Setting Up Successful Live Trades

Setting Up Successful Live Trades

Successful Forex Trader

After you have completed your initial training as a forex trader, understood terminologies and demo traded for some time, the next step in your forex trading career is to start executing live trades successfully, time and again. This guide takes a look at how you can progress.

Moving from a demo account to a live account

For many traders, the transition from a demo account to a live account can be jarring. By far the biggest factor is that you now have your money at stake. When trading paper money as provided on demo accounts, you can afford to make a mistake. One such mistake on your live account could lead to losing your money. The thought of this is what makes it hard for many traders to adapt to the live trading environment.

Therefore, to successfully move from a demo account to a live account, the most important thing you need to do is to keep your emotions in check. Remind yourself of all the training you already have and detach emotionally from your live funds in the market. If you had a good trading ethos in you demo trading days, replicating the success on a live account should be straightforward.

This is also why it is important to avoid entering into live market conditions with money you cannot afford to lose. If you are expecting to quickly double your rent money in a month of trading, there is a high chance of failure, not as a result of not understanding the market or knowing how to execute good trades but as a result of the mental pressure that comes with such a decision.

Choosing Your Live Trading Platform

Many traders often proceed to open a live account on any trading platform they have used during their demo trading days.  This is a wise decision as you will most likely have understood all the functions (and possible limitations) of the platform. If your trading system is hampered by a function or lack of one, it could be best to explore other options.

For example, many forex brokers offer Java or Web based platforms that do not require you to run a download and can be fired up from anywhere. However, most of these are limited in the kind of trading tools they offer the trader. With many, it is impossible to use any trading tools that are not already provided. This leaves traders on such platforms to either improvise or to make analytical decisions on more accommodating platforms like the Metatrader 4.  However, depending on your trading strategy, the split second it takes to move from the Metatrader 4 to your live trading web based account could be costly. This is why you should consider the benefits of moving to a broker that will allow you to have all your trading tools in one place.

The Metatrader 4 is not immune from a downside either. The interface can be confusing for new traders and where the trader is comfortable with the interface, a function such as the OCO for pending market orders missing could throw your strategy off balance. OCO stands for One Cancels the Other and allows traders that set pending trades in both directions to avoid losing money by the market triggering both orders. As soon as one order is triggered, the other is cancelled. This function is not available in the Metatrader 4 and is one of the reasons why some traders choose the Metatrader 5 (pictured below).

Metatrader 5

So, your live trading platform should be determined by your trading strategy and your comfort level with the platform in question.

Identifying the right strategy to use (Currency Pairs and Time Frame)

As we have seen in previous sections, if your trading strategy was proven to work on demo trading conditions, there is a high possibility that it will work the same in live market conditions. Simply maintain the same rules, the same currency pairs and the same time frame that formed the crux of your demo trading and you will most likely succeed.

However, it is important to note that many providers have different environments for demo and live trading especially as it concerns spreads, slippages and commissions. If your system is dependent on getting a few pips per entry, you need to factor in spreads when in the live market. A 2 pips spread on a demo account could be 5 on a live account. How will that affect the profitability of your strategy?

A good tip to deal with this issue is trade the next higher timeframe and doubling your profit target. So if you’d normally trade the 5 minute charts, aiming for 10 pips, go to the 15 minutes and aim for 20 pips. This way you can still take quality trades, cover the cost of the transaction and end in profit.

Alternatively, you can avoid the currency pairs that are most at fault for high transaction costs. Typically the major pairs (EURUSD, GBPUSD, USDJPY etc.) have the least transaction costs while the exotics and crosses (AUDCHF, GBPJPY, GBPNZD etc.) have the highest transaction costs.

Trade goal setting and Trade Management

When you get into a trade, the aim is to make a certain amount of profit, while risking a fixed amount. How do you know the right amount to risk and the right amount of profit to target?

Again, you are most likely going to stick to rules that have worked for you in your demo trading. Many traders often target a certain number of pips as risk and double their risk amount as profit. This is a sound approach as it means you don’t have to be right always to make money. However, it still leaves room for subjectivity that pushes many traders to their failure.

It is not sustainable to simply say, I am risking 20 pips on this trade and targeting 40 pips as profit. Why are you saying so? It may have worked for you in your demo days but it is not sustainable.

The right method of goal setting is to first and foremost, consider the average daily movement (ADR) of a pair over 10 days. All pairs have different ADRs and the number keeps changing every week based on market movement. There are numerous indicators online that can help you to quickly calculate this.

When you have worked out the range, the next step is to determine what invalidates a trade position based on your strategy. At what point would you know that a trade has gone wrong? In a Moving Average Crossover System for example, a cross to the opposite side (trade reversal) indicates that the market direction is about to change on the chart you are looking at. So how do you bring all of these together to create a reasonable trade goal?

First of all calculate the distance in pips between the trade reversal area and your entry price. Whatever the distance, target twice this number as profit. However, do not take the trade if the market has already moved the total amount of a 10 day ADR at the time of getting your trade entry signal.  See the image below:

ADR Chart

The distance in pips between the entry area and the reversal area (behind the signal arrow) was 14 pips. This means that the trader can target 28 pips as profit. At the time of entry, the day’s range was still below the 10 Day average as shown at the top with 22 more pips to go. This means there is room for more movement and the possibility of meeting the profit target. This is a more logical way to analyse and set trade goals.

The method described above is for intraday trading, which is why a 15 minutes chart was used as example. For longer term trading, however, goals can be determined by other factors such as nearest resistance or support area, pivot levels or psychological levels.  A long term trader can also set goals by determining risk. For example, if it will take a 100 pips move for a support or resistance level to get invalidated, a 200 pips target is in order.

Some long term traders do not set any targets. They work out their risk and then stay in the market as long as possible when in profit. This is mostly done by trailing profits by a set number of pips. For example, if the profit on trade is 200 pips, they lock in 100pips. If the profit moves another 100 pips to 300pips, they lock in another 100 pips making it a guaranteed 200 pips profit on the trade and so on.

The bottom line is to dispel the one size fits all approach to trade goal setting. The forex market is one of the most dynamic and should always be treated as such.

Summary

The key to setting up successful live trades is to have the right trading platform and strategy and then to be willing to remain psychologically in charge while managing each trade as a separate entity.