It’s far too easy to take this Forex thing casually.
You can open an account with a broker is the blink of an eyelid and in two more blinks you can be trading Forex.
But Forex is a game a skill played by some of the most sophisticated, well connected and intelligent men and women in the world. Every time you trade it’s like playing chess against a chess master. (Not to burst anyone’s bubble!)
So do you think that having sloppy objectives for what you are trying to achieve is going to cut it?
Nope… you are right they sure won’t.
The good thing is that once you do understand how to craft proper objectives a number of nice things happen:
- You stop losing money (even if you don’t always make it)
- You trade with purpose
- Your discipline goes up several notches
And you have already have taken steps that 98% of other Forex traders won’t (because they don’t know how, or because it’s too hard work), to seat yourself on the side of the table that the chess master sits.
Beautifully crafted objectives take time
Van Tharp, market wizard, suggests that setting correct objectives for your trading should be about half if not more of the system development process.
Internalise that for a moment.
How much time are you focussing on your objectives? 10%? 5%?
Or are you TOO BUSY WITH YOUR CHARTS to take the time to think about your objectives? (How’s that sweet indicator combo coming along?)
You need to have these objectives
You should have at minimum these objective for your Forex trading, or at least variations thereof.
- Account Return target over different time periods i.e. 5% a month, 30% a year
- Account Drawdown limits i.e. 2% a month.
- Percentage chance of hitting both of the above. This will dictate how aggressive your position sizing model is.
- Account Intra-time period drawdown target. I.e. if you are up 5% for the month how much are you willing to give back to make further gains.
- Trading opportunity i.e. the number of trades you want to take a month.
- Trade Return target. I.e. 3 times initial risk.
- Intra-trade drawdown i.e. how much of your profits (per trade) trade you are willing to give back.
Why do I need to have all these things you may ask?
They all feed into your position-sizing model. And that is how you achieve your objectives.
You achieve your goals though position sizing, and your position sizing comes from your objectives.
Again, as Van Tharp says, you achieve your goals though your position-sizing.
Each of the objectives above is a factor in building your position-sizing model.
For example, if you have a goal of risking no more than 2% of your account in a month, will you risk 1% a trade? Not likely on the first trade of the month.
It’s absolutely critical you get the “how much” factor right when you trade Forex, and it’s by establishing proper objectives that you do it.
Tips for future money managers: You need to work even harder in this area.
If you are planning on managing money one day, you need to work even harder on defining objectives worthy of a professional trader. Your future investors are not going to be very forgiving of big overnight losses that come from not understanding what you are trying to achieve.
As mentioned in this article, you also need to take into consideration notional funds.
Where to next
You can learn more about setting objectives in The Advanced Forex Course for Smart Traders. But you don’t have to. Take some time to really think about why you are trading and what you need to do to be successful.
About the Author
Sam Eder is a currency trader and author of the Definitive Guide to Developing a Winning Forex Trading System and the Advanced Forex Course for Smart Traders. He is a key team member at premium FX services provider www.fxww.com and part owner of Forex Signal Provider www.fxrenew.com. If you like Sam’s writing you can subscribe to his newsletter for free.
This post was first published here.