I am often asked, "how do i find a good trade setup?" my answer is, you must train your brain to see what most traders cannot see.
The next question is "How do i do that?" my answer is, get the right education and also find someone that is already a successful trader to mentor you.
The next question is "How often do i have to do that?" my answer is, the same way any shopper finds a good deal at bargain price. In order for a shopper to find a good deal at bargain price, they have to drive from store to store, shopping for food bargains, so it is for trading, you need to become a professional shopper to find a good trade setup. Good trade setup's can neither be created nor destroyed, if they are present, they are, if they are not, they are not, there's no other way.
Kissing many frogs
I will use these fairy tale "the princess who had to kiss a lot of frog in order to find her handsome prince" to make my points lucid in this article.
You have to kiss a lot of frogs in order to know which one is the handsome prince. In trading and many aspect of life that statement holds true.
The tragedy is that most people avoid kissing frogs due to alibis, so they marry them instead. What i mean is that, when it comes to finding trades most people don't take enough time scanning through the various currency pairs in order to find the best trade setup's. Instead of taking a few minutes to look for good trade setup's,most people act on impulse, hot tips or even worst let some one else change or influence their decision making process.
Danger of falling in love and marrying a toad (trade)
A friend of mine, emailed me and said "I took your advice and have now sold the EUR/USD, as soon as my target is hit my deposit will double. Curious, i asked, "Why did you sell with such assurance?" He said, i sold because after looking at 10 currency pairs, i noticed that the EUR/USD have been going up for a very long time and it is setting up to decline at least 300 pips. Feeling grim, i asked "how do you know?" He said, all my indicators are telling me it has overbought and also yesterday and today's news is very positive for the USD. Feeling a little bit comfortable, since he prefers to use fundamentals with some indicators, i asked, what is your risk/reward for the trade? He said, i'm very sure of this trade, it rarely happens, but when ever it does, it is best to make as much money as you can from it, so i did not bother about risk reward, after all it can never go against me 100 pips. After hearing this, all i said is ok, what is your stop loss? he said, there are a lot of confluence of reasons behind the trade, so i did not use stop loss. Sensing he is about to commit financial suicide, i asked what percentage of your account did you enter this trade with? He said, i entered with 40% of my equity and that he will make 100%+ of his equity on this one trade, as soon as profit target is hit.
At this point in conversation, i realized his mind has been made up and their's nothing i or any one could do to change it. So, i wished him the best of luck in his trading.
About 2 weeks later, how is your trade doing? i asked, "i'm losing 90% of my equity now" he replied. His equity was blown the next couple of days later.
That is the price of not kissing enough frogs, being too sure of a trade, over leveraging and not having a trading plan. If you don't kiss enough frogs you can wind up marrying a toad. Because my friend did not do his home work, he wound up marrying a toad (trade), an expensive one.
After that incident, he asked me, "how do i evaluate a good trade setup?" experience is the greatest teacher, i replied, also i said to him, get the adequate education and find a mentor that is already a successful trader to learn from. Secondly, Practice what you have been thought repeatedly until it becomes a part of you.
Quote: "Your homework, prepares you for your job. You don't get paid to do your homework, you only get paid to do your job, most people never earn above average because they fail to do their homework due to some alibis."
Quote: "Alibis are lies we tell to our selves."
Lessons to learn from this article are:
- Never risk more than you are comfortable losing, because any trade you take can go against you, irrespective of the confluence of reasons backing the trade.
- Never buy/sell any currency pair because you think the price is overbought or oversold. Quote: The Dumbest Reason in the world to buy a stock is because the price is going up.
- Always know the end from the beginning, what i mean is, always use a predetermined stop loss, and exit target for every trade you take, live nothing to assumption.
- Never think any trade you take will win or lose, as you will never know for sure what will happen next, so having this in mind will help you stick to your money management rules.
Quote: I've learned many things from mentor's and coaches, but perhaps the most significant is that it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.
I hope you enjoy this article. It is to bring you into the correct mindset that is needed in such a competitive market such as Forex.
Good luck in your trading and life.
Thanks for your time.