Novice traders must face their mental demons before their first trade

Chris Lee

Newcomers to forex trading rarely appreciate the emotional rollercoaster ride that this venue can create. Outside of knowledge and experience, issues related to investment psychology may freeze a beginner in his tracks before, during, and even after the first trade order is executed. We typically underestimate the importance of this success factor, the ability to control one’s emotions, but it is difficult to ignore when it affects every facet of planning, observing, and implementing a carefully constructed trading strategy.

Beginners are especially impacted, but “mind games” can also influence the actions of veteran traders, as well. The recommended solution involves blocking the mind from ever having an opportunity to affect your judgment. One can accomplish this feat by approaching the market with a disciplined mindset, aided by a step-by-step trading plan that embodies entry methodology, prudent money and risk management principles, and a specific set of rules for eventually closing the position.

Having a detailed plan and sticking to it must be a habit acquired after spending hours of practice on a free demo account system. Much of your time will be devoted to recognizing mistakes in judgment or errors in basic pattern recognition. For example, a beginner might decide to enter a position, only to find that he had bought just below an established resistance level that had already been tested on several occasions earlier in the day. The detailed trading plan should therefore include rules for entry. Reviewing longer timeframes or going back over the previous trading action for the day would have prevented this execution error.

Until a higher level of trading prowess is achieved, never try to buck the prevailing trend for the day. Once again, a review of previous trades and a variety of timeframes can highlight key observations of the “lay of the land”, before the battle ensues. As in any battle, the terrain and local conditions, trends or “Fib” levels in forex parlance, must be accepted before an optimum attack plan can be developed. Use what the market gives you to your advantage is the lesson. Mistakes will happen, but, unfortunately, the path to developing good judgment often arises from bad judgment.

Beginners also tend to be impatient with their learning regimen. The desire to enjoin the battle, before adequate preparation, is a psychological misstep that often leads to early failure. Forex markets can be fickle.  Favorable patterns may have come and gone during early hours in the London market, leaving little but a few “scalping” opportunities to go around during the New York session. Patience is the watchword in these situations. Best to wait until another day than waste precious capital on a long shot. There is always another trading opportunity just around the corner, if you wait for it.

The objectives of your free demo practice time are multifold. Crafting a detailed trading plan requires time and effort, but the “fine-tuning” phase creates a better familiarity with market conditions and how to interpret your chosen technical indicators. Anticipation powers grow as pattern recognition and Fibonacci support and resistance levels become routine in your market analysis. As in other art forms, talent can only follow technique.  Once your technical and operational skills are admirable, confidence and consistency will naturally follow.

At that point, you have prepared yourself for the real market, but it is wise to pace yourself. For your initial forays, focus on a single currency pair. Most veterans recommend the “EUR/USD” as the best place to start, but the “AUD/USD” also tends to be more predictable in its pricing action. Also begin with small positions. You will need some time to adjust to real market conditions. Executions will not be as rapid as with a demo system, and since real money will be on the line, you can expect your mind to play havoc with your every move. Observe what works and keep a journal of your trades. On weekends, be sure to review your track record to pinpoint areas needing correction.

For beginners, the most common mistake that must be corrected is holding onto a losing trade for too long. Check your average gains versus your average losses. If the latter is higher, then you need more practice work on when to close your open positions or you may be trying to guess when market reversals will occur. Experienced traders have many scars from trying to pick tops and bottoms. Too much luck is involved. Wait until your indicators confirm that a reversal has taken place and that a new trend is forming. Remember that your mission is always to recognize patterns, levels of support and resistance, and signals from your trusted technical indicators to yield trades with a “60/40” probability in your favor.

In the past few years, a vast majority of newcomers to forex trading have migrated from traditional trading methods to the more exciting genre of digital options. This trading modality promises to remove the complexity of traditional trading by reducing your decisions and needs to worry about risk. Most newcomers, however, have the mistaken belief that no plan is necessary and that there are no constraints to deal with. Sadly, these traders are reduced to gambling where the “House” always wins. Stick to your plan’s entry requirements, be flexible, and always accept what the market gives you, even if you want to succeed in this new venue.

Forex trading must be treated as if it were your business profession if you want to achieve a consistent stream of “net” profitable trades. Losses are a natural part of the process, as are gains. Accepting both with equal confidence is one way to use principles of psychology to your benefit when high-stress situations might suggest otherwise.  Persistence is a winning strategy. Impatience is not.

Chris Lee

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