It’s a phrase everyone knows – Keep It Simple Stupid [or Keep It Short and Simple]. However, forex KISS is better known than practiced. Part of this is because of marketing, as well as that ever-present “keep up with Mr. Jones” attitude that pervades forex.
The forex superstar
Here is what happens: a trader enters the forex market with high hopes and minimal knowledge. He invests time and energy into learning the basics and makes a modest return at the beginning. After a few months he compares himself to a forex superstar or reads an ad for a fantastic trading method with guaranteed results. Off he goes, trying to learn ever more sophisticated techniques, tools, and methods. Several months later he’s exhausted and a lot poorer, with the feeling that he just doesn’t have the sophistication to be in the forex market.
It is still a good thing to become more sophisticated
There is certainly nothing wrong with sophisticated tools or trading methods. Most technical indicators offer genuine insights with real analytical value, and if a trading method never worked, people wouldn’t call it a strategy (though maybe that’s a bit optimistic). In fact, it’s good to grow and become more sophisticated as you gain trading experience.
What’s the key?
The key is to never let go of the fundamentals. To make a comparison to a more familiar market, stock traders can make endless guesses and extrapolations. However, at the end of the day, their price should match the underlying value of the security. People who lose sight of that are speculators and lose money on average.
In the same way, it is fine for a forex trader to use sophisticated, tools of technical analysis, but there are always basic, fundamental realities he should come back to. What are the things you should focus on if you want to “keep it simple, stupid.”
What to focus on?
First, remember that you are trading real currencies in real countries. Anything that influences the economy of that country or makes a difference in how the market regards it will influence the currency as well. You should not be trading a pair without knowing the basic economic data and current events that apply to both countries. You should also know international ties and the paths for trade revenue.
Second, establish a sensible, meaningful strategy and follow it all the time. If you can’t clearly express your strategy in a way that makes sense, you haven’t achieved this yet. You should also have back tested and forward tested your strategy before risking real money, or you should at least have reason to believe that it will be profitable.
Most importantly, discipline yourself to stay within the confines of reasonable risk management. You should have stop loss orders on every trade you make and always watch your leverage. You should also establish what amount of money you are willing to lose. Then compare this to your total liability.
How do you know how much you are risking?
Keep track of the difference between your opening trade and your stop loss on each trade. You can find your total risk exposure by multiplying this number by the leverage and adding the results of this calculation for all of your open trades. The final number should never exceed the liability you started with-what you were willing to lose. In other words, never put yourself in a situation where you could lose more than is acceptable if everything went wrong. As soon as you risk it, everything really will go wrong.
It isn’t true that the simplest traders are the most successful; nor is it true that the most sophisticated traders have the most wins. The best traders are the people who can use sophisticated tools without losing sight of the simple realities which drive the forex market.