As a trader all you have to do is buy low and sell high. Do that and you’ll be turning a profit.
Simple right? Wrong.
Trading, in reality, is one of the challenging endeavours you will ever embark on. If you don’t keep your wits about you, you’ll join the masses of traders who throw caution (and their hard earned cash) to the wind by trading unprepared.
The greatest battle you will face in mastering consistently profitable trading comes in first forgetting everything you’ve learned in life so far. You will need to build a completely new mindset which tends to the needs of the successful trader and blocks out those common tendencies with which so many traders sabotage their own efforts without realising.
The four common denominators that typical failing traders share are simple but people fail to see the glaring red flags staring them right in the face.
Trading Without Rules
We’ve all dreamed about a daily life that breaks from the rules and gives us the freedom to do what we want, when we want. The first time you trade, the feeling that this has been achieved is overwhelmingly apparent. You have a mass of potential wealth at your fingertips and the power to dictate how and when you work.
The problem is that this “holy grail” of lifestyles blinds people to the fact that rules are not only as necessary in forex trading as any other profession, but they are so much more important because of the potential backlash.
It’s often harder to stick to rules we set ourselves as it is easy to rationalize “tweaking” them. But the rules you set in place at the offset need to be kept with same discipline as if they were set for you. If not, you’re effectively trading without a plan, and that is just guesswork, gambling effectively. Find a trading system that suits your lifestyle, and then most importantly, stick to it!
You Haven’t Embraced Risk
Countless traders classify themselves as risk takers without really understanding what this means in trading. Embracing risk is not about having the guts to open a large position or have multiple trades open at once. To embrace risk you must understand it.
Every time you open a trade two things need to happen. Firstly you must be able to walk away without any sense of fear or apprehension. And secondly you need to accept that you have already lost the invested money.
The mindset of a winning trader comes when you prepare for the worse, hope for the best, and expect to be surprised. This first step to psychologically preparing yourself for the ups and downs of trading may seem counter intuitive but it will be a vital ability to rely on. It will keep you grounded in the good times without letting you get carried away, and support you in bad times without letting you spiral into destructive trading habits.
Too Much Focus On Money
“What?” I hear you say, “but forex trading is nothing but focus on money”. No, that is the message all those “make millions in forex” advertisements want you to believe. Those who buy into this lie go chasing riches and end up losing large sums instead.
It is true that there is unlimited earning potential in forex markets. The fact that the fairy tale always misses out though, is that with unlimited earning also comes unlimited loss potential.
Think of your trading as a job. Your job description is not to make loads of cash; it is to excel at managing your risk. You need to be thinking in terms of probabilities and risk/reward ratios. As a trader you are searching for circumstances which set probabilities in your favour and then acting on them. This is what’s known as finding the edge. When you perform this role properly, the money will naturally come as a by-product.
Flogging Your Account
Overtrading is one of the biggest problems in the market. Traders commonly sabotage themselves by wrongly believing that success comes with high volume. No trade is certain, so every time you open a trade your overall risk is extended. So controlling the number of trades you open is good risk management, flogging your count with too many trades is not.
It stands to reason then that you should be looking to spend as little time as possible in front of the charts. After all, how many hours can you sit in front of a screen, staring at prices tick away? Traders who do this eventually get bored or frustrated and end up forcing trades where no real potential exists. Doing this once is bad enough, but when traders end up repeating it over and over with multiple open positions, they’re creating a mess that will only end badly.
Remember the strategy of thinking in terms of worst case scenario? You’ll mentally wear yourself out doing this with several open trades. Instead, searching for those few low risk/high reward ratio, ‘A+’ trades will prevent you from falling into the trap of overtrading and over extending your risk.
End of day trading strategies accommodate the avoidance of the 4 big red flags here. You only need to spend 15 minutes a day analyzing the market and employing the “set and forget” principle. You program in your trades to open and stop out automatically at predetermined points, and you get on with your life. It is a straightforward set of rules that encourages careful risk management and helps you to remove emotion from the mix.
The less you expose yourself to the traps of minute by minute reaction trading, the more relaxed and more successful you will be.
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The Forex Guy is an educational Forex blog run by Graham, focusing on Forex price action, positive geared money management and building a winning traders mind-set. Graham likes to keep trading as simple, logical and as stress free as possible using end of day trading strategies with price action.
