As 2018 draws to a close, the time is right to take stock of your experiences for the previous year and assess what needs to change to improve your record of success going forward. As experienced traders, we sometime take for granted our early learning regimen, often tossing aside many of the tutorials that we once studied and the wisdom that went with them. For that reason alone, it is good practice to step back for a moment and review what are the accepted best habits exemplified by successful veteran traders.
Many of these lessons or truths tend to be learned after enduring some pain at the hands of an unfriendly market, but life’s most important lessons must be lived before they can be learned. Risk and fraud prevention go hand in hand when dealing with financial markets, especially the foreign exchange market. It is easy to get caught up in the action and to forget many of these valuable principles, but, if you agree, then take a few moments to review each of the “habits” discussed below and then determine which ones you want to incorporate in your own trading routine for 2019.
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#1 – Money may be your goal, but set other criteria for measuring success.
Why are you trading? Is it to make a certain amount of money every month, month after month? Yes, trading is a business, but if you continually focus on money as your objective, you may find that you are putting too much pressure on your decision-making process at just the wrong moment in time. Veterans understand this psychological trap and find ways to focus on other things, like the specifics of their trading plan, especially when to hold and when to fold. If you analyze your trades, more than likely the big winners do not happen evenly over time. You must learn to take what the market gives you and to adapt as market conditions change, which they do every day.
#2 – Winning at trading is about having an “edge” and acting upon it.
Have you forgotten that the odds are stacked against you in trading? Many trader logs may have healthy winning percentages, but when all is said and done, you have experienced an overall loss that roughly equates to your commission or spread charges. Imagine that! If the odds are against you, then your plan must provide for an “edge”, your way of beating the odds. A “60/40” winning ratio, based on your native currency value, is your goal. Your “edge” will be your creation. It may be tied to better entries, Fibonacci ratios, Bollinger Bands, or your favorite indicator. It may involve waiting for a strong trend, then capitalizing on the singular opportunity. But if you depend on luck, then you are gambling, and the House always wins in those situations.
#3 – Use Technical Analysis to gauge the thoughts of buyers and sellers.
If making better entries and exits are to give you an edge, then Technical Analysis will be the best tool in your toolbox to get the job done. You may have your favorite indicators for this task, and through your practice regimen, you may have determined under which market conditions each indicator provides the best results. Veterans learn to go one step further. You want to learn when the tide is shifting between buyers and sellers. Look for repeating patterns within your charts that gauge how sentiment might be changing. Your indicators will soon be giving you more insights of value.
#4 – Base position sizes on risk parameters and the market situation.
I once played with a slot machine in Las Vegas that seemed to pay out at least once every seven times. If no win occurred in seven tries, I would hit the “10X” button, and “Voila”! I soon quadrupled my earnings. The same is true in forex trading. Manage your position sizing in line with what you see in the market. If you catch a major upsurge trend, then it may be time to increase your bet, as I did in Vegas, but maybe not by ten times. Place Stop Loss orders in a similar fashion to weigh risk and reward based on the situation. Major moves in the market may only happen a few times in a month. You want to be aggressive when those opportunities arise.
#5 – Know your exit points, for either profit or loss, before you enter your trade.
We are always counseling beginners that you must operate within the market in a disciplined manner or all will be lost. We learn very quickly that when money is on the line, our emotions can play tricks with our minds. The way around this self-defeating prophecy is to have a detailed plan and to stick with it. Part of that plan is also to know your exit points, for either profit or loss, BEFORE you enter your trade. You may of course make an adjustment, based on momentum indicators, but at your chosen point.
#6 – Learn to use an uncluttered chart and forecast future price action.
If you have moved several times, you remind yourself to eliminate clutter each time. The same is true as you evolve as a trader. Most all of us have started thinking that if we had just one more indicator, our world would be perfect. We soon learn that the “clutter” of too much information on our computer screens leads to more mistakes in judgment than the opposite. Veterans remove clutter, but they do one more thing, too. They want to visually predict where the market might go, based on what they have. This ability will take some effort on your part, but give it a try and record your success rate. Another “edge” may be in the making.
#7 – Wealthy traders gave up picking bottoms and tops long ago.
Veteran traders have become such for one major reason – they gave up long ago trying to pick market bottoms and tops. Yes, you could certainly make more money if you picked correctly, but that thinking is just short of gambling. Give it up now, or you, too, will receive the scars that a veteran will willingly tell you about, if asked. The “meat” of a trade is always in the middle of a trend. Take it and be satisfied. Do not let greed send your trading plan down a black hole. When trends take shape, the odds favor it continuing in the same direction. Let the trend be your friend!
#8 – Accept that anxiety is part of your decision-making process?
Decision-making is never an easy process, especially when you think that you need more information. The fact of life and of the forex market is that you will never have all the information that you need. That is the nature of all financial markets. The natural result is a feeling of anxiety deep in your gut, but this feeling is normal. When markets are reacting wildly, your anxiety level is supposed to go up, but veterans learn to accept this and to know when to step back from too harsh a situation. Placing a position in the market is a choice, and no one is forcing you to choose but yourself. It is okay to step back, if you need to catch your breath and reassess. Don’t be hard on yourself.
#9 – Learn to be patient with winning trades, but very impatient with losing ones.
If there is one maxim to commit to memory, this one would be it, but most traders do exactly the opposite. They cut their winners short, and let their losers run. Patience is not an easy thing to achieve when markets are on the move. The earlier tips discussed above can help with this issue, too, as you learn to gauge sentiment and predict within reasonable parameters where market action might go. The second half of the tip, however, is paramount. You must stop your losers in their tracks. Then move on.
#10 – Never ever throw good money at a losing trade.
Does this situation sound familiar: you have a position that you are sure will be a big winner, but the market turns against you. You remove your Stop Loss order to permit your loser room to recover. You quickly do the mental math that if you double your bet, you may recover your losses more quickly. NOT! Big mistake! If you review a log of a beginner, you will see many offsetting winners and losers, but then, out of the blue, there will be one or two big losers. These trades will prevent your living to trade another day. If you did not get impatient with a loser, at the very least, do not throw good money at it.
#11 – Losing streaks happen, but stick with your game plan.
There are two things that every trader must accept. You will lose money trading, and you will have losing streaks. It happens to veterans, too. Sometimes the best-thought out trading system just does not perform under certain market conditions. You must adapt or step back and wait for the storm to clear. It is also prudent to have more than one trading plan. Banks and hedge funds utilize several different trading routines in order to be flexible and to give them the advantage of immediately adapting to market conditions.
#12 – Always know that there is always another opportunity around the corner.
There is no point in beating yourself up for missing a major trend in one sector of the market while you were concentrating on another. The beauty of the forex market is that there is always another opportunity, if not today, then tomorrow for sure. Once again, patience is required, and it will be rewarded at another point in time. You just have to wait it out and choose. Also remember that trading is about the quality, not the quantity of your trades.
Did any of these tips strike a nerve? All of them are basic common sense, but when we get embroiled in a volatile market situation, we tend to operate on instinct, instead of by following our trading plan to the letter. Forex trading is difficult. If it were easy, we would all be wealthy and pursuing other interests. One other tip is worthy of your consideration, as well. Always keep a log of your trades. Over the weekend, take the time to note what you did wrong, but, more importantly, what you did right. Take the time to pat yourself on the back, and then get ready to get back into the game!