It is evident that many new traders take shopping more seriously than trading. Not many people would spend $500 without carefully researching and examining whatever they are purchasing. But many new traders take positions that cost them well over $500 based on little more than a “feeling”! We cannot stress the importance of this enough. Most new traders fail because they simply lack discipline. As we have previously discussed it is so very important that you have a plan/strategy in place before you start to trade. Your analysis should include the potential downside (loss) as well as the expected upside (profit).
For each trade you place, select a profit target that will let you make reasonable money on the position without being ridiculously unachievable. Choose a loss limit that is large enough to accommodate normal market fluctuations, which you have previously analyzed and recorded, but smaller than your profit target. To avoid potentially chasing the market place limit and Stops at these levels. Whilst a very simple concept it is one of the most difficult to adhere to. Many new traders abandon their trading plans on a “feeling”, closing profitable positions before their profit targets are reached because they grow worried that the market will turn against them. But those same traders will hang on to losing positions well past their loss limits, hoping to somehow recover their losses. Oftentimes traders see their stop loss levels hit a few times, only to see the market go back in their favor once they are square. This, inevitably, leads to the mistaken belief that this will always keep happening, and that loss limits are counterproductive. Trust me – Nothing could be further from the truth! Stop Loss Orders are there to Stop your losses. I have been fortunate to have known some of the world’s best traders, whether they are trading FX, Equities, Fixed Income etc. and I can assure you that no trader makes money on every trade. If you are fortunate to have 5 winning trades out of 10 then you are doing very well. So how are you profitable with only half of your positions being winners? Simple – by setting smart trade limits. When you lose less on your losing trades than you make on your winning trades, you are profitable!
Don’t get Emotional!
People are emotional. It’s so easy to conduct objective analysis before taking a position. It is much harder when you’ve got your hard earned money invested. Traders holding positions tend to analyses the market differently in the hope that it will move in a favorable direction, they will be indifferent to changing factors that may have negated their original analysis. This is especially true when losses are being taken on a position. Traders tend to “hold”’ a losing position, ignoring tell-tale signs that point towards continued losses.
You are not George Soros (the man who broke the Bank of England)!
Get back in there Mortimer and Sell, Sell, Sell (great scene in Trading Places) simply put “Do not over trade”. A common mistake made by new traders is over-leveraging their account. Just because one lot (100,000 units) of currency, with 1:100 (1%) leverage only requires $1000 as a minimum margin requirement, it does not mean that a trader with $5000 in his account should trade 5 lots. It is oh so important to remember that one lot is $100,000 and should be treated as a $100,000 investment and not the $1000 required as margin. Most traders analyses charts correctly and place sensible trades, yet they tend to over leverage themselves. As a result, they are often forced to exit a position at the wrong time. A good general rule is to trade with 1:20 leverage or never risk more than 10% of your account at any given time, for all of your positions. Do not risk more than 2% of your equity on any single trade! Ever! Unless you trade successfully for at least 5 years, then risk whatever you feel like it Trading is never easy – if it were we would all be retired on our Yacht in the Caribbean sipping Pina Coladas!!! As Del Trotter always said (and never materialized) “This time next year Rodney we will be millionaires!!!”
#tradesafely #fxzoo #doublehit