There is a wise saying that states "Life is a journey, not a destination". We can't help but agree that the same principle does apply to the forex trading as well. This expression can help us to become way more successful if we interpret it correctly.
A lot of traders nowadays fall into a psychological trap. They only prioritize trading for the final result and made less and less effort on learning the process of how to trade properly.
At some points, these traders often have to part ways with almost all of the profit from trading that they worked very hard to accumulate. They feel disappointed and frustrated at failing to achieve what they so desperately want: to gain profit consistently. The reasons for frustration may be difficult to understand unless we experience them first-hand. Oftentimes, too many traders simply give up and stop their trading activities completely.
The harder you try to earn more money directly by taking a shortcut, the more money you lose. This is a psychological trap. Trading is not an instant way to get big profits in a short time, although this assumption often presents among novice traders. If you can make consistent profits, it is because you are interested in the challenges in trading and always want to get the best results. Success in trading is a journey, meaning that to get consistent profits, you have to focus on the process in trading, not on the result you expect.
If you are genuinely interested in the process and change your goal from "making a big profit" to "being a good trader", the "profit" will follow suit. On the other hand, focusing too much only on the result will lead to wrong trading habits and will ultimately destroy your account portfolio.
How so? If you are not interested in the trading process and can't wait to follow the steps correctly, you will be stuck focusing only on the result you hope for, which is the profit. This kind of mindset in not very healthy and sooner or later you may fail miserably.
Focusing too much on the result will lead to overtrading, which is usually caused by a feeling of having to get 'revenge' after experiencing consecutive losses, or euphoria following consecutive wins. Excessive trading frequency is one of the top reasons why your trading account collapse, in addition to your inability to handle big position sizes and profit targets. Greed and fear are the two most common causes of overtrading due to unrealistic expectations and undisciplined trading methods.
Success in Trading with 3M Rules
Trading strategies, systems, and methods always seem great on paper. But when factually applied in real-time trading, the very uncertain and notoriously difficult to predict market conditions can make even the most powerful strategies unable to continuously generate profits. For example, when the trader is under emotional stress, trading becomes more and more difficult, even if the trader uses an effective trading strategy.
Even though the trading method you use is very important, simply relying on the trading method is not enough. Three core components will determine your success in trading, namely Mind (the way of thinking), Money (money management), and Method (trading method). If you ignore any of these components, sooner or later you will not be able to make consistent profits in the long run.
This does not mean that you don't need a good trading strategy. Forex trading requires a strategy and trading system that has been tested. Without good trading methods, strategies, and systems, it will be difficult for you to find high probability trading signals. But if you only rely on a trading strategy, you will never be truly successful because you don't pay attention to the other two components: Mind and Money.
Indeed, traders will initially rely on sophisticated trading strategies with high winning rates, but in fact, the three components are interconnected and influence each other's implementation. You need to maintain harmony between these three factors to start your journey in finding trading success.
The first component of a successful trading journey is by having the right mindset. If you don't have the right way of thinking, even the best trading strategy won't be able to make you successful. Incorrect ways of thinking include: How much profit you will get if you follow a certain trading method, or how much longer will you be a full-time trader that can continue to gain profit from the forex market, and so on. Such thoughts often occur to newbies or traders who are still struggling to trade profitably.
They always think that forex trading is some sort of money machine (although this assumption could be true if traders can generate profits continuously), so the focus of their minds will always be on how much money they can get. This is what prompts traders to take shortcuts, among others, by entering the market as often as possible, which in the end may very well put a big dent on their trading account.
Thoughts that mostly focus on how much the outcome can be will inevitably lead to emotional distress. The only way to avoid this is simply to change this incorrect way of thinking. You will be able to get money if you are not stuck trading in such an incorrect way of thinking.
Success in trading is a combination of skill and knowledge, also a combination of the three components. When trading with real money in the market, the greater the risk, the greater your emotional response to the market will be. That's why a simple and effective way to always control your emotions is to appease your mind by adjusting the risk by your own standard on every trad.
It will make you think rationally because it will reduce negative emotions, both when experiencing losses and when earning profits. Apart from that, your mind should also focus on the trading plan. Without a clear trading plan, you will tend to enter the market excessively (overtrading) even though you have managed the risk on each trade carefully. By following the trading plan, you will be able to keep your patience and gain more discipline in trading despite the changing of market conditions.
2. Money (Management)
The second important component of trading success is about Money Management. The Money Management factor correlates to the commitment we made to adjust against the amount of risk for each trade. Money Management helps us to determine risk factors and, in turn, enables us to trade proportionately, neither too small nor too big. With Money Management, we can correctly adjust each trade according to the risk and the proportional amount of money.
Another important factor in money management is the risk and reward ratio. Before entering the market, we should determine the amount of risk and reward ratio objectively and logically. For you to be profitable in the long run, the minimum risk and reward ratio should be set higher than 1:1.
Money Management is the bonding agent to the other two M. Even if your way of thinking is correct and the trading strategy you are using is quite sophisticated, your final trading results may not be optimal without a proper Money Management.
See also: 5 Key Tips on Money Management
3. (Trading) Method
The third rule of Trading Success is Method. The Method is essentially the tools we can utilize to predict the possible direction of price movements, determining the probable stop loss and profit targets, the right moments to enter the market, and so on. The trading method is the most fundamental component that you must acquire early on, as it will greatly assist you to face the challenge in a real-time market head-on.
A good trading method is the one that is clear, simple, and effective. It is better to avoid applying many technical indicators that can cause conflict and misinterpretation. A good trading method will positively affect your logical way of thinking more objectively.
The 3M rules interact and complement each other. Like a chain, if one of its components is not carried out appropriately, the chain will break and they won't work properly. If you implement the rules well, then the 3M can be considered as the "Holy Grail" in trading.
The Importance of Reviewing Your Trades
As we all have learned in the principle of management, we recognize that all good management process applies the following four functions: plan, do, check, and act, also known as the PDCA cycle. Developed by Walter A. Shewhart in the 1920s and then perfected by William Edwards Deming in the 1950s, PDCA nowadays is a powerful four-step management method most commonly used by almost every business to control and get continuous improvement on processes and products.
Fortunately, we can also apply this method in our daily forex trading in simple terms such as planning, implementation, and control. By taking the correct steps to review and learn deficiencies from previous trade, we can make substantial improvements for our next trades.
Meanwhile, without any improvement plan, we might repeat old mistakes and inevitably acquire poor results which surely deviates from our original trading plan blueprint. We can also fail to continue the good performance that has been achieved because we forget the critical points that have made our trading activities successful.
See also: How to Build a Winning Trading System
One of the most common forex trade reviews is done on an annual basis. After all, the market on the last days of the year tends to move sideways. So, most traders use their time to review their account instead of getting bored analyzing the price movement.
How to Review Our Trades?
Since the beginning of the year, we need to set the trading plan and have ample time to implement them accordingly. This way, by the end of the year, we will have enough data to assess the effectiveness of our trading activities.
The year-end trade review is a very important thing to do and can become a very powerful indicator to mark our milestone in the forex market. We do theoretical control by comparing the initial plan with the implementation or by utilizing simple questions such as:
- What percentage of profits earned during this year?
- How much is the average profit per month?
- How many winning and losing positions during this year?
- Or even, how many times has the account been hit by Margin Call (MC)?
By implementing a year-end trading review, we can get a better understanding of our trading activities, and even plan for a bigger profit in the following year. When the result of the review matches our goals, it can be said that "everything is in control". If the implementation deviates from the original plan though, corrective action is necessary.
Numerous factors might cause us not to achieve our goals. To analyze the roots of the problem, we can use various questions such as:
- Did we lack discipline?
- Or maybe the target is too high to achieve?
Then, based on the evaluation of last year's trading performance, the corrective action can be done in two alternatives:
- Make improvements in the execution (trading activities), or
- Make adjustments in the planning (trading plan for the next period).
Improvements in the execution were made if deviations were found in the execution. Meanwhile, adjustments in planning are in order if irregularities are not found in the implementation but the target is not achieved.
In the latter case, it means that the problem does not reside in the implementation, but the target. Meanwhile, if the problem is in the first point, it means that there is a flaw in the trading system or the execution of the plan implemented to achieve the target. We should try to re-measure your abilities and get a sense of a rational target.
A good target is one that can inspire enthusiasm and motivation. A good target usually is high but realistic to achieve. The definition of a good target is certainly different from one individual to another since it does get influence from personal factors such as experience, expertise, and the amount of capital of each trader.
See also: Setting Realistic Goal in Forex Trading
We should estimate the right target size for our trading plan and avoid getting provoked by the target of other traders. Usually, traders who get provoked from the achievement of other traders tend to be influenced by lust and a passion to show off. Instead of getting consistent profit, this behavior will most likely generate unstable profit and a risk of greater loss.
Don't Forget To Evaluate Your Trading Motivation
For those of you who are still in the process of learning on how to become a trader, the annual review could be based on how much additional trading knowledge you have gained this year, whether you are still excited and determined to continue learning, and about the positive and negative effects of your trading activities so far.
So, have you started enjoying and finding passion in trading activities? If so, it's fortunate that you can enjoy the trading activity. However, if you do find that there are more negative effects than the positive ones, then maybe trading might just be not for you. You have to decide whether you want to continue to learn forex trading or, conversely, stop trading. Trading activities should not stress you out. You can do it on the sidelines if you are still unprepared to accept the risk of becoming a full-time trader.
Becoming a successful trader is not impossible as many figures prove that it is attainable, however rare they are. The success story of Valeria Bednarik may inspire you to start your journey of becoming a profitable trader, especially if you have experienced a devastating loss that you find very hard to recover from.