Essential Trading Principles Every Trader Should Know - Part 1

Firstly, I would like to wish all visitors a Merry Christmas and Happy New Year! As the new year approaches, we would have made some resolutions to be achieved. And if profitable trading is one of your resolutions, then make sure you understand and acknowledge the following trading principles that I would like to share.

Over the many years of trading, I have found certain principles to be true. Understanding and using these basic principles provides an anchor of sanity when trading in a crazy world. Whenever I find myself under stress, questioning my judgement or my ability to trade successfully, I pull out these basic trading principles and review them.

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The Core Principle of Successful Trading

Trading methods come and go. Some of them are software-based, programmed from purportedly top-secret algorithms that claim to make profits with little or no involvement from the trader whatsoever (simply plug 'n play and you're a millionaire!). Some would avoid the automation route in favor of chart patterns so extremely complex that by the time you've finally recognized them, the trading opportunity has come and gone.

There is one principle however, that is not only much more simple and easier to understand and to see on your charts, but which also stands the test of time as the highest probability route to success in trading. That principle - which you have surely heard before - is as follows:

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Creating Your Forex Trading Plan

Forex trading is a business and every trader should approach his or her business professionally. Contrary to what the Forex 'gurus' and 'marketers' are telling you, Forex trading isn't a video game in which you aim and shoot at a target on the screen for fun and hope to see a gold coin appear. Instead, we're effectively taking part in a highly competitive domain populated by large, powerful players like banks and hedge funds. Therefore,  a planned approach that is detailed, realistic, and well formulated will be needed if you really want to be successful in this business.

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Understanding The Forex Market

An important aspect in trading the Forex market is to understand what drives the market and equally critical, what doesn't. Regardless of whether they can be proven practically or theoretically, the following is a summary of my core beliefs about how the market moves and why so:

• The market may react to news and fundamentals, but that reaction is often short-lived and irrational (e.g. the news is positive but the market goes down, only to go up again later) and therefore do not usually indicate high quality swing or position trades. In other words, any quality trade that does occur in connection with a specific news event is likely to be predicted by a technical setup. This simply means that you need to pay attention to chart technicals in order to trade fundamentals.
  

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How Do You Approach The Market?

The first step in trading the Forex market is to determine how you are going to approach the market itself, i.e. defining your style of trading. Personally, I consider myself as an adaptive trader, which means I adapt my trading style (defined primarily by time in the trade and size of profit objective) to suit the structural implications of chart analysis.

For instance, if I spot an upcoming corrective sequence that is expected to move 100 pips, then I will approach the opportunity as a day trader seeking a more immediate exit for fewer pips. Alternatively, if a Weekly-degree turn appears to be setting up for an expected rally of 1,000 pips, then I will approach the setup as a position trader planning to carry the trade longer with a more aggressive limit exit.

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