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Learn Why Trading is Won Before You Start Trading

April 02, 2018 08:52


Source: Shutterstock

Dear traders,

Sooner or later, most of you will probably read about the importance of developing your own trading plan and the ability to prepare and plan ahead.

This might sound like a boring advice, but it is critical that traders analyse, trade, and manage with a consistent approach.

A famous quote from Sun Tzu is appropriate in this context: "Every battle is won before it is fought." This article examines how traders can win trading "battles" in advance.

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Carving Out Your Trading Plan

Trading plans are, unfortunately, not created overnight. They usually develop over time in a step-by-step fashion, based on your experience, testing, and live trading.

Here are some key tips for creating and improving your trading plan:

  1. Make sure that the trading style matches your trading psychology.
    1. For example, Fibonacci entries could work well for some traders, but you might feel uncomfortable using them. Not all trading systems work equally well for all traders. Find the system that matches your vision and psychology.
  2. When you start trading, it is fine to test new tools and systems, but eventually, it is better to zoom in on one or two methods only.
    1. Testing makes sense to figure out what works well for you, and what not. But eventually, you want to choose a system and stick to it. Rather than switching back and forth between multiple old and new systems, you want to reach a phase where you focus on your core system(s) and work on improving them.
  3. Trade at least 40 to 50 trades with a system before making a judgment.
    1. No trade plans need to be tested with that many setups. But if you really want to make a balanced analysis of a strategy, then you need to take at least 40 to 50 trade setups before you analyse whether the systems works for you, or not.
    2. This test can be done on a Demo account. Anything less than 40 does not provide enough information about the long-term viability because every system can have a 5-10 trade winning or losing streak.

As a trader, you want to collect feedback from this process and improve the trading plan when and where you see fit. Over time, there should be less and less adjustments to be made.

Correcting Mistakes in Trading Plans

Having a trading plan is a must, but implementing the plan correctly is perhaps an even more important part of the equation.

The problem when implementing trading plans is often one of the following three:

  1. Traders forget their own rules in the heat of the battle.
  2. They change the rules during trading.
  3. They interpret the rules differently during trading than after/before.

You can work on correcting this subconscious behaviour by evaluating your trades, fully understanding why the rules were broken, then setting a mechanism to avoid these rule breaks in the future.

What kind of mechanism? Traders need to break or interrupt the pattern and replace it with the desired action. Here's how:

  1. Recognise when you are about to break the trading plan rules.
  2. Make a conscious effort to break the old pattern.
  3. Create a new pattern that matches your plan.

This process will be more difficult at the start, but will become easier as you gain experience with the new pattern (the one that follows your trading plan).

Why is Trading Won Before You Trade?

Each trade can end up as a win or loss. Traders never know this beforehand. Good-looking setups can turn into wins or losses. The same is true for bad-looking setups.

In trading, true performance is measured over a longer series of trades, at least 40 to 50. Trading can only be won from this perspective because making sure that each and every trade will close as a win is impossible. Such guarantees do not exist in the financial markets, but you can create a system that has a win percentage, if that aspect is important.

Another important aspect whether you can win from trading, besides entries and trading systems, is the exit. How the stop-loss is placed, where the target and take-profit level is, how the open trade is managed, and trail stop-losses are used. These are critical aspects to review before entering any setup.

Last but not least, set realistic goals for each trading month, quarter, and year. You can be aiming at reaching the moon, but then chances are always high that you will miss.

All in all, these aspects are key in whether you can win from trading:

  • Create a trading plan that matches your style.
  • Take your time to test out different methods, such as MetaTrader Supreme Edition
  • Eventually choose 1 or 2 and work on improving them.
  • Work on implementing your plan correctly.
  • Work on removing any implementation flaws going through the three steps above.
  • Review success of your trades in batches, not on a 1-by-1 basis.
  • Focus on both entries and exits.
  • Set up realistic targets.
  • When you feel ready for a Live account, take a small risk on each trade so that you do not feel nervous about losing a trade.

As you can see, preparation is at least half the battle. Hopefully, you can use Sun Tzu's motto saying "every battle is won before it is fought" and make it "every 40-50 trade cycle is won before you actually trade by preparing and implementing a trading plan".

Wishing you a happy week of trading,

Chris Svorcik

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