Know Yourself, Know Your Setup

This Article will help you through making Strategy plans for your Forex trading,Day 1 of Winners Edge Trading journal.
Trust me and read the entire article ,It takes 15 minutes of your time ,worthy to read.

Who are you? What are your strengths and what are your weaknesses?
Do you thrive amidst chaos or require regimentation and
stability?

In trading, the answers to these questions are far more
important than any setup you can devise. At its core, trading is a game of
psychology, and no amount of reading, no computerized back-testing, no
advanced seminar work will produce long-term success if your trading
style is in conflict with your basic personality.

Contrary to popular belief,
successful traders do not change their approaches to adjust to the market
but rather find market environments that best suit their inherent
strengths. That’s why in books like Jack D. Schwager’s Market Wizards
(New York Institute of Finance, 1989; HarperBusiness, 1993) you will find
very successful traders following diametrically opposite approaches to
the market and often dispensing what appears to be contradictory advice.
In fact, it’s not at all inconceivable to imagine two market wizards taking
opposite sides of the same trade yet both walking away with a profit.
To market novices this idea may seem completely illogical. In most
businesses we are taught that there is always an optimal way of doing
things, that certain processes will be far superior to others. Clearly that’s
the case with engineering, where scientific rules of optimization and refinement
apply to everything from car production to bridge building. Financial
markets, however, are emotional mechanisms, which is why
engineering-based solutions to trading inevitably fail.

Financial markets are extraordinarily complex with a multitude of players,
each with a different agenda and time perspective, providing the trader
with a variety of opportunities for profit. Since the currency market is the
largest financial market of all, the flexibility to craft a strategy conducive to
your specific personality is even better in FX than in any other market. The
cold hard truth of life is that we do not really change; we just grow older. The
most successful businesspeople in the world learn how to utilize their
strengths while minimizing their weaknesses by having their more skilled
colleagues perform those tasks which they cannot do well. Trading is very
much the same. Successful traders choose those strategies that are most
aligned with their psychological profiles while staying out of the market
when conditions aren’t suitable for their style. It isn’t a matter of doing the
easy thing or the difficult thing. All trading is difficult. Rather it’s a matter
of doing the natural thing. Why is this concept so important? Couldn’t you
simply learn proper trading habits with enough practice and discipline?
No. No matter how much discipline you possess, if you are trading contrary
to your natural impulses you will eventually sabotage your trading
plan and you will fail.

This is the reason why cookie-cutter trading maxims such as “Cut
your losses short and let your profits run” are not only useless but often
highly destructive for most traders. Each person is unique, and successful
currency trading is the art of applying each trader’s personal skills to the
array of opportunities present in the market.

Let’s take a quiz. It is by no means a scientific test. It’s just seven simple
questions that I devised a while back to help discover potential trading
profiles. Don’t worry—there are no right or wrong answers. But maybe
you will gain some insight into who you are as a trader.
Answer the questions as honestly as possible.
There are no “correct” answers.
You fail only if you lie.

1. You need to buy one important item in the store. You run in quickly,
pick it up, and approach the counter. Unfortunately, instead of the
usual five cashiers only one cashier is open and there is a line of 20
customers ahead of you. You:
A. Walk out of the store immediately, leaving your item behind.
B. Get in line and wait your turn.

2. You are driving down a two-lane highway on your way to work. Suddenly
a sports car tries to cut you off, nearly clipping your fender. You:
A. Slam your horn for at least 15 seconds and wish the driver dead.
B. Hit the brakes and let the driver pass unimpeded.

3. Assume you are capable of doing both activities. What’s more fun?
A. Fishing.
B. Downhill skiing.

4. The Powerball lottery jackpot is $100 million. You are at a newsstand
buying a magazine when you discover a crumpled $20 bill in a shirt
pocket. You:
A. Buy 20 lottery tickets.
B. Put the $20 in your wallet.

5. Your favorite entertainer is in town for a surprise show. Your choices
are:
A. Get up at 4 A.M. on Saturday morning to get tickets at the box
office.
B. Buy tickets online for a show nine months later.

6. What is worse:
A. A constant low-grade toothache for a month?
B. Having your wisdom tooth pulled with no anesthetic?

7. For the next 52 weeks choose one:
A. You will be paid $2,000 per week.
B. You will be paid $700 per week with a reasonable chance but no
guarantee to collect a $250,000 bonus.
There is no final score for this test. There are no neat boxes to classify
the answers. Rather, they are meant to uncover some inner drives
to your behavior that may offer you better clues to what type of trading
suits you best.

Let’s examine each question in detail.

1. You need to buy one important item in the store. You run in quickly,
pick it up, and approach the counter. Unfortunately, instead of the
usual five cashiers only one cashier is open and there is a line of 20
customers ahead of you. You:
A. Walk out of the store immediately, leaving your item behind.
B. Get in line and wait your turn.
How many of us have been in this situation and wanted to scream in
frustration? Yet while this question seemingly examines the common
problem of modern life, it is actually trying to probe your ability to abandon
positions quickly. Will you cut and run at the first sign of trouble or
stubbornly wait it out? In other words, answer A says you are likely to
take a quick stop-out. Answer B indicates you will nurse a trade, no matter
the discomfort.
Know Yourself, Know Your Setup 145

2. You are driving down a two-lane highway on your way to work.
Suddenly a sports car tries to cut you off, nearly clipping your
fender. You:
A. Slam your horn for at least 15 seconds and wish the driver dead.
B. Hit the brakes and let the driver pass unimpeded.
This question tries to ascertain your ability to react to surprising and
uncontrollable situations in the market. Do you stoically accept the fate
that is dealt you or do you fume in furor over the injustice over it all? Put
simply—can you take stops well?
Again, this is not a moral question, but rather one of style. If surprises
really unnerve you, the solution is not to learn to repress your emotions
but, as we’ll see later in the chapter, to apportion your capital in such a
way as to avoid a death spiral of impulsive, reckless trading caused by
loss of control.

3. Assume you are capable of doing both activities. What’s more fun?
A. Fishing.
B. Downhill skiing.
Surprisingly enough, this is a question about trend and countertrend
trading. Fishermen trend, skiers fade. Before I receive letters of protest
from trend-following skiers and fading fishermen, allow me to explain.
Fishing requires time, methodology, and, most importantly, patience. Fishermen,
like trend traders, will cast their line many times before they get a
bite. Downhill skiers, on the other hand, look for a quick thrill with a very
specific goal—end of run. This psychological drive is similar to that of
faders who seek quick profits as currency prices make a quick retracement.
Does fishing always lead to trend trading and skiing to countertrend
trading? Of course not. However, the activity you choose suggests a definite
predilection for one style versus the other.

4. The Powerball lottery is $100 million. You are at a newsstand buying
a magazine when you discover a crumpled $20 bill in a shirt
pocket. You:
A. Buy 20 lottery tickets.
B. Put the $20 in your wallet.
This question is really a measure of a trader’s preference to trade long
shots. If you are willing to bet the lotto, that means you are willing to take
a very low-probability trade. Again that fact in and of itself is not necessarily detrimental to a trader’s success. As we will see later, if done properly
currency speculation allows the trader to place highly improbable
bets while limiting overall risk. However, if you chose A, you need to understand
that you will most likely lose. A very common problem among
traders is the tendency to trade long shots with the expectation to win frequently.
This inability to reconcile action with expectation probably leads
to more trader failure than all other problems.

5. Your favorite entertainer is in town for a surprise show. Your
choices are:
A. Get up at 4 A.M. on Saturday morning to get tickets at the box office.
B. Buy tickets online for a show nine months later.
This is a question of trading goals. Do you seek immediate gratification
and are willing to pay the price to get it? Are you willing to stare at
the screen 18 to 20 hours 5 days per week and then scrupulously review
every single trade over the weekend? Then you most likely picked A. Or
are you more long term oriented? Are you willing to delay your desire for
quick cash in order to live a less-demanding lifestyle? Then B is your
choice. Note if you picked B but have the goals of a trader who picked A,
you are unlikely to realize them.

6. What is worse:
A. A constant low-grade toothache for a month?
B. Having your wisdom tooth pulled with no anesthetic?
Since neither choice is at all pleasant, this of course is a question
about stop-losses. The issue that this question tries to determine is this:
Are you more comfortable taking a long series of small losses or would
you rather take an occasional large loss? How one honestly answers this
question is crucial in determining what style to trade.

7. For the next 52 weeks choose one:
A. You will be paid $2,000 per week.
B. You will be paid $700 per week with a reasonable chance but no
guarantee to collect a $250,000 bonus.
No doubt entrepreneurially minded, free-market-loving traders would
scoff at the idea of a steady paycheck and will inevitably choose B. But
check your ego at the door and ask yourself, are you really comfortable
Know Yourself, Know Your Setup 147

with this type of volatility? In choice A you stand to make $104,000 per
year. In choice B you make either $286,400 or only $36,400 per year. In
other words, you can almost triple your salary of choice A or make only
about one-third as much. If this disparity truly doesn’t bother you and you
therefore chose B, then a highly aggressive, high-leverage strategy may be
more your style. However, if wide disparity in outcome does bother you,
that type of trading will be financial suicide. Instead a totally different approach
must be pursued.

Article by Boris Schlossberg