are going to trade your strategy in live market conditions. It's highly recommended that you do this in a demo account or in a very small ($1,000 or less) nano lot account.

CAUTION: Do not trade your strategy with full-sized risk yet. If you do, you will set yourself up for failure.

This is another point where most traders frequently fail. They trade their full-sized account and expect the same results as in their backtesting.

There are still some kinks that you need to work out in your strategy.

On top of that, when you pile on the additional stress of losing significant amounts of money, that can lead you into a downward spiral really quickly.

You may not be able to recover from this negative trading psychology.

So keep the pressure off and focus on the process. If you can practice without worrying about the money, then you will be much better off later.

Journal your Forward Testing trades and track your results.

Step 5: Results Hit Your Goals?

If yes, then congratulations, you are ready to move on to step 6!

If not, then there's a specific review process that you should go through.

Let's get into that…

Trading it the Same?

Are you trading the strategy the same as in your backtesting? Review your backtesting trades and analyze your charts.

Also look at the time of day and day of the week that you are entering your trades.

There could be trades that you could take in backtesting, that you cannot take in Forward Testing. This could be due to work, family obligations…or that pesky thing called sleep.

If you cannot compensate for these factors, then you probably have to start over and tweak your original trading plan.

There might be an easy fix to this issue and if you can identify it, then adjust and keep Forward Testing.

Can't identify the issue?

Then the issue is probably psychological.

I'm not being sarcastic.

Our beliefs color everything we do.

Limiting Beliefs?

Can you identify any limiting beliefs that are holding you back?

Here are some common beliefs that you may be saying to yourself subconsciously:

• I'm too smart to backtest, I can just trade it live
• I don't deserve to make a lot of money trading
• Rich people are douchebags
• I'm afraid to succeed because people will see me differently and I will lose friends
• I'm not smart enough to do this
• I can't picture myself as successful

If you do find these voices in your head, don't beat yourself up over it. Your greatest ally in trading is the ability to forgive yourself.

Now that you have forgiven yourself, it's time to dig into why you feel this way.

Obviously, this isn't something that you can figure out overnight. It will probably take some time to work through this.

…and that's OK.

Rest assured that once you can figure out some of these mental “gremlins” in your trading, that will also help you in other parts of your life.

You can read about what I've tried (and what worked for me), in this blog post.

All limiting beliefs come from some sort of trauma. It could happen in your childhood, in adulthood or even before you were born.

Now, when your Forward Testing is successful, it's time to step up to the plate…

Step 6: Trade Live

Now it's time to trade your strategy in your full-sized account.

But you aren't out of the woods yet…

The process is similar as in Forward Testing.

You want to find out if there are any live trading issues that are standing in the way of consistently profitable trading.

Trading in a full-sized account can create additional pressure and may cause you to trade differently.

If your results are different from your testing…again, figure out the following:

• Are you trading the strategy the same as you tested it in backtesting and forward testing?
• Are there any limiting beliefs or negative trading psychology that are stopping you from consistently profitable trading?

Work these things out and consult your trading journal often.

You may need to create a new trading plan. This doesn't happen a lot, especially if you got this far, but it can happen.

Accept it as part of the process.

Step 7: Add this Profitable Trading Strategy to Your Toolbox

Once you are able to demonstrate consistently profitable trading in your full-sized live account, you can officially add it to your trading toolbox.

Congratulations!

Now you can choose to master another strategy, or go trade your one strategy from a beach somewhere

Final Thoughts on Consistently Profitable Trading in Forex

This may seem like an easy process, but it can be very difficult.

Again, simple is not necessarily easy.

The keys are to stick with the process, work on one thing at a time, and don't skip steps. 

I know, I know…it's tempting to jump directly into live trading.

But following this process will give you more practice, more confidence in your trading strategy and ultimately leads to consistently profitable trading.

If you don't believe me, listen to these interviews.

What do you think? I would love to hear your comments below…

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