Before You Begin Trading
Before you even consider trading it is important to take the time to seriously question yourself as to why you want to be in the market. Do you see foreign exchange as the means to a quick profit? Are you trading for excitement or a rush? Are you interested in trading because you seek satisfaction on a purely intellectual level? Do you see trading as a hobby or as an additional avenue of investment? Are you looking for a way to fund early retirement or do you see trading as an opportunity to augment your savings? Do you need the profits that trading might bring to cover debts or other financial commitments? Many traders do not know why they want to be in the market. By taking the time to honestly evaluate your reasons for trading, not only will you learn more about yourself but you’ll also be forced to justify your commitment of hard earned capital to the market. Remember if your rationale is floored so too will be your trading.
For those contemplating a career in foreign exchange trading, the following provides a useful list of issues that should be covered prior to entering the foreign exchange market and the pitfalls that all too often cut short the career of an aspiring foreign exchange trader.
Psychology
Successful FX traders always acknowledge the importance of psychology in their trading. Traders must be disciplined and remain emotionally detached from the market. Trading foreign exchange requires the management of emotional states. A new trader will experience a gauntlet of emotions as they enter the markets for the first time – fear, anxiety, panic, exhilaration, even greed – these are all emotions the novice trader should not only expect but be prepared to face. Emotional imbalance impairs your ability to make congruent decisions. The most optimal state for successful trading is one of complete emotional detachment – to remain calm and to act in accordance with your strategy. Such detachment includes both negative and positive emotions – the key word is to remain “cool”.
Following are the most important points we believe any Margin FX trader should observe in trading psychology…
- Know your purpose.
Know why you are trading – for the thrill, for the challenge, to make a living – whatever the reason, you will enjoy the experience more and trade better if you know your purpose.
- Maintain mental clarity.
One of the keys to successful trading is mental independence and clarity – the ability to free yourself from concerns that might distract your trading. Whether they’re family, friends or financial concerns, always aim for a complete clarity of mind in your trading. Being clear in your goals and maintaining your mental focus will help you to stick to your plan and not make rash decisions based on emotion.
- Accept that the market is always right.
The market cannot be controlled by one person so you must accept that it will move regardless of your wants or needs. Fear, greed and hope can cloud your vision of the market and can cause emotional responses detrimental to your trading. The market will also go where it wants. Do not become enamoured with a losing position. If you get it wrong – admit it, get out, conserve your equity and wait for another opportunity.
- Don’t follow the crowd.
When the newspaper calls a bull market, it is possibly that time to sell. Most traders are uncomfortable when the position is popular with the general public however the opposite may be true if the “crowd” consists of mostly institutional traders.
- Keep fresh.
Trading can be stressful and if done daily, you can become tired and your judgement dulled causing you to begin to lose money. It makes sense to have a break every now and again and do something completely unrelated to trading. This can often give you a new look at the markets and sharpen your trading skills.
- Keep healthy.
You will think clearer if your trading activities are blended with physical activity. Whilst trading is time consuming and stressful, it provides the opportunity for growth – both financially and personally – not found in any other arena. It therefore makes sense to give yourself every chance to be successful by incorporating exercise into your trading day.
Recommended Reading
Trading for a Living, by Alexander Elder
Study Guide to Trading for a Living, by Alexander Elder
Trading to Win, by Ari Kiev
The Disciplined Trader, by Mark Douglas
