Forex Trading Guide for Novice Traders Part 2 Foreign Exchange

Post on: 14 Июнь, 2015 No Comment

1. One of the biggest mistakes that we have seen traders make is to keep adding to a losing position, desperately hoping for a reversal. As traders increase their exposure while price travels in the wrong direction, their losses mount to a point where they are forced to close out their position at a major loss or wait numbly for the inevitable margin call to automatically do it for them.

2. Typically in these scenarios, the initial reasoning for the trade has disappeared, and a smart trader would have closed out the position and moved on. However, some traders find themselves adding into the position long after the reason for the trade has changed, hoping that by magic or chance things will eventually turn their way.

3. We liken this to the scenario where you are driving in a car late at night and are not sure whether you are on the right road or not. When this happens, you are faced with two choices.

4. One is to keep on going down the road blindly and hope that you will find your destination before ending up in another state. The other is to turn the car around and go back the way you came, until you reach a point from where you can actually find the way home.

5. This is the difference between stubbornly proceeding in the wrong direction and cutting your losses short before it becomes too late. Admittedly, you might eventually find your way home by stumbling along back roads much like a trader could salvage a bad position by catching an unexpected turnaround. However before that time comes, the driver could very well have run out of gas, much like the trader can run out of capital. Adding to a losing position that has gone beyond the point of your original risk is the wrong way to trade.

6. There are, however, times when adding to a losing position is the right way to trade. This type of strategy is known as scaling in. The difference between adding to a loser and scaling in is your initial intent BEFORE you place the trade.

7. If your intention is to ultimately buy a total of one regular 100,000 lot and you choose to establish a position in clips of 10,000 lots to get a better average price instead of the full amount at the same time this is called scaling in.

1. Novice traders who first approach the markets will often design very elegant, very profitable strategies that appear to generate millions of dollars on a computer backtest.

2. The majority of such strategies have extremely impressive win-loss and profit ratios, often demonstrating $3 of wins for just $1 of losses.

3. Armed with such stellar research, these newbies fund their FX trading accounts and promptly proceed to lose all of their money. Why? Because trading is not logical but instead psychological in nature, and emotion will always overwhelm the intellect in the end, typically forcing the worst possible move out of the trader at the wrong time.

4. As E. Derman, head of quantitative strategies at Goldman Sachs, once noted, “In physics you are playing against God, who does not change his mind very often. In finance, you are playing against God’s creatures, whose feelings are ephemeral, at best unstable, and the news on which they are based keeps streaming in.” This is the fundamental flaw of most beginning traders.

5. They believe that they can “engineer” a solution to trading and set in motion a machine that will harvest profits out of the market. But trading is less of a science than it is an art; and the sooner traders realize that they must compensate for their own humanity, the sooner they will begin to master the intricacies of trading.

1. If there is one inviolable rule in trading, it must be “stick to your stops”. Before entering every trade, you must know your pain threshold. This is the best way to make sure that your losses are controlled and that you do not become too emotional with your trading.

2. Trading is hard; there are more unsuccessful traders than there are successful ones. But more often than not, traders fail not because their idea is wrong, but because they became too emotional in the process. This failure stems from the fact that they closed out their trade too early, or they let their losses run too extensively.

3. Risk MUST be predetermined. The most rational time to consider risk is before you place the trade when your mind is unclouded and your decisions are unbiased by price action. On the other hand, if you have a trade on, of course you want to stick it out until it becomes a winner, but unfortunately that does not always happen. You need to figure out what the worst case scenario is for the trade, and place your stop based on a monetary or technical level.

4. Every trade, no matter how certain you are of its outcome, is simply an educated guess. Nothing is certain in trading. There are too many external factors that can shift the movement in a currency. Sometimes fundamentals can shift the trading environment, and other times you simply have unaccountable factors, such as option barriers, the daily exchange rate fixing, central bank buying etc. Make sure you are prepared for these uncertainties by setting your stop early on.

5. Half of trading is about strategy, the other half is undoubtedly about money management. Even if you have losing trades, you need to understand them and learn from your mistakes. No strategy is foolproof and works 100% of the time. However, if the failure is in line with a strategy that has worked more often than it has failed for you in the past, then accept that loss and move on.

6. The key is to make your overall trading approach meaningful but to make any individual trade meaningless. Once you have mastered this skill, your emotions should not get the best of you, regardless of whether you are trading $1,000 or $100,000. Remember: In trading, winning is frequently a question of luck, but losing is always a matter of skill.