9 Things I Wish I Knew When I Started Trading Forex
Trading Forex is quite an adventure. Many people choose to travel the world to ‘find themselves’. If you really want to embark on a soul-searching experience, trading is an excellent way to genuinely get to know yourself.
We’ve made a list of what we believe traders will discover on their path to becoming a prosperous Forex trader. If you are new to the Forex market, here are some valuable life lessons to give you some insights into the hurdles that are expected.
If you’re an experienced trader, perhaps this will serve as a healthy reminder.
A good workman never blames his tools
There are many trading platforms, indicators, robots and tools out there to help you trade. Many high profile trading personalities claim to owe their success to particular strategies and tools. Unfortunately, what works well for others, won’t necessarily work for you.
Picture a tradesman who has built a reputation on building the finest furniture. Beautifully crafted surfaces and decorative edges like you’ll never find in a mass produced IKEA piece. Well, do you think that any random man off the street could build the exact same pieces, simply by using the same brand of tools? Of course not, he couldn’t because it’s about the craftsman himself and not the tools he uses.
The tools you choose to support your trading decisions are relative to how you perceive them. You need to identify the tools that resonate with you. Luckily we’ve got some guidelines to setting your stop loss properly that you can test drive before adding them into your trading strategy.
Expecting other people to have all the answers
Take anything you read or watch online with a grain of salt (except for this sentence!). To elaborate on the previous point made, what works for other traders won’t necessarily work for you in the same way.
That doesn’t mean you can’t learn from other more experienced traders. Just don’t believe that you can follow their advice word-for-word and get precisely the same results. The success of a trader is hugely influenced by their behavior and decision-making abilities. This means outcomes are deeply personal and can’t be branded as a product.
Thinking there’s a scarcity of opportunities
Some traders believe there is a scarcity of opportunities in the Forex market and choose to keep their ideas top secret. Look at any Forex chart and see how often trends change; there is no shortage of opportunity.
Many traders find it helpful to discuss their trading ideas with others. The objective is to get validation or criticism to support or improve on their concept. Should you be worried about people stealing your ideas? Well, considering that the Forex market trades more than $6 trillion per day, it’s unlikely anyone will be able to take an opportunity from you.
There’s always tomorrow and the day after tomorrow
Not only is there an abundance of opportunity in the Forex market, but the market never sleeps (except for weekends). There is always tomorrow, and it’s important not to forget that.
Many new traders find themselves trading in revenge. After a couple of bad trades, they start feeling as if the market owes them. These are the emotions of gamblers, not traders. If you’re having a lousy trading session, turn off the computer and walk away. Shake off whatever happened and start fresh the following day.
Don’t expect to make a profit on every trade, nor should you expect to finish every day in profit. When you work for an employer, you don’t receive your salary at the end of every day. Nor if you own a business do you buy inventory and sell it all on the same day. The objective of trading is to be profitable on average, not exclusively.
Drawdown is something you need to tolerate
Drawdown is not comfortable, but it’s something you need to come to terms with. Sitting in a losing trade for hours can be distressing but thinking that whenever you open a trade, it will immediately gravitate towards profit is naive.
No matter how much preparation you have done for that trade, it’s not uncommon to begin doubting everything once you start seeing red. Markets move up and down all the time, even while trending. As long as your trade is within your risk tolerance, leave it alone. Don’t cut the cord just because you have mistimed your trade slightly. Closing the position will guarantee you lose money. Until your stop-loss is hit, stick to your original game plan and accept the loss you determined to be reasonable before emotions got involved.
Be aware of the disposition effect
After being sat in a drawn-down trade, some traders are happy just to get out of it unscathed and take just a few bucks profit. Meanwhile, those same traders are prepared to allow trades to draw down 50% of their account balance. This behavior is known as the disposition effect. Such an unbalanced risk to reward ratio is a sure-fire way to blow a trading account in no time.
The best position is not to have a position
As a new trader, you feel that you need to be in a trade to be making money. This mentality can cause you to overlook the careful timing of your entry points. If you enter a position while a market is trading sideways, you’re causing yourself two problems.
First, you’re locking up margin and may obstruct yourself from being able to take advantage of other trading opportunities. Second, you now have a position to take care of, which takes your time, attention and energy away from more meaningful activities like studying or relaxing.
It’s best to flip this idea completely. You don’t need to be in a position to be making money. Instead, you should be flat, so you can prevent yourself from losing money.
Using the news to influence your short-term sentiment
News is an essential component of fundamental analysis, and it absolutely affects traders' sentiment. High profile announcements, especially from the U.S., can initiate a new trend. The common misconception is that a single piece of news will dictate which direction the market will move in. Usually, the trend is already determined. Some news does cause wild volatility, but it eventually settles down.
Often you will see that following a negative announcement, like millions of jobless claims in the U.S. being announced for the third week in a row, the market will continue to trend upwards. Likewise, a positive announcement can trigger a bearish trend. The idea of this may be baffling, but the truth is banks and market makers have been trading with this information for hours or days before it hit the public. Don’t fall into the trap of believing that when you see a significant headline.
In fact, many traders follow economic calendars to pause their pending orders and protect levels. This is because they don’t want the news related volatility to interfere with their trading strategy. We’ve built a very useful Forex News Indicator, which displays past and future announcements on your chart. Having this data on the chart is incredibly convenient since you don’t need to leave your trading platform to find it on third-party sites.
Underestimating how much work is involved
The last and probably most important point that every aspiring Forex trader should know is that it’s not easy. A lot of newbies are attracted to the idea of placing a few trades a week and working their way toward financial freedom. If only. These visions are a mis-sold idea of investing from affiliate marketers and people who really don't know much about investing.
Don’t delude yourself into thinking that you can become a profitable trader without putting in serious hard work. Consider this article as more of a reality check, not a cheat sheet.
You need to study. You need to practice. You need to test a variety of tools and methodologies. You need to start out small. Expect to make mistakes, plenty of them, and learn how to avoid them in the future.
One of the ways we can help is with over a hundred great articles like this one, numerous guides on how to develop your own strategy and our offer to access a selection of 18 unique trading tools and indicators which you can test and apply with just one subscription.