Friday, 24 February 2017

Lesson 2 – Introduction to Forex Trading - Understanding the basics - Part 2

Three Steps to Help You Avoid Over-trading

Another common flaw new traders have is over-trading.

Traders who are prone to this will know who they are. They’ll be no stranger to seeing their account turn positive on the back of a few good trades, only to get excited and lose it all and more in the next quick run.

Often, just as they think they’re getting the hang of it, they get another shock, and are left disheartened and disillusioned.

So what’s the difference between these traders and the pros? Well, there are three distinct things that can help.

1. Keep a Trading Log

forex trading log

I keep saying it but it's important!

The first one relates to your trading log. To give you a real life example, one new trader had a similar issue to the one described above - after winning a few good trades, he would then go on a losing streak and give back all of his earnings.

So, like all good traders should, he started to keep a log of all of his trades, specifically writing down the exact time, signals and charts he was using.
It turned out that when he reviewed his log at the end of the month, his problem was simple. In the UK morning session he made money, but in the US session he gave it all back. The solution? End the trading day at lunchtime.

So it’s very important for traders to keep a detailed log. Whether you are winning or losing, make sure to review your trades on at least a monthly basis, if not weekly.

It’s unlikely the challenge will be as simple as the above to fix, but keeping a record of times and set-ups allows you to understand where there may be patterns in your behaviour. Just remember that not all losing trades are bad trades.

2. Stick to a Trade Limit

rolls of dollar bills

The second challenge is understanding how many trades to place.

Most pros aren’t in lots of trades each day, they are only trading when their targets and set-ups hit perfectly.

It is therefore important for traders to avoid taking every possible trade, stop trying to jump on trades that have passed, wait for the right signals – and above all, be patient.

If you don’t trade for several days, or even a week, it isn’t an issue. It is far more important to be primed to play again tomorrow when a perfect set-up might come your way, than to trade a rubbish set-up today and lose capital.

If you really struggle with this, limit yourself to a number of trades per week. For example, tell yourself you are only allowed to take 5 trades a week. Therefore they have to be just right, as you won’t want to waste one of your 5 trades on a set-up you’re not deadly certain on.

Remember, its quality not quantity.

3. Stop Picking Tops and Bottoms

fx chart

There is no need for traders to be picking tops and bottoms, unless you are an absolute pro. In fact, even the pros cannot do this on a consistent basis. What makes them ‘pro’ is that they realise this fact themselves. It is a very difficult style of trading, requiring incredible timing, and there isn’t really any need for a retail trader to be doing this.

A useful tip to new traders is to trade with the current bias and trend of the market.

“The trend is your friend” is a line most have heard before, but it isn’t just a fancy saying for traders. It can save you a lot of money.

If you are really struggling to trade with the current trend, here’s a tip. Turn off Twitter and any similar news feeds where every analyst is providing you with conflicting turning points on a second by second basis.

(If you still rely on these feeds, then ensure you keep all the details in your log so at least when you go broke you will have something to remind you of how it happened.)

Seriously. Turn everything off. Only trade your charts, ignore the news, don’t read the paper, only trade what you see – then review your performance and understand whether it was really helping or hindering you.

All you need to remember is that it is not important if you are right 90% of the time, or 10% of the time, or even just 1% of the time. All that matters is that you make money consistently.
Traders should not be in the business of being right. They are in this to make money – don’t forget this fact.

The majority of trading is about good money management, and great traders focus primarily on risk management. There is a famous saying: “a great trader can get into a trade on the flip of a coin and still remain profitable”.

This may not be strictly true, but it does highlight the importance of managing risk, which will be covered in the next part of this lesson.

< Lesson 2 Part 1

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