Because of my software engineering background, where I spent over 30 years designing and developing intricate web based business applications, as well as a 40 year career as a real estate investor, I understand how to take complex problems and break them into small, simple steps.

Solving the complexities of FOREX trading is no different. It's simple, once you break it down into its core principals. When you do that, it's just: learn how to spot an opportunity to enter a trade, get out immediately if it doesn't seem to be working, and have a rule as to when to exit a profitable trade.

That's it. That's trading. Three stupid simple things to learn.

When I got into FOREX trading, however, I initially didn't understand this. I thought that currency trading was complex — like the software development and real estate investing I had done successfully.

Complex problems require complex solutions. The solution skill is in knowing how to convert the complexity into just a bunch of simple steps — something I was an expert at due to my accumulated skills. So, it was natural for me to develop the same sort of action plan in trading currencies as I had used in software development and real estate.

After all, real estate, for example, is just a longer term trade than a currency pair. Trading is trading whether it's stocks, bonds, real estate, currencies, commodities, old tires, whatever: it's all just for sale.

My error in implementing this thought process was that I abdicated what I should have figured out on my own to that of becoming immersed in the huge morass of trading educational resources: books, videos, talking heads, websites, etc. Some of what's out there is good, but you do have to have enough experience with what isn't good to recognize what is good. A conundrum, for sure....

After losing a considerable amount of money, I found that you can't directly mix the structure of a real estate plan solving a complex set of issues with a currency trading methodology.

Why? Well, because of a couple of important differences: the timing, and the emotional demands. Those alone change the game significantly. There are others, and I discuss some of these in my blog post 04/12/20: From FOREX Currency Trading Failure To Success — which, incidentally, is the first blog post I made.

By the time I figured out what was going on, I had successfully vaporized my account.

Once I realized my mistakes, I immediately sat down to analyze the currency market in the same manner I would investigate the problem domain of a business issue I would model for building a programmatic solution.

As I began my analysis, I was really disappointed in how foolish I had been in undertaking such a potentially (and for me: certain) disastrous activity as trading in the world FOREX market.

On the bright side of this, however, was that I came to 3 simple steps my trading plan should be based upon. From that basic model, I was then able to flush out equally simple trading methodologies within each step.

I briefly touched on these issues in a blog post I did 05/12/20 — Importance of Learning FOREX Currency Trading Skills which I referred to as "The 3 Stupid Simple Things To Learn To Trade Successfully" — listed way at the bottom as that was not the purpose of the post. Below is the section of that post where I mention these steps:

Trading currencies on the FOREX market is something you should seriously consider.

It's not dangerous unless you refuse to exit a losing trade. That's really all there is to it.

Oh, sure there's some basic stuff to learn, but you can learn all of that by reading 1 book. I recommend one to my students that gives them everything they need to know about all of the plumbing in 50 pages.

From there on, it's just learning how to spot an opportunity to enter a trade, getting out immediately if it doesn't seem to be working, and having a rule as to when to exit a profitable trade. That's it. That's trading. Three stupid simple things to learn:

The 3 Stupid Simple Things To Learn To Trade Successfully

• Learn how to spot an opportunity to enter a trade.
• Get out of a bad trade immediately.
• Have a rule when to exit a profitable trade.

Of note is that to this post, I have a companion video of the same title: 3 Steps To Profitable FOREX Trading that puts all of this together from a different view point.

If you've come from watching that video, then press on here. However, if this is your starting point, I might suggest that you read through this before watching the video. Or, if you want, you can skip to the bottom of this post to watch that video now.

So, let me take you through each of these rather obvious steps. However, the presentation will be more from the why certain things are done as opposed to how they could be done.

Knowing the 'why' of something enables you to figure out the 'how'. Starting from the other approach, that of just knowing the 'how', will most likely not lead you to the 'why', and it's the 'why' that fosters success in any endeavour more complex than peeling an onion, or feeding the dog.

Of course. However, overlooking the really simple stuff can easily take us on the totally wrong path toward the goal we have.

Think back to how you might have done this. Maybe it was just unpacking the parts for that grill you just bought, spreading them out on the garage floor, glancing at the diagram, and started bolting the support pieces to the frame. I mean, really.... It's just a grill. How tough could it be?

You have to admit that it would have been so much easier if you'd have read the simple instructions first, right? Then, maybe, you might not have had to pull the whole thing apart, and start again. Right?

You can't just enter a trade because you did a bunch of study — or simply because you learned where the Buy/Sell buttons are on your trading platform.

You can't enter a short trade just because you see a massive pin bar followed by a subsequent red down candle. Even the dimmest of wanna-be traders have read something about 'structure', or support and resistance zones, or moving average cross over, or the Fibonacci Spiral Of Death Pattern that Rob Booker jokes about.

I'm just going to chat briefly here about this topic, but another post that I wrote 04/16/20: The Myth of Using FOREX Currency Trading Indicators does go into quite a bit of depth about these issues.

The following video I did (which is also referred to in the blog post), Problems With Using Technical Analysis in FOREX Trading, also offers a lot of insight into many important issues of indicator theory as presented in most of the educational resources available:

Video: Problems With Using Technical Analysis in FOREX Trading

What those educational resources don't mention about indicators and their usage — either because they don't know, or they don't know how to present — is that all of the indicators out there are about what happened in the past, and they are all highly correlated so that all of this nonsense about confluence is really gibberish.

Huh? Well, if all of that is true, then why is almost all trade entry theory premised on indicator analysis?

Well, that just really beats the shit out of me. Really.... I don't know the answer to that question. In fact, most of you reading this will close the browser tab and continue with lunch, or something because you've been trained on indicators, and everybody uses indicators....

Yup. And that's why a major FOREX broker's analysis of 43 Million of their client transactions showed that 90% of traders lose 90% of their account in 90 days.

Why is that? Is that because all of those folks are stupid? Hardly. It's because of the educational resources feeding them invalid information.

Indicators have a place in position analysis, but not in the manner commonly found as is presented in trading educational resources.

Because there is so much discussion in the trading educational resources about indicators, and this concept of indicator confluence, you should find the discussions in my video titled Fallacy of FOREX Trading Indicator Confluence interesting—

Video: Fallacy of FOREX Trading Indicator Confluence

Well, if you shouldn't base an entry on some indicator, or indicator confluence, then what?

In order to determine what to do now — as in identify a trade entry opportunity — you have to have a very clear view of what the goal, or the reason, for that analysis is for.

The quarterback doesn't just throw the ball to the designated receiver — that's not the reason he throws the ball.

The reason he throws the ball is to get it to a receiver that has the best position to carry it to the goal line, or maybe just to the next down point. In order to do this, the quarterback is looking at the goal, or better: what or where he wants the result of his throw to be.

And this, like all else in life — including currency trading — has absolutely nothing to do with what...happened...in...the...past.

The purpose of determining a trade entry point is not to make just a safe trade, but rather that the over all analysis of the market (i.e. price action, fundamental conditions, technical issues, etc.) has produced a favorable probabilistic result that by placing the trade at some identified point will provide the price action conditions favorable for price to reach the desired profitable target value while at the same time ensuring minimal losses if things don't go as projected.

And that's why you do the proper analysis to determine a trade entry point. Now, just how you do that is a whole other discussion, and beyond the scope of this post. However, there is more to say about this topic as to the 'why' aspect.

If, for example, you've got an important doctor's appointment that you need to get to on time — as my wife recently had for cataract surgery at a hospital several towns away — then you're going to study the map for the best route, check the projected weather, determine if there will be any commuter or tourist/vacation traffic at the time you have to go, take into consideration how much extra time you might need to be in the doctor's office to fill out forms, etc.

Now, you might say then that when considering making a trade, that the entry point decision should thus be premised on identifying and mitigating your risks as the first order of business. Unfortunately, that should not be the case.

I know that's what all of the educational resources say to do: identify your risk first, and then make sure you have a valid profit target at least 1X, though preferably 1.5X to 3X that risk.

Doing risk analysis first is a total waste of time, particularly if you're a short term trader because you just don't have that time.

When evaluating a trade entry — once you've established the end goal of that trade — the first thing you do is to determine what the potential profit for that trade could be. Why waste your time calculating risks if there isn't enough potential gain to be had from taking the trade?

Figure out the potential gain first, and then see what the risks are.

Make sense? I hope so, because if you do it the other way around you're really looking at the wrong goal.

If you're interested in learning more about this topic of reward and risk, then a video I did titled A Different Approach To FOREX Currency Trading Reward To Risk Analysis will be of interest to you:

Video: A Different Approach To FOREX Currency Trading Reward To Risk Analysis

If you evaluate risk first, then your focus is on the loss, the negative. Why would you do that? But those are the so-called 'best practices', i.e. to determine risk first. I just don't get it....

In some disciplines, putting the risk parameter in the numerator and the reward in the denominator makes sense. But that's not the case in trading. In trading we talk about having 2 units of reward for every 1 unit of risk, i.e. calling that a '2 to 1 reward to risk'.

That makes it a correct representation of what you want to know. How about if I inverted that and said that my risk to reward ratio for the trade is 0.5? That's just confusing, and not a clear description of the information you need to know.

But what's even more confusing are the educational resources that refer to a reward of 2 to 1 risk as a 'risk to reward ratio of 2 to 1'. That's just plain stupid because what that really says is that you're supposed to take twice the risk for the reward.

Regardless of all of that, it's critical when you look at the current price wondering if there is a trade to be initiated, that you do an analysis of what sort of reward could be available if price action continued performing in the manner that it has, and currently is, moving in.

Once you train yourself to look for the reward first you'll not only find more profitable trades, but you'll be able to quickly scan your selected watch list for possible action.

The job of a trader is to look for profitable entry scenarios, not to initiate trades. If you look for trades, you'll find them, but it'll be jump-ball as to whether they'll be profitable or not. Looking for potential reward targets is aggressive trading to win, not by trading not to lose.

I'm reminded of something Samuel L. Jackson said in the marvelous 1993 movie Searching For Bobby Fisher—

"Where'd you learn that? From your teacher? He didn't teach you how to win; he taught you how not to lose. That's nothing to be proud of. You got to go to the edge of defeat. Never play the board. Always play the man."

Yes, in currency trading you have to be willing to face the reality that any trade you make could take your account to the wood, i.e. "You got to risk losin'. You got to risk everything."

However, that doesn't mean doing stupid shit. You have to have a plan, and that plan is all about risk mitigation.

Your rules for trading are all risk mitigation focused. Those rules are immutable, just as Captain Ramsey played by Gene Hackman addresses Denzel Washington's character Mr. Hunter in the movie Crimson Tide:

"Mr Hunter, we have rules that are not open to interpretation, personal intuition, gut feelings, hairs on the back of your neck, little devils or angels sitting on your shoulder. We're all very well aware of what our orders are and what those orders mean. They come down from our Commander in Chief. They contain no ambiguity."

By having such rules in place, you thus do not have to worry about your 'risk' in your reward to risk ratio. Your only — as in only — job is to see what the potential reward is.

If that reward is sufficient — 10 pips, 20, 200, whatever — and you determine that the risk is 'manageable', then: you...take...the...trade.

Again, determining how you decide if the reward is 'sufficient' is beyond the scope of a simple blog post. However—

Primary Trade Entry Decision

Your focus when looking at price action to determine if there could be a trade entry is what the potential reward is first, and then consider the risk.

For a far more in depth written analysis of trade entry theory, you might be interested in taking a look at my blog post How to Evaluate a FOREX Trade Entry Setup.

Why not?

Because part of the trade entry decision process was focused on a set of rules that you create that deal with risk mitigation. One of those rules should be something like: "When event X, Y, Z... happens: exit the trade."

That's it. Couldn't be any simpler than that — unless... you failed to do the prep work planning in the trade entry decision process step.

Of course, the question to resolve in that trade entry plan is what constitutes a 'bad' trade.

For me, it's simple: If price goes against me 8 pips, I'm out.

Now, that's just for me, because that rule is based on me as a short term trader on low time frames with currency pairs where 8 pips is sufficient to indicate a potential reversal. If I trade a currency pair with a different ATR, for example, then that 8 pips may change up or down.

Exiting A Bad Trade

All that matters to ensure that you exit a bad trade immediately is that you have a very simple rule that is "...not open to interpretation, personal intuition, gut feelings, hairs on the back of your neck, little devils or angels sitting on your shoulder." A rule, thus, that contains no ambiguity.

In my analysis of trade entry, my first consideration — and the simplest to determine — is if a trade could offer me my desired profit if run to fruition.

Let's just run with my example currency pair scenario characteristics of ATR, etc. such that a trade must provide me with at least 25, if not 30, pips of potential profit for me to consider further analysis.

Now, how I make that determination is not within the scope of this overall discussion topic. However, just for example: let's say that I identify that potential through a reasonable consideration of past price action structural formations, firm continued probabilistic price directional bias, and a little pixie dust such that taking a long position could result in a 30 pip run.

I stop there, and then go through all of my risk analysis as I've discussed.

When I enter that trade, there are only 4 possible exit situations:

• Price hits stop loss point.
• Position margin close out.
• Profit target limit order reached.
• Trader determined exit event.

The first three exit situations are evident. That fourth one, however, needs some discussion....

A 'trader determined exit event' is not a static rule, but rather a fluid price action situation you identify in real-time that causes you to abandon your original profit target.

Why would you exit a trade before it reaches your anticipated profit target?

Simple, right? You'd exit because it doesn't look like price is going to make it to the profit target, and you want to retain as much of the accumulated profit the position has that you can before it gets worse.

For simplicity of analysis, I'm not going to get into issues of staging out of a position. It's the decision to exit that's relevant here. How you exit is not material.

Okay, so let's ask the more than obvious question here: What sort of price action conditions could cause you to prematurely exit that position?

The simple answer is: When price doesn't look like it will make it to the profit target.

Sure-sure-sure. Let me complicate that for you with just a few situations:

• Moving average cross over event.
• Sudden price reversal.
• News event.
• End of day/week and don't want to do a carry trade.
• Price stagnates.
• Your emotional state changes.
• Telephone call, or visitor.
• Need more coffee....

I could go on....

But those are all easily understood, and no real decision needs to be made, right? For example, you're either going to feel that a telephone call is too disruptive to your concentration and exit, or you decide to continue on. That's a real-time exit decision, and a very common one, as are most of the others.

One of those situations, however, is not so easily discarded: price stagnates.

What does that mean: price stagnates?

In other posts, and videos I refer to price stagnation as price 'chattering'. Regardless of what you call it, it's a situation where price — through some metric determination, or visual presentation on the chart — ceases moving in the desired direction, and just sort of 'flat-lines'.

I'm not getting into the gory details of how this might appear, but — for me — I drop down onto the 5 second chart when I see that price movement on the 5 minute time frame I'm managing my trade on seems to have 'slowed' — however that's determined....

This is position management at its core. I do this on the 5 second chart because with the pair I'm trading it has a 1 or 2 pip ATR which, after just three or four candles, will start to be visible as a change in momentum. When the fast moving average (actually an ema) begins to flatten, and then turn, I'm definitely out.

I'm out because price has probably retraced 5 or 6 pips by that time. Since I'm only shooting at a 25 or 30 pip optimum profit target, that's a lot of pips to lose....

Let's say price has gone 8 pips in my favor, and then this price stagnation starts happening. How long do you think it will take for that reversal to become recognized on the 5 minute time frame with an ATR of maybe 5 to 7 pips?

Too long; maybe 15 or 20 pips? Yeah, that's just a big hit.

So, by following my trading plan, when I see this sort of thing happening on that 5 second chart, I just exit.

In most cases, I retain 3 to 5 pips of the run. And, as I've shown before in many, many posts: 5 pips per $1,000 traded/risked is a 0.5% return. Do that 2 days a week, and it's an annualized simple return of something on the order of 80%.

For a more detailed discussion of this concept, check out my post Why I'm a Short Term FOREX Scalper. You might also benefit from watching the following video I did of the same title that deals with my views of the shorter times frames, and how what I do there is easily mappable up onto the higher time frames:

Video: Why I'm a Short Term FOREX Scalper

Oh, and remember to watch the companion video to this post at the bottom of the page!

Anyway, why would I pass up that sort of return on my low end expectations? I'd be crazy to risk holding that position to see if it would 'turn around'. It may turn around, but it also may take my position to a negative value, or even back to hit my entry stop. Why would I do that? I wouldn't....

Well, that's what I do as a short term trader. But someone who's out trading the daily chart can do the same thing by seeing what's going on down on the 15 minute time frame because their profit target is probably several hundred pips.

Dropping down onto the 15 minute time frame with an ATR of, say, 13 pips would enable the trader to spot this 'chatter' after 30 or 40 pips.

The percentage of loss due to chatter as a function of overall profit target is going to be — or should be calculated to be — about the same as what I'm shooting for in my shorter time frame analysis. Simple.

Exiting A Profitable Trade

The main issue to deal with in exiting a profitable trade revolves around having a process to determine in real-time when price action begins to lose it's momentum such that the probability of not reaching the profit target is greater than making it.

If you find that you exited prematurely, and that price has come out of its consolidation and continued toward your original profit target, then you can always do another trade entry analysis, and get back in if that analysis indicates doing so.

Video: 3 Steps To Profitable FOREX Trading