Newcomers to currency trading have flocked to this active medium in droves over the past decade, taking advantage of a highly flexible trading environment and sophisticated software trading platforms. Popularity, however, does not bestow competence. Failure rates have been astronomical, as high as 70% by some accounts, leading many to question the risk profile and greed of its many promoters. The simple fact is that forex trading is risky business, firmly affixed at the top of the investment risk pyramid.
The attraction of doubling your money with a 2% change in value, coupled with “50:1” leverage, has definitely drawn its share of gambling types, but experienced traders understand that gambling should not be part of the equation. Success depends on three factors: knowledge, experience, and controlling one’s emotions. To the surprise of many, successful traders often cite the latter as the primary reason for their favorable performance results, their disciplined approach being “habitualized” as routine after many hours of practice sessions on free demo account platforms.
Psychologists agree with the accepted method, summarized above, for insulating your trading decisions from uninvited interventions of your emotions. Many, however, will also claim that an incorrect decision regarding your individual trading personality type may also lead to failure in the long run. “Know Thyself” may have come to us from the Greeks of old, but present day wisdom also confirms that if one attempts to act in a way counter to their true “authentic self”, then they are destined for disaster at some point.
Trading currencies is all about speculation, the “process of selecting investments with higher risk in order to profit from an anticipated price movement”. Currencies will typically be “range bound” until a new piece of data causes a sudden swing in valuations. Traders search for this volatility and are capable of moving quickly to capitalize on anticipated movements. If you are a studious “buy-and-hold” investor, then stay away from these “shark infested” waters. You are not a trader at heart. If you thrive in an active trading environment, then perform a self-assessment to determine which of these three personality types suits your profile:
- Day-Trader: This moniker speaks to a stereotypical trader, perhaps on steroids, who is tightly wired and drinks too much coffee. In actuality, this type of trader does trade often and for small amounts, the objective being to accumulate many small “wins” before market forces have a chance to reverse the price action. Trading methods are highly technical, sometimes referred to as “scalping”, resulting in as many a 100 trades a day in volatile currency pairs. No positions are left open at the end of the day.
- Swing Trader: These traders look for their “moments”, characterized by high probability setups that can yield healthy returns in the 25 basis point area. The objective here is to ride a trend wave for as long as possible, and to cut losers early when the market does not move as expected. In this case, one must react quickly, but losses are an accepted part of the game. The “Net” return for all trades must be consistently positive for success. Trades can extend for a few days if warranted.
- Position Trader: These traders look to longer timeframes and are not necessarily driven by short-term movements in the market as with the previous examples. Understanding the long-term fundamentals guides most decisions, and positions can be for days, weeks, months, and even years in rare instances.
Your personality type will dictate how you approach the forex market and form your personal trading strategies, always supported by prudent risk and money management principles for long-term success.
Tom Cleveland is a market analyst for Forextraders.com. He has over 30 years of experience in executive management, corporate governance and business development, having served as CFO for various Visa International entities from 1980 until his retirement in 1999. Tom’s articles have appeared in the NY Daily News and BusinessInsider among others.
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