Forex Trading Articles

PRACTICE, PRACTICE, PRACTICE

By Dick Thompson for Forexmentor
©2008, Forexmentor.com, October, 2008

I have loved music all of my life. I took lessons in piano and clarinet as a kid and guitar and violin as an adult. I never really became an accomplished musician because I simply have no talent. But I had fun. I remember, however, that I was asked to practice a lot. I was not asked to practice a sonata or a concerto; the things that I ultimately hoped to be able to do. I was asked to practice scales; or finger exercises; or chords; small pieces of the skill set that would eventually, if I did have talent, enable me to play that sonata or concerto.

You know the story of the tourist in New York who asked: “How do you get to Carnegie Hall” ? The answer of course is: “Practice, practice, practice.”

I have been thinking about trading and what we do as we try to learn to be successful traders. We read books, attend seminars, watch webinars, videos, and various other materials. Perhaps we even work with a mentor. Then we just start trading. Perhaps, we do so in a demo or practice account, or with a micro mini account where we don’t risk very much money. But what we do, is we jump right in and try to play the Sonata.

From my music experience, and what I know about the education and training of just about any other activity, whether it be a sport, a language, a vocation, or a profession, this is not how complex activities are learned. We should be trying to understand trading in small, separable pieces; small skill sets that we could practice and learn independent of the whole. Then we should put them together in a way that builds on what we are learning until finally we have a complete trading methodology. The different ways we develop and learn those skill sets and the different ways we put them together might yield a different methodology for each of us, one that fits us as individuals. Perhaps the process of studying and practicing the individual skill sets will in itself assist us in discovering the eventual trading methods that best suit us.

What are the small skill sets we could identify and practice? Here are a few that I think might work: Identifying support and resistance; entering a trade; when to exit a trade; reading and understanding price action; finding reversal patterns; scaling out of a trade; top down analysis; following a plan with discipline; keeping a gain from becoming a loss. This list is only a first cut. I am not even sure that a meaningful practice session could be developed for each of these. But you have to start somewhere and as far as I know, this is new ground.

I am going to take a stab at an exercise now. I will try to make it as simple as possible, easy to accomplish, and have a measurable result to enable us to quantify our ability to learn. OK, here we go.

Enter a long trade on the EUR/USD 30 minutes prior to the London close, and close the trade at the London close. Make this trade every day for 30 days. Sound simple? Sound stupid? Perhaps. What does this practice and what can this practice accomplish? Well, it practices discipline, for one thing. It practices following a plan. Never mind that it is not a very exotic or probably even successful plan. It is a plan and following it to the letter will take discipline. For some new traders, it might be the first and only time this has occurred. Does that have any value? Any worth? I think so. When is the last time that you followed a plan, any plan, for 30 days?

Granted, this practice session, in and of itself, is not destined to yield successful trades. That is not its goal. But let’s move on. Suppose we do the same trade as above but add the following activity. For the 30 minutes that the trade is active, watch the price action on the 5 minute chart. You study it carefully, paying attention to how price moves, the difference in how it moves up versus down. You will have six candles to look at; are the up candles different from the down candles? Can you determine why? What does that tell you? Are there any other characteristics that you observe? From this study, and from this study of price action alone, determine whether you think that price will move up and make your trade successful. If you determine that it will not, then close the trade as soon as you make that determination. If you determine that it will, then let the trade run for the full 30 minutes and then close the trade. Keep a record and see if your ability to read price action gets better over time. If it does, your wins should be larger than your losses, on average.

So. Do you think this training exercise will be beneficial? Will this practice help you develop useful skills? I think so. Understanding the market is important. Understanding how price moves is critical. All of our teachers and mentors tell us to let our profits run and to cut our losses short. Ever really know what skills are involved in accomplishing this? Do you think that this practice session might help? By the way, if you took the opportunity to watch price during that first exercise above, Kudos to you!

Can you see how you might build on this idea? Suppose you change the way you enter the market. Entry based on time, as I have done here, is pretty simple but probably not too valid in the real world. How about just changing it to entry based on pivots. For instance, you might want to try looking at the market one hour after the open and see if you are in the buy zone (below the daily central pivot) or the sell zone (above the daily central pivot). If in the buy zone, buy. If in the sell zone, sell. Another way might be to tie your entry to the touch of a support in a down move or a touch of a resistance level in an up move. These exercises might both help your entries and give you added benefit of practicing knowing where you are with respect to the market. The activity of trying to create a practice exercise in itself might be very instructive to learn more about trading.

I am going to leave it here, folks. Hopefully, I have planted the idea that you can dissect the trading experience into small skill sets and then create ways of practicing these skill sets independently of each other and independently of a trading methodology or system as a whole. Obviously, you would want to do this in a demo account, or better yet, in a platform using training software. There are a few of these floating around such as the Expert Advisor that can be added to any MT4 platform (for free) or a stand alone program called Forex Tester.

P.S. If any members are interested in a Forex Trader’s Users Group in the Seattle Area, please contact me at gartleytrader@yahoo.com

Index of All Forex Trading Articles