8 tests for FX trading, where are you now?

1. Stop loss

Usually, after entering the market, traders will find themselves suffering from losses, even a series of major losses, at the beginning period of trading. After analyzing their trading history, traders usually found out their major losses of principle were the result of one or several tractions. At that time, the equity curve shows a free fall.

Therefore, for traders to prevent big losses, it is a must that they stop loss firmly. Stop-loss is the first lessons that a trader encounters and learns in real practice. It plays an important role in protecting the principle and helps traders survive the next test.

2. Following the market trend

Once learned to stop-loss, traders might, after a period of operations, still find their principal shrinking as usual, only at a slower pace. In other words, the more they tried to stop loss, the more they lost.  Again after analyzing trading history, they often find the problem being that they operated against the market trend. In the end, traders have to close position to stop loss. At this time, the equity curve demonstrates an escalating downward trend.

3. Reducing position  

When a trader passes the tests of stop loss and following the market, his or her performance will finally improve and gradually turn into profit. Yet, it is likely that at this time, the trader’s desire to make fast money will swell. He or she might become bolder and bolder and his or her position heavier and heavier until the day comes when despite the stop-loss order has been set, the market offers no opportunity for execution. In result, the trader has no choice but to resort to drawdown and suffer from a huge loss in a single order. At this moment, the equity curve shows an occasional free fall in an overall upward tendency.

Very much like a healthy person in a car accident, you never know when the accident in trade comes. For a trader, it is critical to be aware of the occasional major negative effect on one’s trading career and understand that one starts dreaming of being rich overnight might usually end up with sudden death. To prevent such a situation, the trader should never invest heavily in one position so that there is still room to manoeuvre even special cases occur. Instead, traders should not rush for quick results but invest lightly.

4. Time choice

After learning how to stop loss and gain profit using light position, traders will find their speed of making money slows down as a result. Hence, many traders would anxiously hope for 24h trading and crave for the market to rise all the time. Every day, they will wander around, waiting for the so-called opportunity and dive in without a second thought. Then, after a period of operations, they find that although there is no big drawdown the equity curve, the curve fluctuates with no evident rise. And the analysis shows that the reason lies in their non-stop operations during market turbulence. Because there is no real rising tendency, their hard work brings little margin but an increase in trading fee.  

So, it doesn’t require the trader to stay in the market every single day. Sometimes, a little rest may bring in better result. So far, traders understand the importance of a balanced strategy. Instead of trading all the time, it is more important to seize the numbered market opportunities in one year.  

5. System

After the former four tests, a trader has cleared the main obstacles that will get him or her die fast, slowly or suddenly. With all the detours made and all the lessons learned, the trader should have a relatively completed trading idea by now. Even so, traders may still find themselves making the same old mistakes mentioned above, such as hesitating to stop loss, or relaxing their stop-loss point time and again, sometimes bottom-fishing on a whim, or indulging himself or herself to heavily invest, and even over-trading on a rush to recover after losses. Unconsciously, traders will make these mistakes again and again like it’s impossible to put an end.

Therefore, traders must turn their trading ideas into specific operation rules, disciplines that they can abide by. After trying hard, traders finally built their own trading system, and realized a perfect trading system has to include initial funding, admission, stop loss, stop profit, position increase or decrease. It is not feasible to start at one of them and save the rest for later. Instead, all five constituents should be set simultaneously.

6. Confidence

With the trading system successfully built and the historical data test going well, a trader might think he or she can finally make easy money. Yet, after strictly following signals, the trader might find consecutive losses for five or six orders. Under extreme circumstances, one might suffer nearly 20 consecutive losses. At this time, traders will begin to suspect where there are major defects that they are not aware of.   

Those with perfectionism tendency and an enquiring mind may fall back into patching the system, sadly this problem cannot be solved by hard work alone. It might take a long while for traders to understand that consecutive losses and mistakes are only bad runs at work because the trading system does not fit the current market. One of the functions of fund management is to survive this kind of market situation.

7. Repetition 

At this stage, traders are honed to understand losses are an inevitable part of trading, profitable trade is not necessarily a good one and vice versa. Reviewing the classics in the industry, you will find all these secrets of trading have been told by predecessors, but one may never understand its true meaning without personal experience. At this point, traders are already making steady profits, but a question might still haunt them: is there a shortcut for success? In other words, even though they have their own trading system, but is it possible that others would have a better one? In order to avoid being penny wise and pound foolish, they would jump into designing and testing other systems and end up with nothing.

 In fact, no trading ideas can come into shape without the traders to go through frustrations and learn from failures, whereas the function of a system is to make the ideas more specific. From this point, all trading systems share the same principle while their methods might differ. Hence, traders should concentrate on their own system, follow its signals and repeat the successful profit model so as to enjoy a sustained fund growth.

8. Composure  

After the 7 tests, traders should have standardized their approaches to prevent each mistake and should follow the rules strictly for each trade. At this time, the equity curve should rise gradually with a proper slope and no big retracement. Although still keeping an eye on the market, traders should feel more relaxed, as their number of operations fell and the rate of success rise. If the trader believes in his or her trading system and understands that despite the certain flaws of the system, with persistence it is a must that they will make money. However, if at this stage, traders are still easily affected by external information, like advice from an admired top treader, reports on market makers or ambiguous information on the fundamental, they are sure to suffer losses for being credulous.

At this period, the most important thing for traders is to have composure. With an improved mindset and enriched experiences, they should be less disturbed by external information and be able to distinguish the truth and identify its importance. At this time, when traders look back at their trade history, they will find enough money is made despite the number of trade is limited. In the long term, they will not only get financial freedom but also a peaceful mind.