A new year means new opportunities. It’s a time to reflect on what you did well in 2017 and what can be improved in 2018.
For a trader, that means figuring out how to make the new year a profitable one.
Maybe you over-traded last year. Or perhaps you rushed your entries. Whatever the case, there’s always room for improvement.
In this post, I’m going to share five resolutions that can help make 2018 a success. The topics below come from some of the most common questions I receive throughout the week.
Whether you’re just getting started in Forex or have been at it for years, this post has something for you.
Read on to learn how you can make 2018 your most successful year yet.
1. Use the Daily Time Frame
There’s a reason I include this topic in just about every list post I write. I do so simply because the daily time frame is better.
It’s okay if you don’t agree with that statement. Everyone has to find a suitable time frame, and that can vary from the daily to the 1-minute chart.
However, having traded the Forex market since 2007, I can tell you that switching to the daily time frame has had the greatest positive impact on my trading performance over the years. Nothing else even comes close.
Yes, I still trade the 4-hour charts on occasion, but my go-to time frame will always be the daily.
There are two reasons for this…
1. The daily time frame slows things down
As Jack Schwager famously stated, good trading should be boring.
That’s a comment I’ve carried with me for years, and one that has served me well.
One way to slow things down is to trade from the daily charts. In fact, I would argue it’s the best way to allow yourself more time to make decisions and to reduce emotional involvement.
2. Volume is king
When it comes to the validity of technical patterns and levels, volume is king. The more volume a market has, the more likely it is to react to various technical structures.
Accordingly, it makes sense that the daily candle is more reliable than a 1-hour candle. There’s far more trading volume in a 24-hour period, thus its formation tends to carry more weight than those that occur on the intraday time frames.
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Unless you were trading from the daily time frame in 2017, this could be the single biggest improvement you make in 2018. Heck, I would argue that no other change throughout your trading career will even come close.
If nothing else, just give it a try. Commit to one month of trading the daily charts and nothing else, and see what happens.
There’s a chance it may not resonate with you, and that’s okay. Finding a trading style and time frame that fits your personality requires some trial and error.
But what if it does resonate with you? It could be a game changer in 2018.
2. Limit the Strategies You Use
Did you jump from strategy to strategy in 2017?
It’s okay to experiment if you’re just starting out with price action. After all, you don’t know what you don’t know.
Just remember, in order to find out if a particular trading strategy has merit, you have to give it some time to work.
One of my biggest regrets from when I started trading over a decade ago is how I never gave a strategy the time of day. I would come across a new blog post or forum topic talking about some new strategy and instantly jump onboard.
The problem was that I never gave any of them a chance to work in my favor. More importantly, I didn’t give myself enough time to decide if one of them was right for me.
I eventually found the price action strategies I use today in 2010 and never looked back.
But for those of you still searching, jumping from strategy to strategy is a surefire way to get frustrated.
So here’s what I recommend you try in 2018…
Instead of searching for different strategies, narrow it down by trading style first.
Here are a few styles to get you started:
- Price action trading
- Swing trading
- Day trading
- Scalping (often a subset of day trading)
- Position trading
- High-frequency trading
Once you’ve narrowed down the style of trading you’re most interested in, begin searching for strategies within that style.
Since you know the style(s) you’re interested in, it becomes much easier to find suitable strategies.
Here are a few of the candlestick patterns I use each week.
If you’re more interested in chart patterns such as channels, this post is for you.
So there you have it. In 2018, try to narrow your options by style first, and then begin searching for suitable strategies.
Also, try to limit the number of patterns or strategies you use to just one or two at a time. You can always add more later, but trying to learn too many strategies at one time is an inefficient and often costly way to learn how to trade.
3. Mind the Mean
The concept of mean reversion is something I talk about regularly here at Daily Price Action. It even comes up throughout the week in my daily commentary.
Despite its intimidating name, mean reversion is simply the act of a market moving back to its average price. It’s most common after an extended move higher or lower.
I use a simple exponential moving average (EMA) combination to find the mean in any market. One is a 10 period moving average while the other is a 20 period.
One thing to keep in mind is that this type of combination is most effective on the daily and weekly time frames. You can use it on the 1-hour or 4-hour charts, but you’ll find it becomes less reliable the lower you go.
When a market moves too far away from the 10 and 20 EMAs, it becomes overextended. During these times it’s best to avoid entering long or short.
How far is too far?
There is no universal answer. The best way to determine whether a market is overextended or not is to study recent price action. A glance at the last few weeks or months should give you an idea of how the market behaves when it strays too far from the average price.
Once the market reverts or consolidates so that the moving averages catch up, it’s time to look for entries.
I should also note that mean reversion tools, such as the 10 and 20 EMAs, work best in a trending market. A range-bound market doesn’t offer enough space or momentum for the moving averages to do their job.
If you didn’t use the concept of mean reversion to your advantage in 2017, now is a great time to start! It will help you stay patient in the face of uncertainty and improve your risk to reward ratios in the new year.
4. Reduce Your Trading Frequency
How many trades is too many?
The answer depends on several factors including the number of currency pairs, time frames utilized and trading style.
But if you’re trading from the daily charts and using price action strategies, I can give you some tips for the new year.
I monitor 22 currency pairs. I also find 90% of the setups I take on the daily time frame with the remaining 10% coming from the 4-hour charts.
That combination has given me an average of four to eight setups per month. So in any given week, there are approximately one or two quality setups on the pairs I monitor.
Now, I also have some weeks where I don’t trade at all. If there’s a U.S. holiday or too much volatility, I may opt to stay sidelined all week.
Keep in mind, however, that my trades also last anywhere from a few days to a few weeks. So even if I’m not opening new trades, chances are I have one open somewhere.
My goal for 2018 is to reduce that to no more than four setups per month.
I know what you’re probably thinking…
How can just two or three setups per month be profitable, especially from the daily time frame?
Well, I can tell you that even one setup per month can be quite profitable—unless you’re under the impression that Forex traders make 50% profit every month, which just isn’t the case.
A two or three percent monthly gain is a win in my book. That and much more can be achieved with just a handful of quality setups.
How many setups did you take in 2017?
Take this time to dig into the numbers. Once you have the total for the year, divide by the number of months you were trading. You may be surprised at how frequently you were engaging the markets.
Try to reduce your trading frequency in 2018. It doesn’t have to be as low as my goal, but even a 20% or 30% reduction from your 2017 average will likely yield positive results.
Always place quality above quantity when scanning for setups.
5. Keep Bets Small
The best one-two punch for protecting capital is to reduce your trading frequency and keep bets small.
We already covered the first, so now let’s discuss position sizing for a moment.
How much did you risk per trade in 2017?
The answer can go one of two ways. You either calculate your positions using your account balance or you don’t.
Now, just because you calculate position sizes doesn’t mean you are keeping bets small. It’s a good first step, but it isn’t everything.
For instance, what if you were calculating positions in 2017 but risking 10% of your account balance on each trade?
That’s a recipe for disaster if you ask me.
Similarly, those who don’t calculate positions aren’t necessarily doing it wrong. If you risk a set amount on each trade and it’s equal to just 1% or 2% of your balance, you’re better off than the trader calculating 10% positions.
So what should you do differently in 2018?
I suppose the answer depends on what you were doing last year. However, I can share what I do to keep bets small.
First off, I always calculate my position size. There are no exceptions to this rule. You can use the free calculator I created to do this.
Second, I never risk more than 1% of my account balance.
That may sound rather insignificant, but it’s my best defense against emotional trading. And once you learn how to pyramid into positions, that 1% position can amount to a substantial profit.
The best offense is a good defense. That’s as true in trading as it is in sports.
In 2018, prioritize protecting your capital. Keep bets small, focus on the process rather than the profits, and let quality setups come to you.
A new year brings new opportunities. It’s time to take a long hard look at what you could do differently for a successful 2018.
If you traded from the intraday time frames last year, it’s a good time for a change. While they aren’t for everyone, the daily charts offer greater reliability and a slower, more controlled style of trading.
How many patterns or strategies did you utilize in 2017? If you’re just starting out, it’s okay to experiment. However, if you know price action trading is right for you, reducing the patterns you trade to just two or three can work wonders.
One thing all successful traders have in common is that they time their entries. They’ve learned that it’s better to miss an opportunity than to chase a market. A simple way to stay patient when entering a trade is to use a mean reversion tool like the 10 and 20 EMAs.
If you’re using the daily charts and trading more than 12 times per month, there’s a good chance you’re overtrading. For 2018, try to limit your trading frequency to just one or two (at most) trades per week.
As a trader, the name of the game is capital preservation. Make 2018 the year you focus on protecting your capital rather than making more money. A defensive approach combined with the tips in this post will get you started on the right foot for 2018.
What are your trading resolutions for 2018?
Share them or ask a question below and I’ll get back to you shortly.