Do you want to trade forex? Or do you want to win at forex?
Anyone can trade forex. But only a small percentage of traders can do so successfully over a long period of time.
Those few traders may use very different strategies, but they have three basic things in common:
- Method: They have a trading method that they have tested inside and out, and which can generate reliable results.
- Money: They have a money management plan that helps them extend their bankrolls.
- Mental: They have their trading psychology in order.
These are the three “M”s of forex.
In this post, we are going to go over them with you in detail. That way, you know what you need to do in order to potentially join the elite ranks of profitable forex traders.
Let’s start with the first “M,” Method.
This is your trading method, sometimes also called your trading system or trading strategy. Some people feel that each of these words implies subtly different things, but they all refer to the same basic concept.
Your trading method is a set of rules which you can use to determine when it is appropriate to enter or exit a trade.
Typically, trading methods fall into any of the three following categories:
- Fundamental analysis
- Technical analysis
- Price action
Fundamental analysis involves analyzing the economic factors at play in the world and using that analysis to try and determine what price is doing.
Technical analysis involves plotting technical indicators on your chart and then basing your decisions on whether those indicators suggest you should buy or sell.
Price action methods entail looking directly at the patterns formed by candlesticks. Certain patterns can help you figure out whether the price may be rising or falling.
Note that it is possible to combine aspects of each of these as part of your trading method if you desire.
For example, a price action trader may use a technical indicator for context or confluence when looking at price patterns.
As there are literally hundreds of trading methods in existence, finding the one that you want can be a bit daunting. It is also possible to come up with your own method from scratch.
The vast majority of your time during your learning process will probably involve learning different methods, testing them, and deciding what to use.
Here are a few basic pointers:
- The right trading method for you should be compatible with your schedule, the timeframe you want to trade, and your overall style.
- A method that works great for another trader may or may not be a great choice for you.
- No matter what trading method you choose, you need to subject it to intensive backtesting and demo testing before you take it live.
- Try and keep it simple. The more elegant your method, the easier it will be to work with—and often, the more reliable it will be.
- Do not forget about exiting. You will either need to have an event on your chart that tells you when to exit, or you will need to come up with a general rule for setting a stop loss.
Now, let’s move on to the second “M,” money management.
Your money management plan is a set of rules you use to decide how much you are going to risk on your trades.
There is not as much variety in money management strategies as there is in trading methods.
In fact, you will discover that most professional traders use very simple and conservative rules for managing their risk.
In fact, here is a common money management technique. For every one of your trades, just risk around 1-2% of your total account size.
Many novice traders are startled by just what a small percentage that is. But such a small percentage allows you to sustain significant losing streaks without going bust.
While 5% or 10% may sound like a small amount, you may be surprised by just how quickly you can blow your account losing trades that size.
Another recommendation is not to arbitrarily vary the amount that you are staking. It does not make sense to risk a higher percentage when you are confident and a lower percentage when you are not. Instead, you should only trade when you are confident.
The third of the three “M”s is the mental aspect of the game.
As trading is a high-risk activity, it is one that will have you confronting your anxieties on a daily basis.
It also involves a great deal of hard work each day, quite a bit of which is monotonous in nature, and requires discipline and patience.
Just as bad money management can blow your account even with a good trading method, poor trader psychology can do likewise.
To hone your trader psychology, you need to get brutally honest with yourself about your strengths and weaknesses as a trader.
Self-discipline is most commonly cited as what you need to master, but the following traits are also critical if you want to be successful:
- Confidence (not overconfidence)
- A positive attitude toward mistakes and learning
- Balance in your life
While many people gravitate toward forex trading to increase their financial freedom, quite a few also are drawn to trading for psychological reasons.
They do not see improving their trading psychology simply as a means to an end, but also as an end in itself.
Master the 3 “M”s of Forex Trading to Achieve Success
Now you are familiar with the 3 “M”s of forex trading: Method, Money, Mental.
As you can see, none of these ingredients are complicated, but that does not mean that they are fast and easy to master.
Nevertheless, if you persevere, you can combine a reliable trading method, a smart money management plan, and your developing trader psychology into a winning formula for forex success.
Keep in mind that market conditions are always changing, and as a person, so are you.
So, you will need to continue to polish your method and psychology as your journey unfolds.
Continue to explore our blog for tips and resources to help you with all three “M”s of forex trading.
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