Firstly, I hope you had a wonderful Christmas and enjoyed the festive period, getting to spend time with friends and family over this special time. Christmas is definitely one of my favorite times of the year and it’s always refreshing to take a few days off from the markets and use this as an opportunity to not only relax, but also to get prepared for the new year ahead. Each New Year offers us an opportunity to set specific goals and get ourselves into good new habits and routines that will benefit us over the coming months.
For each year that I’ve been writing these articles, I’ve usually highlighted the importance of a trade plan and other helpful practices which my readers could use to better their trading in the short and long term future. This time around, I wanted to share with you three separate case studies of students going through common issues in their currency trading. I decided to highlight these specifically, as I’ve found there are a number of common themes amongst struggling traders who I’ve worked with. Hopefully, by detailing their challenges and offering some action points, you too can take something away from this article to help your own FX trading in the coming year ahead.
Case Study 1: The “Over-Trader”
The “Over Trader” type is pretty much destined for failure right from the very start. While I know this sounds pretty bleak, it is however a harsh fact of reality. Randomly clicking buttons and entering the market on a whim is only going to guarantee one thing: frustration and multiple losses. I have been guilty of over-trading myself so I know exactly the dangers that come with it. It is especially difficult in the currency markets when you consider that you have to pay a spread as well every time you get into a position. Imagine taking 20 trades in one day with a two pip spread – that’s 40 pips given away before you have even had a winning trade!
Beyond that fact however, is the important question of why people over-trade. Having worked with multiple students worldwide, my conclusion is that most traders hit the button far too many times because they have a feeling that they know what is going to happen next. This is usually a result of losing a few trades in the first place, which typically puts a person on the back foot and creates a level of desperation with need to make the money back and get into a level of profitability. Going home a winner for the day is a far more attractive prospect than going home a loser, so it’s easy to understand why people try to force trades in an effort to get themselves back to the profitable scenario. It amazes me how easy it is for people to stop trading when they win straight off the bat, yet they carry on when they are losing because they are so desperate to make those losses back. How crazy is that? I will stop trading when I win but I will carry on when I lose!
The last consideration we have to take into account here is that many of us just lack the patience to wait for the right set up. If you want to earn income trading, you have to have a trading plan that does not require constant activity in taking trades. Most time is spent waiting for the right set up which will offer the maximum reward and the lowest possible risk, with a high level of probability involved as well. When markets are moving frantically, it can be difficult to sit on your hands and wait for the best time to pick your spot. Yes, patience takes time to develop but as they say, the best things in life are worth waiting for.
Case Study 2: Too Many Stop Outs
When I meet a trader who is taking far too many stop outs it usually comes down to one of two things: either their stop losses are too tight or they don’t have a proven rules-based strategy that they are using. Taking small loss after small loss can add up and, while we have to prevent the large loss from happening, it is also vital to recognize that a multitude of small losses can start to add up to one large loss over a longer period of time. I call this the “slow bleed” of the account.
Many traders I encounter use tight stop losses because they are trying to get cheap entries into the market and huge rewards. While there are rare occasions when you can get away with a minimal stop loss and make a huge reward, in real-world scenarios this is often very difficult to achieve on a consistent basis and many times, the Forex trader will find themselves getting stopped out only to then witness the price move in the direction in which they anticipated. The key here is giving yourself enough room for the trade to work, while also knowing when to get out if you are wrong.
You should also ask yourself the question of whether you are following a trade plan when you find and place your trades. If you are following a plan, you should know your specific entry price, stop loss price and target all before you even place your order. Randomly taking a trade and applying a stop loss and target is no guarantee of success because you should only enter a position at the key moment when the lowest risk and the highest probability of success is present. This is what we call “market timing.”
An inability to time the market means you will have a low success rate in your trades making it unlikely that you are ever going to achieve your short-term income or long-term wealth goals that you set out in advance. Using Online Trading Academy’s patented core strategy which identifies institutional supply and demand imbalances on a price chart, students have the ability to time the market in advance using a stop loss entry and target price which is both objective and effective in maximizing reward and minimizing risk. This alone prevents a multitude of unnecessary stop losses.
Case Study 3: Nothing I Do Ever Works!
The last of our case studies is one which is probably the most common of all. It is a frustrating time when traders go through the syndrome of feeling like every time they place a trade the market is against them. You can feel like nothing you do is right and that you’re destined for failure no matter what you try to do. Obviously, if you have never had any formal education in how to trade it shouldn’t be too surprising to find yourself facing these hurdles because there are many professionals out there who understand how the market really works and are willing to play that against the novice.
If you have had some education however, then good for you! This is the very first step in making sure that you are on the right track and will, no doubt, give you the best chance of success in the long term. It should be recognised though that getting an education is step one. The second step is being consistent enough in your actions by sticking to one proven strategy time and time again. It can be tempting to keep reworking your system to maximize results, especially if you go through the occasional losing period. However, in my experience, this can be a very dangerous thing to do, especially if you’re not keeping a healthy track record of your actions in the markets.
The only way to find out what works for you and what doesn’t work for you is to simply do the same thing over and over again for a number of times and analyze your results. Understand what practices give you success and recognise the ones that don’t. By doing this level of ground work you will discover the best course of action that suits your style and psychology when trading. Many traders just fail to stick to one thing long enough to give themselves time to really figure out what works because, after all, consistency is the true key to successful market speculation. If you can’t be consistent enough to gain a track record, then you are doomed to failure from the very start.
I hope you found the topics in this article helpful in overcoming some of the hurdles that you may be facing in your own trading experience. Hopefully, if you have been enjoying success up until this point, then you can use these guidelines to know what not to do in the future. I hope you’re as excited about 2015 as I am and I wish you and your loved ones all the success and prosperity you hope for in the coming New Year!
Happy New Year and be well my friends,