Forex is Not Gamble “Important Risk Management”
Trading is all about managing risk
The management of risk sets a trader apart from a gambler playing roulette at a casino.
Trade position sizes should be limited to the amount a trader is willing to lose.
The idea being that one trade should not be sufficient to wipe out an equity balance.
A trader needs to aim to incur acceptable losses and consistent gains.
The risk to reward ratio should preferably be biased to booking profits that are larger than losses.
In terms of hard and fast rules, how much a trader should risk on any given trade is very much down to their risk appetite and experience.
However stop loss levels could vary between 0.5 – 5% however many professional trades will risk at the most no more than 2%.
Risking more could mean that a trader is over leveraged or has misread the market
Sitting on a position that is 5% underwater does beggar the question of how wrong must to a trader be to be right?
Forex must come with “Stop Loss” otherwise….?
Formulating a great trading strategy will not be enough if a trader does not have the discipline to follow the trading rules.
The market will always give a trader another opportunity; therefore chasing a moving market or trying to second guess the market and ignoring the rules of the strategy lead to the traders equity balance to be damaged or exposed to greater risk.
Furthermore ignoring rules such as tampering with margin or stop loss and take profit levels during the trade will lead to uncertainty and in-consistence results.
Trading requires the discipline to enter and manage the trade according to predefined rules.
Aim for achievable expectations
Trading is a race between knowledge and capital
During the learning period it is the goal of a new trader to learn as much as he/she can.
This may require reading books, attending seminars and training, practicing on demo accounts, formulating trading strategies and test strategies on demo account.
However a learning process has no value if a new trader does not test these ideas on the market with a live account.
A trader can only sharpen his or her knowledge through live trading.
This leads to a race between knowledge and equity.
The more knowledgeable and experienced a trader becomes the less likely that losses will be incurred and the more likely that profits will be booked.
At some point in time a new trader will cross that magical line where the trading knowledge and experience leads to profits being booked on a regular basis as well as a consistent trading style.
A traders expectations should also be in line with what the market will give back to the investor.
Traders need to be able to place both stops and take profits which are in line with underlying market volatility.
Furthermore a trader who aims to take 120 pips on daily positions whilst the average range is 80 pips will lead to disappointment.
It is the duty of the trader to understand the financial instrument and how it typically moves.
“Trading Plan” Here is what Successful Traders do every day
A well written and detailed trading plan will go a long way to easing the anxiety that a trader will feel about trading.
Furthermore a strategy that is logical, robust and that has been tested, will give the trader a chance to pull the trigger and enter the trade when the trade set up presents itself.
To be a successful in the financial markets a trader will need to:
- Define their trading strategy
- Have a disciplined approach to trading
- Have a achievable expectations
- Be patient
- Use tested money & trade management techniques
Professionals Defines the Trading Strategy
Consistent profits can only occur through the consistent application of a proven and well thought out trading strategy.
Trading off hunches and estimates might work on occasion but in the long run will surely grind down the value of an investors equity.
A trading strategy must be thoroughly researched, be based on logic and well thought out.
How the execution of the strategy must be clearly stated and documented in a step by step process.
All the components that are used to create a trading strategy must be of value.
Integrating indicators and components which make the strategy unnecessarily complicated will slow down and cloud a trader’s decision process.
The strategy ultimately is written to allow a trader to benefit from their knowledge
This can only be achieved if the trading strategy clear states:
What event of events will trigger the trader into taking action?
- What is the exact entry level?
- What is the Stop Loss level?
- When does a trader take a profit?
How Greed, Fear and Hope can ruin your Investment Career
The catch phrase during the years of the well respected and now retired head of the Federal Reserve Mr. Alan Greenspan was irrational exuberance.
Traders feel the need to make huge profits in the shortest period of time possible
The sharp market operators sense that a big move is about to happen, they therefore minimize their risk and book profits according to a well thought out plan.
Less experienced traders, do not always anticipate moves like that.
Fearing that they have missed a great opportunity they jump onto the trade.
Soon, the find themselves into the black as their unrealized profit begins to rise.
However this trader did not have an entry plan and certainly did not have an exit plan.
Big and Common Mistake of Beginners
The possible outcome to such a trade is therefore in a state of flux.
This type of trader may get lucky and close the position for the maximum profit available.
It is however more likely that the greed takes hold as this trader gets excited and feels an emotional high as his unrealized profit increases dramatically.
The market then begins to fluctuate. The trader reinforces the positive feeling about this trade by telling himself,
“don’t worry, it’s just another consolidation.”
Then the price slips lower so the trader sets an imaginary stop under the current price action.
The trader anxiously watches the market as the price action ticks down ever so closer to his soft stop.
His stop is then breached.
He tells himself
“the market is wrong, this is just a minor correction”
but the market moves lower.
The trader now places another soft stop just above the entry price.
The price action inevitably heads lower and before he has time to contemplate what is happening, a profitable trade is now in debit.
With his position now underwater a sense of fear and hope takes control of what should be a rational trader.
This trader now is hoping that the selloff has run its course.
He tells himself that if the position goes back into profit he will close the trade with a small win.
Then he thinks about the opportunity he missed in booking a large profit and that next time he will not repeat the same mistake.
However a simple transaction of buying low and selling higher has turned into an emotional roller coaster and a story that has an unscripted ending.
All this could have been avoided if the trader had a trading plan in place, which would pre-define the strategy, entry, take profit and stop loss.
It is only through a trading plan that a trader can conquer his/her emotions.
Surprisingly Important Psychology of Forex Investment
The path to become a master of trading requires the student to become well versed in the subjects of both fundamental and technical analysis.
Furthermore a great deal of awareness is required to both the current trading environment and market sentiment.
It is only possible to come to a conclusion regarding through a thorough understanding of the current market conditions that it is possible to come to a conclusion regarding the direction the price action will move in during the period of interest.
Psychology is really a big part of Investment
However , having a good understanding of the mechanics that give the market its form and catalysts is not enough to master trading.
The reason is that humans are emotional machines and trading can be a very stressful occupation that brings these emotions to the forefront.
For example a day trader who employs a high volume scalping strategy, could have feelings of euphoria and depression in a short space of time.
Much like a football player who scores an equalizing goal for his team but only to see the opponents snatch a winner in the dying moments of the match; emotions of joy and despair are amplified.
Technical Analysis vs Emotion
For a trader to be successful there is a need to conquer ones emotions, especially because a trader might suffer many confidence sapping losses.
In fact some trading strategies have been created with a goal to accept many tiny losses which are wiped out by a smaller amount of large wins.
An emotional person who will trade on such a system would soon begin to question their ability and their strategy.
Emotions can ruin your Career
All traders need to hurdle what has been described as a wall of fear and greed.
In fact an old Wall Street phrase about the market, says that the market has two emotions.
“Fear and greed”
Although this sounds as a very simple way to describe the market participants state of mind, the inability to conquer these emotions will have a negative effect on an investor’s equity position.
IronFX
Comment by Diletta
March 26, 2024
Awesome bonuses, good leverage. A few hiccups, but support rocks!