The goal of achieving consistent profits in the Forex market is a long and often confusing process. And with a never-ending flow of new information, sometimes getting back to the basics is all you need.
That’s why I decided to break the process up into five simple yet effective steps that anyone can follow. Although there are other factors outside of this post, the five steps below will help you establish a strong foundation for success.
By the time you finish reading this article, you will know which currency pairs I trade and how to set up your charts for a clean, professional look.
I’ll also explain how to scan for favorable trade setups, best practices for placing trades as well as how to track your results.
This post turned out to be somewhat lengthy, but it’s packed full of helping tips that I know you’ll love. So get a fresh cup of coffee or tea, find a comfy spot and get ready to become a better Forex trader.
Let’s get to it!
Step 1: Choose Your Currency Pairs
The very first thing you’ll want to do is decide on the currency pairs you will trade. While it’s a personal decision, there are a few key points to keep in mind at this stage.
Don’t limit yourself
An adage in the Forex market is to focus on one or two currency pairs when you first begin your trading career.
This is an entirely wrong approach in my opinion.
The reason it’s wrong is that your number one focus needs to be taking quality trade setups. You can’t do that if you’re trading one currency pair, especially on a higher time frame as the shortage of opportunities will inevitably cause you to overtrade.
At the same time, you don’t want to overwhelm yourself with dozens of pairs when you’re starting out.
A good rule of thumb is to set yourself up with no less than five but no more than ten currency pairs. You can always modify and expand later, but that should offer enough favorable opportunities without the frustration of trying to manage dozens of markets.
Beware the exotics
The name may sound intriguing, but unfortunately, exotic currency pairs aren’t so great when it comes time to trade.
These currency pairs suffer from limited trading volume which causes choppy price action along with sudden spikes, both of which can be detrimental to your trading.
Also, it’s a well-known fact that technical analysis is most useful in extremely liquid markets. The greater the liquidity, the more accurate your analysis is likely to be, all things being equal.
Take for example the penny stock market. These are the stocks that trade for less than one dollar and sometimes even at a fraction of a penny. As such, the daily volume is sparse.
For this reason, you don’t often hear traders talking about compelling technical patterns on a penny stock, even though the gains can be astronomical.
Now compare that to the Forex market where daily volume is in the trillions of dollars. It’s no secret that technical analysis works extremely well in the currency market, which is one reason I made the switch from equities to Forex in 2007.
The yen can bite you
When I first entered the Forex market, I heard warnings about how the yen can be a tough currency to trade. It wasn’t until I experienced a painful event firsthand that I understood what the warnings were all about.
While the yen pairs can occasionally offer some compelling opportunities, they can also be the most volatile. This characteristic is particularly disruptive during times of economic unrest.
You never want to drop your guard as a trader, but the yen will make you pay if you do more than any other currency.
So, which currency pairs are the “best” to trade?
Again, it’s a personal decision that only you can make. But to get you started here is the list of pairs that I trade as of this writing.
The top row in bold are my go-to pairs and are the ones I trade most often.
Step 2: Set Up Your Charts
Like the step above, the way you set up your charts not only depends on the strategy you employ but also what resonates with you.
Some traders like a dark background while others prefer a light or even white background.
While it’s a personal decision, studies have shown that lighter backgrounds are easier on the eyes. And when you’re spending hours each day studying charts, especially in the beginning, less eye strain is always welcome.
If you’ve followed me for a while, you know that I prefer a white background with white and black candlestick bodies.
I suppose the color scheme matches my style of trading, which is purposefully simplistic.
The way to get this combination will vary depending on the charting platform you use. However, for the MetaTrader 4 (MT4) users out there, the steps below should help.
In MT4, the first thing you’ll want to do is pick a chart to use as your template. It doesn’t matter which currency pair or time frame since we’ll be creating a template that you can apply to all charts.
Once you have a chart in front of you, right click on each indicator (if applicable) and select “Delete Indicator.” You’ll want to do this for any indicator on the screen.
Now that you have a clean canvas to work from, right-click anywhere on the chart and select “Properties…”
You should see the following screen.
Luckily, MT4 makes it easy to get the same look that I use. Just click the drop-down menu that’s labeled “Color scheme” at the top of the window and select “Black On White.” This will give you a clean-looking chart where bullish candles are white, and bearish candles are black.
This combination is what works best for me but feel free to play around with these colors to fit your taste.
The next thing you’ll want to do is customize your chart settings. For this, you’ll need to select the “Common” tab.
Here’s how I have my chart set up:
I like to keep “Chart autoscroll” turned off and “Chart shift” turned on. Autoscroll will automatically scroll your chart to the right edge every time price changes. This can be annoying especially when trying to analyze past market activity.
I prefer chart shift because it adds additional white space to the hard right edge of your screen making it easier to analyze the price action.
That’s all there is to it.
You’ll want to save this chart as a template so that you don’t have to repeat these steps every time. To do this, right-click anywhere on the screen and hover over “Template” and select “Save Template.” Name it whatever you like in the default folder.
Now when you go to the next chart, you can just right click and hover over “Template” once again. This time you should see your saved template on the list.
Step 3: Scan for Favorable Trade Setups
Scanning for trades is something I know some of you struggle with because I constantly get emails on the topic.
Here are a few tips that will hopefully make this process more efficient and effective for you.
The very first thing you need to know is that the time frames from which you trade will make all of the difference here.
For example, someone who uses a 5-minute chart needs to be in front of their charting platform all day or at least a good portion of it. This is due to the frequency and speed in which a setup can materialize.
On the flip side, someone who trades from the daily time frame such as myself only needs to check in periodically.
The same goes for the 4-hour chart. After all, there are only six 4-hour closes each day.
Which brings me to my next point…
If you’re trading the higher time frames (4-hour and daily), there is no need to look for setups unless a candle is getting ready to close.
This assumes you’ve already done your homework for the week. More on this shortly.
What about all the time in between, you ask?
It doesn’t matter. If you’re going to trade Forex price action like a professional, you need to forget about the intraday “noise.” Because if you enter a trade in the middle of a 4-hour candle, you mine as well be trading on a 30-minute chart.
As Ed Seykota once said in an interview with Jack Schwager for one of his Market Wizards books.
Having a quote machine is like having a slot machine on your desk—you end up feeding it all day long. I get my price data after the close each day.
While quote machines are outdated in the trading world, the message above is timeless. Ignore the noise and wait for the close—whether it be a 4-hour or daily—and you’ll begin to find a lot more success in this business.
Once you’ve trained yourself only to scan for trades every four hours or at the end of each session, scanning for setups becomes much easier.
My process for the 22 currency pairs I trade is, like everything I do, incredibly simple.
I have my watch list for the week which usually consists of three to five pairs that look promising. You can view these trade ideas via the Weekly Forex Forecast that I release every Sunday.
From there it’s just a matter of keeping an eye on each one throughout the week to see if a favorable setup materializes. I’ll check in throughout the day as each 4-hour candle closes to see if anything worthwhile pops up.
If it does, I’ll pursue it further. If not, I wait.
The truth is that I take anywhere from three to eight setups each month; that’s it!
Think about how much less stressful your trading would be if you reduced your trading frequency to just a handful of trades each month.
But I want to reiterate that I’m never blindly scanning for trades. Before I even sit down in the morning, I already know which currency pairs I’m interested in for the week. This structured approach keeps me disciplined and prevents me from straying too far between Monday and Friday.
There’s no magic formula or special sauce. Trading is a waiting game pure and simple.
Those who manage to wait the longest before pulling the trigger stand a much greater chance of coming out on top at the end of the month.
Step 4: Place the Trade
I won’t get into too much detail about how or where to place a trade as there are far too many variables. The way you place a trade depends on several factors, most of all the strategy you’re employing at the time.
While I can’t possibly run through every scenario, here are a few general guidelines that should help.
Have a plan
You’ve no doubt heard the saying, plan your trade and trade your plan. While it might be a bit cliché or even played out, it remains one of the best pieces of advice ever given.
As a Forex trader, you have two “modes” if you will. The first exists when you have no open positions, also called being flat.
The second is when you have at least one open position. In this mode, you’re at risk because you stand a chance of losing money.
Whenever you design a plan for a particular trade, you should always do it when you’re flat. This way you can make decisions without being influenced by the risk that comes with an open position.
But before we go on, let’s define the characteristics of a good plan.
First and foremost, this does not need to be complex. In fact, I urge you to keep it simple because it will be much easier to connect with your plan and thus remain disciplined if it’s easy for you to understand.
The image to the right shows the new trade entry screen from the Daily Price Action Trade Tracker. It’s an online trading journal and tracking system that I put together for my members.
As you can see, it’s pretty basic, but it gets the job done. Also, note that I want traders to define their risk using a percentage as well as a monetary value.
You’ll also see that I created a place where members can upload annotated charts. This step gets overlooked far too often, but it’s necessary for proper record keeping and will be especially handy when we get to the fifth step below.
Remember that you should always construct this plan before entering the market. Because once you have risk on the table, your state of mind quickly turns from neutral to biased, which can influence your decisions.
Risk is always two-dimensional
There is a logical side to defining risk, and then there is an emotional side. I’ve found over the years that most Forex “gurus” only teach the former. They tend to forget that humans have an inherent emotional attachment to money.
Unsurprisingly, most Forex traders forget about this aspect. Either that or they believe that a logical risk control strategy is enough.
If you want to move past the barriers that are holding you back, you need both.
The logical side of risk control deals with percentages. For example, risking 2% of your account balance on each trade.
While that may sound great, it isn’t enough. You must also define a dollar amount. That’s where the emotional side of risk control comes into play.
Here’s why it’s important to have both…
The words, “2% of my account balance” are meaningless. What is 2% of your account balance? We have no idea based on that statement alone.
And that’s what will get you in trouble.
What if you have a $50,000 account? Are you comfortable losing $1,000 on your next trade?
Maybe you are, but even if that’s the case, it’s important to write it down. Because until you write it and fully accept it as money you can lose, it will continue to exist as a single point of failure during a trade.
You should always define both a percentage risk and dollar risk for every position you take. It’s the only way to engage the logical and emotional side of your brain fully.
Missed profits are better than a poor entry
The fear of missing out is perhaps one of the strongest emotional disrupters in the Forex market.
How many times have you screwed up an entry because you were afraid of missing the trade?
If you’re like most, that number is pretty high.
One thing I mentioned to my members a few days ago was the notion that patience as a trader extends beyond waiting for the right setup. It also involves waiting for a proper entry.
This is because a poor entry can ruin a great setup. If you’ve been trading for any length of time, you know this to be true.
Becoming a successful Forex trader is about waiting for the right setup to come along, waiting for a proper entry and then waiting some more for it to play out.
Notice a theme?
As I mentioned in the last step, trading is a waiting game.
Always remember that the ability to place a trade isn’t what makes you a trader; anyone can do that.
Being a successful trader is about knowing when not to trade. So if you find yourself waiting 90% of the time and even getting bored, it means you’re on the right path.
Step 5: Track Your Results
Perhaps the most overlooked aspect of trading is good record keeping. If you want consistent profits—which I’ll assume you do because you’re here reading this—you must track your results.
Whether you do this in an Excel spreadsheet or even a notepad is up to you. But the idea is to keep track of both winners and losers, so you know what’s working and what isn’t.
Steve Clark, a fund manager, interviewed for Hedge Fund Market Wizards, said it best.
Do more of what works and less of what doesn’t
While that may seem like an overly simplistic notion (and it is), the point is that you have to know what works as well as what doesn’t if you wish to improve upon your trading performance.
I hear from hundreds of Forex traders every week, and a consistent theme is that most don’t actually know why they’re struggling.
For instance, you may think that you don’t have the “right” strategy, but are you sure? Do you have data to back it up?
Or maybe you think your risk to reward is holding you back, but how can you be sure? Where’s the data?
The odds of becoming a successful Forex trader are less than 10% (closer to 5% in my opinion). And if you aren’t tracking your performance, you’re sabotaging an already small chance of success.
With that said, you don’t need to develop some complex system to manage and track what you do. A simple notebook or spreadsheet can do wonders and is a heck of a lot better than nothing.
In the case of Daily Price Action members, they get access to the Trade Tracker, which is an online system I put together.
But again, it doesn’t have to be complex.
To get you started, here are a few key pieces of data that you should be tracking at all times.
Notice that I’ve also included a chart showing the setup. This is great information to have when reviewing what’s working and what isn’t.
Like any business, the decisions you make should be data-dependent. And if you aren’t tracking your trading activity, you won’t have the necessary data to make those all-important decisions.
As famously stated…
What you measure grows.
Regardless of how you trade, it’s important that you establish a structured approach, especially in the beginning.
Trading Forex or any other financial market is a process and one that requires a high level of discipline from start to finish.
It isn’t enough to find a profitable strategy. Even if it has a favorable risk to reward ratio built-in; it still isn’t sufficient on its own.
While that’s a good start, you must have a process by which you analyze potential setups as well as how and where you enter and exit all trades.
Otherwise, you’ll find yourself losing trades but unsure as to why. And the only thing worse than consistently losing is not knowing why.
Finally, the steps above are influenced by the way I trade as well as how I teach. But always remember that the most important factor is finding a style of trading that works for you.
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