During my regular webinar at FxStreet earlier, we had an interesting discussion on the use of technical analysis.
I thought this topic would be worth sharing and putting across for the views of other traders.

We were in the middle of discussing Harmonic patterns & Fibonacci ratios, which is not a very easy analysis. 
And we had an opinion that the harmonic patterns are too complicated and its best to keep things simple.

While I am very much in favor of the “Keep It Simple Silly – KISS principle, its my personal opinion that it should not stop a trader from learning something new….which will give him/her an advantage in trading.
After all, everything in the beginning is difficult & gets easier with practice.
When you started learning technical analysis, did you have difficulty initially in understanding the basic workings of the indicators?
I am sure you did.
But after some time, it became easy & natural.

Let me go towards the technical part to drive home my point.
I have seen that price tends to respect Fibonacci levels quite accurately, and the correct use of Fib ratios can definitely give the trader an edge.
I would call it an earlier “Heads Up”, where you can anticipate upcoming levels of resistance / support…before the crowd.

A Harmonic pattern is a series of price retracements & projections which form a very accurate trade setup.
Without getting too much into the actual detail, let’s just take the base of the pattern.
The initial pullback of a price movement gives clues of the kind of harmonic pattern that should form, which in turn gives you the anticipated price movement.

If this can give me a “heads up” of the anticipated price structure, then it should be worth my while to understand this pattern.

Coming back to our topic, should I be content with the “simple” things I know, of technical analysis & keep following them?

Well, one school of thought says that “If it ain’t broke…don’t fix it”
So, if a trader is successful with the “simple” system he/she is following, then obviously, one would not want to complicate things further.

But if a trader is not getting the results from the trading, should he not try & improve the trading by implementing new & different techniques, which could give him better results?
Or should he desist from it, because it’s complicated?

Your opinions, please.

Do you have doubts while placing a trade order?
Do you hesitate to get in a trade, even though all the factors for the trade have lined up perfectly?

Trusting your analysis, and pulling the trigger at the correct time, without any second thoughts, can be a real challenge.
It’s a natural part of trading and overcoming this problem is one of the key hurdles, which a trader has to overcome.

First & foremost, it is the faith and confidence that one must have in the system. Whatever technique one has decided to follow, one must enter the trade with no second guessing.

Easier said than done!

And this is exactly what we need to discuss.
How does one do that?

From personal experience, I can tell you that this comes from taking trade after trade based on the same technique, regardless of the outcome.
This is the key….regardless of the outcome.
In the process of trading, one will experience losses.
For most traders, this is the most difficult part to accept.
It’s not easy to accept a loss.
More than the financial loss, the effects of the psychological damage are more pronounced. Most of the times, it results in a “revenge” frame of mind.
It’s a natural human tendency to want to recover the loss & I have seen a lot of traders “get back” to the market by doubling their positions.
This is the beginning of a vicious circle that would only end in a greater loss.
Hence one has to learn to look at losses very objectively.

What I do, is look at these losses as a necessary expense, since one is learning from it…..here, I assume, that a trader would learn from the mistakes.
Taking an example, if you have to travel from one city to another by car, you would need to fill gas in the vehicle.
Would you consider this gas expense as a loss? The bottom line is that you have spent the amount, which is not going to come back to you.
I would look at this expense as a necessary requirement, since it is getting me from one city to another.
Similarly, if you learn from a loss, then it only adds to your experience…and makes you a better trader.
So….is it a loss or a necessary expense?

Coming back to the topic, we can conclude that the faith in your system comes only after taking it time & again…regardless of the losses.

So it has to chart time, chart time & chart time, till you know your system inside out…which then gives you the confidence.

One note of caution – One has to back test the system to check its effectiveness, before you start using it in real time.
There are different factors that go towards making a system effective & I would not advise trading with a technique which cannot give you positive results.
It would naturally end in losses & more losses….then you would want to catch my neck & say….you told me so -J

The second important factor is money management.
If you do not risk more than 2% of your capital at any given time, your risks become affordable.
Hence you go into a trade knowing that even if it ends in a loss, these losses can be taken in stride.
That itself, should give you the confidence of taking a trade.
The flip side is that one feels the expected profits will also be small, and one would tend to increase the capital exposure.
And this is where the discipline comes in.
Once you have decided on a certain procedure, you must have the discipline to follow it.

Most traders do not give the time to the technique, to prove itself.
Human nature being what it is, one tends to look for another technique because this one has had some losses.
And most traders quit a system when they have put in a lot of efforts, and are almost at the finish line.
This is not the place to give up.

The bottom line is that a trader should learn to analyze the markets for himself.
Only when he knows why price is moving…the way it does…will he have an edge & the confidence in the technique.

It’s only when you stick to one plan that you tend to make it perfect.

Plan to make living from trading the forex markets??? ……yes, it can be done.
Let me first tell you, that it’s not an easy task, but not impossible either.

The first fact that one must keep the expectations small & reasonable.
The statistics say that 85% of the traders lose money.
In my opinion, most of them come with the wrong expectations into this business. They look at this as a Get-Rich-Quick game, and thus lose even before they have a chance.
If you think you are going to double your account in a month, then you are better off in a casino…at least you will have fun while losing money -:)
Trading has to be treated as any other business & it involves hard work, patience & determination.

Secondly, one would naturally tend to equate this business with the normal everyday situations that we come across.
In the real world, one gets paid at the end of the month, for the effort & work that one puts in.
Trading on the other hand, may not pay you consistently every month and a trader could even end the month with losses.
One must keep in mind, is that losses are inevitable in trading…and therefore money management plays a far more important role in your success, than technical analysis.

The basic concepts are -
Keep your expected profits at a reasonable level, and start with a fixed target per month. That I am going to increase my account by 5 to 10% a month, or I plan to make 30 points on every trade etc. Keep it realistic enough to happen.
Accept that you will have losing trades. The market is too big and too unpredictable. Finally trading is a game of probabilities, and your trading plan has to have that extra edge. Even the professionals consider that 5 winning trades out every 10 trades taken, is a very good win-loss ratio.
Keep a Risk-to-Reward ratio of at least 1:2. This simply means that for every risk (stop level) of (say) 30 points, your profits should be at least 60 points. Hence one winning trade should take care of 2 losing trades, which is the only way to make your equity grow.
Concentrate more on losses. Always consider the worst case scenarios. And if you accept that these losses are acceptable, you are prepared. As they say, take care of your losses, and the profits will come.
Remember, making money in forex is not difficult. It’s making money consistently which is the challenge.

Enough and more information is available about technical analysis, indicators, chart patterns, trade setups etc. etc.
But surprisingly, very few traders look outside the box and strive to understand the other factors which go into the trading process – the psychology of trading, money management….and a “Trading Plan”.
I could label “forexology” as the combination of these principles, which are more important than technical analysis, and ironically, the most ignored.

Let me introduce myself.
My name is Sunil Mangwani & I am a Physics graduate with a Diploma in Financial Management.
I have been trading the forex market since the last 6 years and devise simple trading strategies based on my vast knowledge and in-depth study in the field of technical analysis.
But in my years of trading and experience of teaching technical analysis, I realized that applying technical analysis is not enough to be a successful trader.
One can be successful in this exciting, fulfilling and yet demanding business, if and only if, one has a definite plan on how to approach the market.
If a trader has an iron clad “Trading Plan”, it automatically puts the trader into the top 15% bracket of the winners.
I now conduct special coaching for developing specific trade plans from my website www.fibforex123.com
My vast repertoire of services on this website also includes Live Trading room training, special webinars on educational topics & advanced trading strategies.

When I got the opportunity of presenting a blog on Fxstreet, to convey important & relevant thoughts on forex trading, it was only natural for me to think about forexology.
The underlying principle & the most important factor that I concentrate on, is the concept of 3M’s – Mind, Money & Method.

At the risk of repeating myself, most traders are not aware of the following fact -
If one were to distribute the 3M’s (Mind, Money & Method) on a scale of 1 to 10,

Money Management would account for 50%;
Psychology of trading would account for 30%;
Technical analysis would account for only 20%.

This by itself should highlight the fact that a trader should give more emphasis to the factors of forexology.

In this blog, I will be presenting my thoughts on the concepts of Trading Plan, Money Management & the Psychology of Trading.
My intention is to make the traders realize the importance of these topics & I will be touching on technical analysis only when required.
This does not, in any way, diminish the importance of technical analysis, since the foundation of a “Trading Plan” has to be a technical strategy.
We will, of course, be talking about trades, because we are here to trade and trade successfully.
But I will be giving more weight to the factors of forexology, to create a larger awareness.

I will be putting my thoughts regularly and will also include relevant situations which we come across in my live trading room.
Every day, every moment, the markets throw us different & unique situations and if one learns these lessons, it paves the way to success.
I would appreciate your comments and suggestions for this….and of course, bouquets & brickbats are welcome -J

Sunil Mangwani
www.fibforex123.com

Surprisingly, the simple fact of preparing and following a trading plan could be the difference between success & failure in trading.
This is something which I repeatedly try to drum into the new traders, but human nature being what it is -:)), people don’t realize the importance of it.
For a new trader, and for that matter, even for an experienced one, I hope I can save a lot of unwanted stress & losses by pointing out the relevant facts.

You must have a Trading plan.

It’s just as simple as that, but it is very important.
Whether you trade on technicals, on fundamentals, on the news release or even by tossing a coin -:)), you must have your plan written in front of you…BEFORE you enter a trade.
And it has to be in black & white, with no shades of grey.
The simple fact is that most traders lose, because they just enter a trade when they see price rising or falling.
If you don’t know the reason for your trade entry, your battle is lost right at the beginning.
The bottom line is – Decide on your technical strategy & finalize a precise plan around that strategy which should clearly define -
What should be the conditions for entry?
Where you would put your stop?
Where you would exit the trade?
How much capital will you risk on this trade?
What would you do if the trade turns against you?
When & where would you take profits & when would you let a trade run?

And subsequently -
Have the patience to wait for this setup and not trade till this technical setup occurs.
Once it occurs, have the discipline to follow the plan to the "T" with no deviation & no room for emotions.

Finally -
The trade may not turn out to be a winner, but accept that losses are a part of trading and there will be more opportunities.
Don’t look at a single trade to gauge your success or failure.
The war consists of many battles, and one should consider this as a long term business with a steady growth, and not an Overnight-Get-Rich-Scheme.