There are many elements that, when put together, produce a great trader. If you look and read about them, you will usually find three different types of analysis: technical, fundamental and sentiment analysis. If you continue reading, they will tell you that if you analyze properly from the technical aspect, as well as take into consideration context of the currency pair i.e. fundamental analysis, you will do well as a trader. However, this is only partially true.
One of the main reasons why very few brilliant scholars can make their way into trading, lies in their trading plan, or the lack of one. Out of many Forex experts I follow on Twitter, only one or two of them have a background in finance/economics. If you ask why, your answer lies in the title of this article - Trading plan. Instead of reading endless papers on how to define your trading plan, I advise to use Trading Contest to practice and most importantly, to learn how to trade in the right way. And that is: by limiting your position size (risk management), defining trade parameters (entry, SL and TP) as well as trying to stick to your plan.

Fundamental analysis

Each and every morning when I go through all charts, I formulate my own strategy. The better you do it in the morning or when you start trading, it lowers a chance that your impulse and emotions will take over your trading. For example, I will use fundamental analysis to analyze the pair in political, social and economic context. Usually, I identify the weakest currencies for the day/week ahead and look for the strongest currencies to decide which will gain the most against the weakest one. The picture 1 below can offer some perspective on where are the central banks currently regarding their monetary policy, e.g. the FED finished its easing policy while the ECB has just started it. Below, I will use the example of trading in between the RBNZ and FED respective rate decisions in June 2016.

Picture 1. Monetary policy: Which central bank stand where ? (Source: Scoopsnest)

And here is my first point. Many traders make rookie mistakes by buying or selling one currency against ALL currencies. If you think that the Fed will be dovish and depreciate the greenback, then analyze the context of other currencies and what is their short term outlook. For example, I will be looking to buy NZD against the USD after the Fed decision and statement on June 16. Why the NZD? Well, just two weeks before the Fed meeting, the RBNZ decided to hold and not cut its benchmark rate to 2% and it has changed the outlook from easing to neutral, at least short term. Hence, the NZD was one of best performing currencies. So instead of buying everything against the USD, I will focus on NZD, since I am hopeful it will gain the most against the USD, should FED be dovish. Also, I look at the cross pair to determine which is the strongest currency, i.e. if I cannot decide between AUD or NZD, they I will look at the chart of AUD/NZD and see which one has better momentum.

Technical analysis
After I have identified one or maximum two currencies to purchase against the greenback, I now move onto the second element of my analysis - technical. The fundamental analysis tells me WHO but the technical tells me WHERE. Hence, from the strategic point of view, this is more important. Even if you are 99% sure that NZD/USD is going up, you cannot just enter immediately into the market and buy the pair. You need to analyze the price movement and identify right time for an entry. My technical analysis is rather simple. I use three instruments: Fibonacci retracements and extensions, moving averages (55, 100 and 200), as well as trend line and horizontal supports/resistances.

Picture 2. Technical analysis of the NZD/USD

On the picture 2, you can see simple technical analysis of the NZD/USD. The pair struggled to move above the 0.7050, which created a temporary double top in place. However, following the RBNZ decision, it broke to the upside and now the big resistance becomes big support. Below, I will briefly explain how I enter into the trade, following both fundamental and technical analysis.

Trading plan
And this is where most of the scholars and academics fail big time. How to make most of your knowledge and your expertise? How do you translate that into your profits, or your clients ? To give answer to these questions, we need to: 1)Identify strategy; 2) Set your entry point, SL and TP; 3) STICK TO IT - the most important element.

Before I explain the picture 3, let me emphasis that in this business there is no place for emotions. If you are European and you are patriotic, you will go bankrupt if you put your emotions into markets and keep buying the euros. Here, you need a cold head more than anywhere else.

Picture 3. Defining your trading plan

After I analyzed the price movement and had identified 0.7050 as the bull/bear line, or line in the sand, I will enter the trade ONLY at the re-test of the broken resistance, now support. This is where discipline comes into the play. The first thing you DON'T do is: never ever enter the buy trade at highs or sell at the lows. In this particular case, you are not buying the NZD above 0.71 cents. You wait for the pair to retrace and then you can enter into the trade.

As you can see, if I enter at 0.7050, I will put my stops below the second layer of horizontal support around 0.6980, which means I risk around 70 pips. However, If I'm right, there is a higher chance that the pair will re-test the highs, and that is my aim. I'm not interested in touch downs and 400 pips moves. I'm a swing trader. I'm looking for the move back up to 0.7150, which means my reward is 100 pips. In the worst possible scenario, your risk reward ratio can be 1:1, which means you can lose as much as you can gain.

Risk management
You can either enter into the trade just a couple of hours before the Fed statement or after it. It is highly unlikely that the pair will move above or under the bull/bear line before the statement is out. You can also choose to avoid trading before big events, which is highly advised. Hence, you can trade the pair after the announcement. For the point that I try to make it really doesn't matter. What it matters is that you have a defined strategy and you stick to it. From the risk management point of view, I would advise that you never risk more than 1% of your account one one trade. What that actually means is that if your account is 100,000$, you can risk as much as 1000$ on this trade. Even if the Fed shocks the market and announces its decision to hike, you will only lose 1% of your account.
Again, and I'm speaking here from my experience, I advise you to use Trader Contest, as it represents a great learning curve to learn to trade properly and rightfully. And that is by defining your strategy, analyzing context and price movement, as well as how much are you willing to risk.
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