Trading currency pairs in the world of foreign exchange is a high-risk endeavor, a fact we demonstrated in our last article on the topic. But as we also stated, the way to protect yourself from becoming a casualty statistic early on in the learning process is to adopt many of the healthy habits of veteran traders.
It is estimated that one out of ten newcomers to forex eventually go on to achieve success at this risky profession. Not everyone is cut out to be a currency trader, but if you have the will, the emotional control, and the disciplined mindset it takes to survive and thrive in these shark-infested waters, then follow the plan laid out in our first article. After your preparation phase, it is then wise to embed the wisdom of veterans in your daily routine.
How do you acquaint yourself with this wisdom? Veteran traders are more than happy to share their winning secrets with fellow traders at forums, seminars, and related conferences. They understand how difficult it is to maintain a consistent record of trading gains over time and have talked freely about the competitive edge they developed to succeed. After interviews and surveys of these fellows over the years, a consensus has formed around a small group of healthy habits that we will call the “Decisive Dozen”.
Many of these bits of wisdom will not be new to you, but, in most cases, there might be a small tweak here and there that will trigger a positive response in your consciousness, enough to signal that a small change in how you do things could make a big difference. Keep an open mind as you read what follows and pick a few habits to try on for size. You will notice that veterans take patience to a new level and often do exactly the opposite of what you might think is a winning formula. The psychology of trading is very important to them, as well. The more you understand crowd mentality, the better off you will be.
Here then is our version of the “Decisive Dozen”:
#1 – Avoid using money as a measuring stick for success.
If you are to win at this game, you are taught that you must treat it like a business and to be successful, you must make money. The shear thought of putting money on the line in a market can mess with your mind big time. Veteran traders understand how thoughts about money can put added pressure on your ability to perform, a negative issue that must be dealt with daily. The solution – Veteran traders develop the discipline to follow rules and their plan to the letter or focus on their winning percentage of trades, knowing that, if they do, the money will follow as a direct result.
#2 – To win, you must develop your personal competitive edge and refine it.
You will rarely find two veteran traders that think alike or use the same strategy, but each of them will tell you that they had to develop their own personal way of obtaining an “edge” and then adapting it to changing market conditions. After commissions and fees, trading forex is actually a net-negative game. Forget zero-sum. To win, you must pick your moments to leverage your “edge”, which could be as easy as waiting for a forceful trend before acting or using a particular indicator in a specific way. Whatever it is, make it your own, refine it, and stick to it.
#3 – Use Technical Analysis as a barometer of buying and selling forces.
Too often we get caught in watching our charts for crossing indicator lines, but veterans use TA specifically as a gauge to measure how buyers and sellers are changing their thinking in real time. Are forces increasing at an increasing rate? If momentum is being created, it often overshoots the mark, a nice thing to know when looking for an edge. These subtleties may only be discernible from how candlesticks or Fibonacci levels are forming, but monitoring changing sentiments in real time can make for better entries and exits.
#4 – Follow strict position sizing rules, but be prepared to jump on winners.
Obey risk and money management rules when sizing your positions. By limiting the size of your bets, you develop the stamina to outlast bad trading days, which are a fact of life. Another fact of life, from a veteran’s perspective, is that the majority of their trades will net to zero, but they win by having a few big winners during a month. They are very patient, waiting for these rare moments, but, when the stars align and their analysis is spot on, they will adjust position sizes upward for advantage. When the market shifts, they reduce again immediately. Pick your winners, and cut your losers in a flash!
#5 – Before establishing a position, know your exact exit point criteria.
If you followed your risk rules in “#4”, you would have determined a risk/reward ratio that would have set your stop loss and take profit points, before you even entered the market. Veterans also make an adjustment for volatility by using an Average True Range (ATR) indicator to advantage. More volatile markets equate to more risk and potentially for more reward, as well. If you let a winner run, it will depend on your assessment of market force momentum and whether you are conservative or aggressive.
#6 – Visualize the right side of your chart rather than focus on the left side.
Professional golfers are always visualizing their next shot with a pre-set routine that never varies. Veteran traders do the same thing in a way. They look to the right of price action on their charts and visualize how the candlesticks will form going forward. It helps to have Bollinger Bands to guide the process, but this is a developed skill, meaning it takes practice to acquire it. Try this one on for size over time. If you give it a chance, you will develop confidence in predicting future price action, which is your primary goal in the first place.
#7 – For once and for all, give up trying to pick tops and bottoms.
Have you ever been tempted by an offer that is too good to be true and then regretted it? Forex fraudsters are adept at plying these tempting attempts to rob you, but, as a trader, there are two such temptations that must be avoided at all costs – tops and bottoms and the tempting pastime to predict their occurrence to the minute. We regret doing it, but then we immediately jump at the chance to get it right next time around. All veterans have learned that predicting tops and bottoms is a fruitless exercise. They go for the “meat” of the trade, the middle portion of the trend. You should do the same.
#8 – Do not fight the tape – Go with strength and short weakness.
This habit naturally follows the previous one, as one more chance to emphasize the obvious from a veteran’s perspective – be patient enough to wait for the trend to form. If the move is up, bet into the strength, and ride it for all it is worth. That last point requires more patience, as well, but, if the move is down, then short into the strength of that movement. Trying to fight the tape can be fun, but being right about the market is not what trading is about. It is only about taking what the market is giving you right now.
#9 – Learn to accept anxiety and use it as a weapon to sharpen your focus.
Hollywood has always portrayed a successful trader as someone with ice in their veins, surrounded by a multitude of screens screaming financial opportunity across the globe. He strikes and is handsomely rewarded. Anxiety never enters into the equation. NOT! We have never encountered a veteran trader that does not feel anxiety before and during a trade. When instantaneous decision-making is involved, there will always be anxiety since you will never have enough information to make a perfect decision. All veterans know and accept this axiom and then use anxiety to focus their efforts.
#10 – Replace panic with the right kind of patience when evaluating exits.
When in doubt, we typically do nothing, especially when it comes to closing a position, whether for a gain or a loss. Wealthy traders have learned their lesson long ago that there is a right kind of patience to be employed when acting upon an exit decision. It is the opposite of what you might think. If they have doubt about closing a losing trade, they become very impatient and shut it down on the spot. If it is a winner, then the real patience kicks in to determine if it should be extended or if the position size should be increased. Learn to be patient at the right time and impatient, as well.
#11 – Never ever add to your position on a losing trade.
Why are casualty rates so high in forex trading? Most newcomers are never prepared for what they think they expect. Impatience kicks in when chaos is encountered. If you review their winning and losing stats, you find a number of large losing trades and hardly any large winning trades, the opposite of what it takes to survive. They throw money at losing trades in the hope that things will turn in their favor, ignoring the wisdom of habit #10, and falling victim to one more temptation. Never ever add to a losing trade.
#12 – Forget the past – There is always a new opportunity around the corner.
Our last habit is about forgetting the past. Do not get caught up in second guessing your mistakes. Mistakes happen, as do losing streaks. They are both part of the game and happen to everyone. Focus on the good decisions that you have made and loving your winning streaks. They happen, too. No matter how badly the market is treating you, it changes like the weather. Give it time. Return with confidence, and realize that there is always another opportunity just around the corner, waiting just for you.
And there you have our list of healthy trading habits, our “Decisive Dozen”. Try to incorporate a few of these in your daily regimen, and, who knows, you, too, may become healthy, wealthy, and wise, like many veteran traders before you. Happy Trading!