Forex Education
Psychology
of Trading
Four
Principles for Becoming a Better Trader
Trade
with a DISCIPLINED Plan.
The
problem with many traders is that they
take shopping more seriously than trading.
The average shopper would not spend $400
without serious research and examination
of the product he is about to purchase,
yet the average trader would make a trade
that could easily cost him $400 based on
little more than a "feeling" or
"hunch." Be sure that you have a
plan in place BEFORE you start to trade.
The plan must include stop and limit
levels for the trade, as your analysis
should encompass the expected downside as
well as the expected upside.
Cut your losses
early and Let your Profits Run.
This
simple concept is one of the most
difficult to implement and is the cause of
most traders demise. Most traders violate
their predetermined plan and take their
profits before reaching their profit
target because they feel uncomfortable
sitting on a profitable position. These
same people will easily sit on losing
positions, allowing the market to move
against them for hundreds of points in
hopes that the market will come back. In
addition, traders who have had their stops
hit a few times only to see the market go
back in their favor once they are out, are
quick to remove stops from their trading
on the belief that this will always be the
case. Stops are there to be hit, and to
stop you from losing more then a
predetermined amount! The mistaken belief
is that every trade should be profitable.
If you can get 3 out of 6 trades to be
profitable then you are doing well. How
then do you make money with only half of
your trades being winners? You simply
allow your profits on the winners to run
and make sure that your losses are
minimal.
Do not marry your
trades.
The
reason trading with a plan is the #1 tip
is because most objective analysis is done
before the trade is executed. Once a
trader is in a position he/she tends to
analyze the market differently in the
"hopes" that the market will
move in a favorable direction rather than
objectively looking at the changing
factors that may have turned against your
original analysis. This is especially true
of losses. Traders with a losing position
tend to marry their position, which causes
them to disregard the fact that all signs
point towards continued losses.
Do not bet the
farm. Do
not over trade. One of the most common
mistakes that traders make is leveraging
their account too high by trading much
larger sizes than their account should
prudently trade. Leverage is a
double-edged sword. Just because one lot
(100,000 units) of currency only requires
$2500 as a minimum margin deposit, it does
not mean that a trader with $5000 in his
account should be able to trade 5 lots.
One lot is $100,000 and should be treated
as a $100,000 investment and not the $2500
put up as margin. Most traders analyze the
charts correctly and place sensible
trades, yet they tend to over leverage
themselves. As a consequence of this, they
are often forced to exit a position at the
wrong time. A good rule of thumb is to
trade with 1-10 leverage or never use more
than 10% of your account at any given
time. Trading currencies is not easy (if
it was, everyone would be a millionaire!).
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