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Forex Beginners Guide: 4 Pivotal Rules to Trading Success

February 19
20:20 2018

Today’s Forex Beginners Guide breaks down the 4 most important aspects to becoming a profitable forex trader. Over the last 13 years of trading, I’ve run had the opportunity to talk to well over 15,000 traders, 5,000 members of DTFL alone. Through the years I’ve also met many profitable traders, most of which traded different strategies. What I always found interesting is that while they all traded different strategies, they all stuck to these 4 rules.

Enjoy and please leave any questions or comments you have below.


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Video Transcription Below:

Hello, everyone, it is Sterling here from Day Trading Forex Live and in this video, I’m going to show you what I believe to be the four most pivotal aspects to becoming a profitable trader. Now I term this as a Forex beginners guide. I started trading at 17 I’ll be 31 shortly, so a little over 13 years. If I could take all that information and boil it down to the most important aspects, what would I teach myself at the beginning? What would I teach myself to help me expedite the learning process? Because for me, it took me about three and a half years before I was consistently profitable, and it wasn’t until my mentor personally taught me these four aspects and really ingrained into my mind the importance of these aspects.

What has been unique over the last 13 years of my trading, is that after I implemented these in my trading, that was literally the turning point for me in my trading, and it had nothing to do with strategy, that’s the other aspect. What was unique about it is that every single profitable trader I have met in that period of time has followed these four rules to a tee. I mean they might make slight variations to it, but they follow the sentiment of these four rules.

So what I’m telling you is if you are struggling right now, you’re new to the market, or maybe you’ve been around the market for multiple years. It’s not just a beginner’s guide for those that are new to the market, but also a beginner’s guide for anyone that’s not yet profitable. If you’re not profitable, then the fact is you have to make some changes. If you want different results, you have to perform different actions. What I’m going to show you today is the four crucial rules to turning your trading around. Before we get into that, let me just state that I worked on shortening this video, but the fact is guys, I don’t want to shorten this video just to appease those that don’t have an attention span. So what I’ve decided to do is to make it as long as I need to, and quite frankly if somebody doesn’t have the time to stick around you’re probably not going to have the patience to be a profitable trader.

The first thing I want to cover is why mindset is so important, because these four rules, although not strictly mindset related, they go back to mindset. The reason they’re so important is really illustrated in a guy named Roger Bannister. It’s probably a guy that many of you have never heard of, but he was the first guy to run the four-minute mile. Now you might be thinking, what does the four-minute mile have to do with learning to trade Forex? Well, what’s interesting about the four-minute mile is that up until Roger Bannister ran the four-minute mile in I believe 1956 or 1953. Up to that point, no one had successfully run a sub 4: 00-minute mile. What’s unique about that, is that within the same year he ran the 4-minute mile, some 16 or 17 other runners were also able to break the 4:00-minute mile barrier.

So what was it about him running the four-minute mile that suddenly allowed all these other runners to do it as well? The point I’m making is that it wasn’t their training or anything else that changed, it was the simple fact that they now believed with 100% confidence that their goal was achievable because they saw somebody do it. They saw Roger run that four-minute mile so they knew for a fact it was possible. Because they knew it was possible in their mind, that was what facilitated the physical action. Now I’m not telling you that positive mental attitude is the key to trading success and anybody that’s telling you that is just blatantly lying to you as that’s not the case. What I can tell you is a negative mental attitude, whether knowingly or unknowingly can hurt you. I’m also going to explain how it can be that you have this negative attitude affecting your trading unknowingly.

Whether you know it or not, a negative mental attitude has a dramatic impact on your trading. To illustrate, I want you to think about any time you’ve achieved some level of success in trading. Maybe that’s a couple weeks of profitable trading, or maybe that’s five, six, or seven trades in a row that were profitable. What inevitably creeps into the back of your mind? Now I’m no different than you, so if this crept into my mind at that time then I know it did yours as well as human nature rarely deviates. What crept into my mind was, “I wonder when this winning streak is going to come to an end?” Or, “I wonder when I’m going to blow up this account?” You could have also just had an uneasy feeling about those five profitable trades, or about that two weeks of profitable trading, or whatever it may be.

You had an uneasy feeling because you have a history of failing prior to that success. The subconscious mind has seen this numerous other times, and the longer you’ve been trading the more baggage there is. So what the subconscious mind is seeing, is limited periods of success and then a blow-up, success and then a blow-up. So what happens when you have that success? Inevitably your mind goes, “I’ve seen this before, and I’ve also seen what comes next!” That’s when those negative trades start coming in. That’s when you start revenge trading, overtrading, and all the other aspects that come along with a mental failure or a mental breakdown.

What I want to do is to change what you perceive to be the keys to success, as the longer you’ve been trading the more baggage you have, and thus the more important this is for you. Changing that perception of success gives your mind a new goal. If your mind has a new goal of what it takes to be successful you don’t have all the other mental baggage. At the very least it’s pushed off to the side in the most effective way we can. Changing your perception of success is what I’m going to show you today. I’m also going to show you the four keys to successful trading. When you see them, you’re going think that they are much lower than what you would have shot for prior to seeing this video. Because they’re much lower than what you shoot for right now your mind is automatically going to put you in a state where you think, “yeah I believe that’s possible!” The importance of that positive belief is going to make sense shortly. Having said that, just because you believe something’s possible you have to also know that it’s extremely profitable as well. Otherwise, as far as trading is concerned, what’s the point?

I’m also going to show you the four rules that you should use to guide your trading. Because you’re gonna think these are much lower than average I’m going to run the numbers on exactly how it would grow an account. Let’s get right into it!

What are the four aspects of turning around your trading? Number one is the win-loss ratio. I’m going to break all these down one at a time, and then I’m going to run through the numbers. Anyway, the first point is win-loss ratios. I want you to change what that perception of success is or what you perceive to be the key win-loss ratio to success, and I want you to change it to a 50/50 hit rate. Again, I don’t claim to know what’s in your mind, but over the last decade of educating traders on the way that I trade, 80-90 percent of them shoot for a number higher than this. I’m not saying that they are wrong or right, I’m just saying they do, and that’s having spoken to 15 or 20,000 traders over the last decade, 5000 of which are members of Day Trading Forex Live alone. A 50/50 win/loss ratio is statistically way on the low side, as most people are shooting for a number much higher than that.

The 2nd rule of the 4 pivotal rules to trading successes is the only number of the four that is going to be statistically higher than what most traders aim for, and that is a two-to-one reward to risk ratio. All that means is that if you’re risking 20 pips, you’re looking to gain 40. If you’re risking a hundred pips, you’re looking to gain 200 at least. We’re talking about a 2 to 1 reward to risk ratios, or you could think about that in terms of percentage gain or loss which I will explain in a second. So if you’re risking 2% of your account value, then you would be looking to gain 4% as your take profit. A positive reward to risk ratio allows for a 50/50 win/loss ratio. A 50/50 hit rate is extremely important, let me illustrate. If I went to you and I said: “your life depends on you winning 70% of your trades this month and you have to take at least 12 trades.” So imagine that your life literally depends on you winning 70% of your trades. Now I go to you, and I say, “option number two requires you
to win 50% of your trades.” Which one are you going to take? Obviously, you’re going to choose option #1. That is a very simple way of illustrating that your mind instantly believes option #1 is much more achievable.

What this exercise should do is change your mindset going into the trading day. Now that you believe it is possible to win 50% of your trades, you have to also see how profitable it is once you achieve a 50/50 hit rate. Then you’re gonna go into the day with not only the belief that it’s possible to hit your goal of winning 50% of your trades, but also the knowledge that it’s hugely profitable.

Number 3, limit the number of trades you have per week to 3 trades. You can increase this number down the road, but in the beginning stick with 3 trades as your max number of trades in a given week. There is an inverse correlation for certain between the number of trades somebody takes and their probability of success. The more trades somebody takes, the lower the probability they are a successful trader. Again you may be the anomaly, but I can tell you that after dealing with close to 20,000 traders over the last decade that is a statistical fact which consistently holds true. I know a lot of people that own brokerages, as well as those that are major parts in brokerages. Speaking with them this number is consistent among many more than just the 20,000 traders I’ve spoken to over the years.

Number four is risk per trade. Again these two numbers are going to be lower than what most people shoot for. Two percent risk per trade means if you have a thousand dollar account you’re going to risk no more than $20 per trade. If you have a ten thousand dollar account, which is what I’m going to run all the figures on here in a second, you would risk no more than $200 on any one given trade. So these are the four pivotal rules to trading success. Now, this might seem overblown or overstated, but let me show you what this does over the course of time, and you can decide how powerful it is for yourself. Now I’m starting with a $10,000 account balance here, and we’ll get to that in a second. First I’m going to illustrate how you can get to the point where you have an account balance that you have the ability to grow. In other words, if you don’t have any money how do you get money? I’m gonna cover that as well here in a second. To begin with, let’s go over those numbers I just showed you, those four crucial aspects to success and illustrate what it would produce in a month. We have to know what they produce in a month to then compound it month after month for one year two year three years.

Three trades per week equals twelve trades in a month, right? If you win 50% of them and you lose 50% of them, you’re gonna lose fifty-six year twelve trades, and you’re gonna win six of your twelve trades. We’re risking 2% per trade, so six losers times negative 2% equals negative 12 percent. You’re gonna lose 12% on the six losing trades out of the twelve. On the six winning trades out of the twelve trades total, you’re going to make plus four percent on each trade. Remember two to one reward to risk ratio, so if you’re risking 2%, then you’re looking to gain four percent. Four percent times six trades equals plus 24 percent. Plus 24 percent on your winners, minus negative twelve percent on your losers results in a plus twelve percent monthly gain. On those figures, I just showed you it’s a plus twelve percent monthly gain. Now what I’m going to do is I’m even going to shoot lower because I’m gonna walk through three different examples of compounding over the course of time using even lower numbers. What I did on this slide here is break down what the results would be if you won only five out of your twelve trades. That means you lose seven trades and you win five out of the twelve. That’s a win-loss ratio just a little bit under 42%. In that case, you’re not much over a 40% win-loss ratio! Let’s do the math and see the results! Again, seven losing trades at two percent risk per trade equals negative 14 percent (7 Trades X -2% P/Trade = -14%) on your on your seven losing trades. On your five winning trades, you’re making four percent each trade. Four percent profit per trade times five trades equals plus twenty percent (5 Trades X +4% P/Trade = +20%). Plus twenty percent minus negative 14 percent from your losers results in a combined total of plus six percent that month.

Now I ran the numbers on plus twelve percent, plus nine percent, and +6%. You’ve seen the numbers on +12% and +6%, but a way you could get to +9% using this exact figure here, is if you just changed the risk from two percent per trade to 3 percent per trade. I don’t highly recommend that but if somebody were to do that using a 41.6% hit rate as I’ve Illustrated here, this would be the result. Seven trades at 3% risk would instead be a 21 percent loss. Then five trades times +6% would equal +30%. Plus thirty percent minus negative twenty-one percent would come out to plus nine percent monthly profit. This is just another figure you could run with a slight variation of the numbers that I’m illustrating. That’s why I said at the beginning, ‘while every profitable trader I know follows these rules, they don’t follow these rules to an exact tee.’ They may make slight variations, normally even more conservative through the numbers I showed you, not more aggressive.

Now I’m going to change over to the next slide here, and this is where I’ve actually broken down the numbers. This is where again, it’s important to understand why all those other rules are in place. For example, it’s important to understand the win-loss ratio we Illustrated and why that affects your mindset going into the day. Next, the reward to risk is really the key to profitability as a 50/50 hit rate and a one to one reward to risk ratio is break-even at best. Likely you’re actually losing money because of the spread. Therefore, your two to one is is to offset your lower win-loss ratio. Then you have the two percent risk per trade rule. That’s there so that you’re not so mentally tied to any one trade. You can be disciplined you can be patient, all things many retail traders lack. Finally, limiting yourself to 3 trades is crucial as it reduces the chances of you revenge trading, over trading or boredom trading. If you know you only have a limited amount of trades per week you’re going to be more disciplined and patient as you wait for those correct setups.

We then did the math on those numbers, and we found out that on a fifty-fifty hit rate with a two-to-one reward to risk ratio, taking only twelve trades per month, and risking 2% on each and every individual trade, it would result in a twelve percent growth per month. Now we’re going to take twelve percent per month, and we’re going to compound that month after month after month to see what it would equal after one year, two years, and three years. We’re also going to do that on the twelve percent per month figure, the nine percent per month figure, and the six percent per month figure on a 10k starting balance.

I’m gonna start off by saying that might look at that 10K starting balance and say, “well I don’t have a hundred dollars!” Use whatever number you have in these calculations. Maybe it’s a hundred thousand; maybe it’s a hundred dollars. The other point that I would make is that everybody looks at this as an insurmountable number, meaning getting a starting balance to trade with. I can promise you that learning to trade profitably is the much more difficult part. If you are a profitable trader and you just don’t have the money to start trading just shoot me an email, and we will get that taken care of! Getting money to trade with is the easy part. Quite frankly, getting you money to trade is not even a small problem, the problem is becoming profitable!

Going back to our compounding example, how much does the account grow over the course of a year if you compound a $10,000 account by +12 percent per month. For 12 months and it would come out to over $38,000. If you compound it over the course of two years at 12 percent per month, it will grow to over a hundred and fifty-one thousand dollars. At the end of the third year, it compounds to just shy of $600,000. Now think about that for a second, what does the thirty-seventh month produce? Well, at ten percent growth it would be fifty-nine thousand dollars, so twelve percent would be at least 10 to 12 grand on top of that! So seventy one thousand or seventy thousand, somewhere in that region. The point is that it’s a huge monthly number! Once you’re crossing six figures, you’re probably going to be dropping your percentage risk down lower to one and a half percent or one percent risk per trade. Even on half of that monthly profit, you can see what I’m talking about with compounding an account over the course of time. That’s why Albert Einstein called ‘compound interest eight to wonder of the world.’

You can’t make the type of money for your account that steady consistent compounded growth can make you. What I mean by that is you can’t take a hundred thousand dollar account and just start making fifty, sixty, or seventy percent per month. You might be able to do that for a month, but you’re not gonna do it for a year. The best traders in the world and the best hedge funds in the world don’t run those type of numbers. Nobody does, and again anybody that’s selling those type of numbers is being naive at best and more likely deceitful. You probably bought into a few of them as I did myself. It shouldn’t be a shock to you that every single time they come up short!

We also did the figures on nine percent. It’s important to remember this was with a 42 percent hit rate with everything the same except for three percent risk per trade. At the end of three years, that equals two hundred and four thousand. No one should think I’m saying that this is easy as that’s not what I’m trying to illustrate. I’m not trying to illustrate that you should expect this either. I’m not trying to illustrate that anybody can do this, but what I’m saying is that your best chance of success is following the four rules I Illustrated at the beginning and then concentrating on steady compounding over time.

Using the final numbers let’s see what six percent per month grows to at the end of three years. Again using a $10,000 account balance, if you compounded it by six percent every month for three years, it comes out to eighty-one thousand. So what would your thirty-seventh month look like? We’re dealing with six percent growth which would result in a monthly profit just over $4,800.

It’s important to put this timeline in perspective because the comment I always get and what you’re probably thinking as is, “Well god, I had a much much shorter time horizon when I came into this market. I thought I could take my hundred dollars or my thousand dollars and turn it into a hundred thousand in a matter of weeks or in a matter of months. But a matter of years, that wasn’t what I was after!” It probably wasn’t what you’re after, but up to this point you’ve probably seen that the get-rich-quick idea is just not working! The fact is, 36 months is going to come whether you like it or not. If you’re anywhere above the age of 30 you probably understand how fast time accelerates. I’m only thirty years old, and it amazes me how fast time accelerates the older I get. So the time is going to pass, it’s just a matter of where you’re at once this time passes. If you continue down the same path you’re on then it’s going to lead to the same results.

My recommendation is that you sit down with a pen, a piece of paper, a calculator you write out your starting balance. Then you write down month by month growth, all the way through five years. In doing so, you’ll see just how quickly an account grows.

So what are the four points I want you to take away from this video? Again, I don’t care what strategy what time frame you trade. Your trading strategy does play a small part which I’ll talk about shortly, but let’s first cover the four main points and then I’ll detail number five.

#1 – Accept a 50/50 hit rate. It is far easier to have a low win/loss high risk/reward strategy, versus a higher win/loss lower reward/risk strategy, and my opinion it is also more profitable! If you want to prove this to yourself, do the math on a 70% win-loss ratio and a one to one reward to risk ratio compared to a 50/50 win-loss ratio and a two to one reward to risk. What you’ll find is that the 50/50 hit rate with a two-to-one reward to risk, is far more profitable than the trader that won 70% of their trades on a one-to-one reward to risk ratio.

After hearing that, the initial thought for many of you will be, ‘what about winning seventy percent of your trades and having a two-to-one reward risk ratio?’ To that, I say good luck! I would love to have a trading strategy with a reward to risk and win/loss ratio that high, but the fact is it doesn’t work out that way! When you increase one, you will minimize the other. By increasing the reward to risk ratio you’re going to decrease your win/loss ratio, that’s just the way it works. What I want you to shoot for is a 50/50 win/loss ratio because it’s far easier to be a successful trader that way.

#2 – Number two is a positive reward to risk ratio of two to one as a minimum.

#3 – Limit the number of trades you’re going to take a month to 12. There is an inverse correlation between the number of trades you take and your probability of being a successful trader. That is a statistical fact that I have found true over the last decade of educating traders, dealing with at least 15,000
and probably closer to 20,000 traders.

#4 – The fourth point that I covered was using a safe risk per trade of 2% of your total account balance. If you want to go a touch higher to around three percent, that would be an absolute cutoff for any account over 20k. Personally, I’d consider that type of risk way too high personally, and I would prefer to see people at the 2% risk figure or under.

#5 – Number five is the trading strategy that you use. Now I didn’t talk a great deal about strategy through this video because, in my opinion, a strategy is a smaller portion of what it takes to be successful than the four mentioned earlier.

The 4 points covered earlier are really the critical aspects, but not every strategy is designed to produce a high reward to risk ratio setup. There are many strategies that are not designed for a higher reward to risk ratio, so you need to examine your strategy. The forex bank trading strategy which is the strategy that I teach is designed to capitalize on the reward to risk ratios. We don’t run high win-loss ratios as we probably average fifty to fifty-five percent. With those type of numbers and a positive reward to risk ratio, it’s very profitable. Having said that, you have to have a strategy that is designed to capitalize on the reward to risk.

If you find that your strategy is just not designed to capitalize on the higher reward to risk scenarios, then you need to start looking for something that is. Maybe it’s the Day Trading Forex Live bank trading strategy, or maybe it’s another strategy. Whatever it is, it needs to be able to capitalize on the higher reward to risk setups!

Well guys, I hope you enjoyed this video! This is going to be the first of many videos where I’m in front of the camera. I got a new setup for doing some of these videos (and a revision to the Bank Trading Course), and I think they’ll be quite useful. I will be walking through some tips and tricks I’ve found over the last 13 years of trading that I wish I would have known in the beginning. If you have any ideas or things you would like covered, feel free to leave it in the comment section below this video. Additionally, feel free to ask me any questions that you might have, ‘like’ the video, subscribe to the channel, and I’ll see you all back for the next one. Until next time happy trading.