It does not matter how strong your trading strategy is, if you do not have the proper attitude and trading mindset, you will never become a profitable trader. Greed and its corollary emotions will likely start to cloud your mind and slowly destroy your account, much like a parasite.
This is one of the reasons for the rise of machines (robot trading algorithms) that have a set of conditions that must be met in order to place a trade or else they do not trade. This is one of the benefits the machines have over humans: they trade solely based on a set of rules.
Nevertheless, they will never have all of the skills to replace a human. Robots cannot replace humans in a world that is constantly changing–and that is the reason why they will fail over time.
A great example of this is the acclaimed hedge fund Long Term Capital Management that used complex mathematical models to take advantage of fixed-income arbitrage deals. This hedge fund was initially superbly successful with an annualized rate of return of over 20%. Following the 1997 Asian financial crisis the fund collapsed and lost $4.6 billion in less than four months, leading to its liquidation and bailout by the US Federal Reserve.
The Mindset of a Forex Professional Requires Four Criteria
- Self restraint;
- Specialized Knowledge,
Losing the Desire to Trade – Why Most Traders Lose Money
Yes, the majority of traders lose money. It is a well-documented fact. On a similar note, according to Bloomberg and Forbes Magazine, 8 out of 10 business fail within the first 18 months.
In my opinion, it is the lack of desire that creates this environment which eventually leads to failure in business or trading. You need to put in a great amount of effort, energy, and money to learn how to trade. It all starts with a burning desire to win at trading, for without it, nothing will be accomplished. The same applies to business.
Trading the markets involves taking calculated risks in the hopes of generating a profit. Like any business owner, the successful Forex trader must work hard at creating a trading plan and a profitable winning strategy, seeking help and/or the counsel of a mentor, analyzing past performance to determine strengths and weaknesses, and staying afloat of the latest technology and strategies through continuing education.
Those who have succeeded in business will most likely have success in trading (any many other endeavors) as well, as it is the desire and mindset that ultimately differentiates the successful from the unsuccessful. Those who treat their business or trading as a hobby will have hobby results.
Those who wish to pursue trading as source of income must work hard and never lose focus or desire. Only losers give up, and will probably give up at the next challenge they seek. However, you are different: you do not care if the odds are stacked against you because you know that even though much of everything today is over-saturated and the competition is fierce, you are going to succeed. You have the will, the drive, and the right mindset.
Be persistent and do not give up
Like in any business, you will face hurdles and obstacles with trading the markets; this is to be expected as you progress in your trading. However, as you overcome your struggles you will learn to develop the mental habits needed to became a successful trader.
Your concentrated efforts at remaining organized and focused with your trade analyses, trading plan, and journal is what will bring you the greatest success. By implementing a trading plan as discussed in the last chapter, will discover your strengths and weaknesses. If you maintain your desire and discipline you will eventually figure out what works for you.
This knowledge is what will give you an edge in the markets to become profitable. I personally believe nobody is born with a special skill to be great a trading, anybody could could do it with enough persistence and self discipline.
Self restraint and Not Falling in the Trap of Greed
Too many people who start trading have unrealistic expectations: some see it as an opportunity to quit a much-hated day job, as a quick-fix to solving their financial woes, or they carry the belief that they will turn a few hundred dollars into a hundred grand within a few months.
Many people also begin to trade Forex do it with the same perspective as a gambler. These unrealistic expectations foster a catastrophic and account-destroying trading mind as the pressure to make ‘fast money’ mounts. When you feel greed or pressure, you trade with your emotions–and that is the fastest, surest way to lose your money.
To be successful in the markets, you must have the precision of a sniper; forgo the haphazardness of the machine gunner. This means you must know your trading strategy inside-out. Know exactly what the market needs to look like before risking money on it. Wait for excellent opportunities instead of spraying bullets in the hope that you will hit your target.
Many traders make the common mistake of over-trading. You must first become comfortable with a strict trading edge and then only trade when the set-up is clear. Emotional trading kicks in once you start trading just because you “feel like it” or because you “sort of” see your trading edge. Over trading is a killer and probably the single one event when eliminated from your trading will greatly improve your odds.
Emotional trading can also sink into your mind after hitting a string of winners. This is the result of overconfidence and forgetting about the real dangers and the true nature of the market which could lead to disaster.
The truth is that you can lose with any trade. The most important factor to keep in mind is that the very foundation of Forex lies a long-term game of probability. If you possess a high-probability trading edge and you follow it with discipline, you will eventually make money in the long-term.
The ability to obtain and then maintain an effective Forex trading mindset comes from doing the right things in the right way. Often, this process requires very conscious effort on the trader’s behalf. In reality, it is not difficult to achieve, but there are certain facts about trading that you must accept and always keep in mind:
Using the financial and economic news is an aspect of foreign exchange training that can be profitable for forex traders, and yet for one reason or another it is often neglected. Most people who start out trading are over eager to get into live trading as soon as possible and they skip a lot of important points in the rush to make (or more likely, lose) money. In order to profit with forex trading, just like anything else, it is important to understand the fundamentals that drive the foreign exchange market.
The market is driven by the comparative strength of national economies. This means that if the American economy becomes stronger in comparison to the British economy, the value of the dollar will rise against the pound. However, because the forex market is based on exchange, everything is relative. If the Japanese economy strengthens at the same time and to a greater degree, the dollar could fall against the yen at the same time that it rises against the pound.
In order to predict currency price movements on the basis of fundamental analysis, it is necessary to have an eye on certain factors. Interest rates and the national Gross Domestic Product (GDP) are the strongest influences on the forex market but there are many other indices too. These include the retail price index, manufacturing costs and orders, employment and payroll figures, etc.
Most of these figures are calculated and announced at regular intervals. There may be monthly, quarterly or annual announcements, and it is important to be aware when these are going to happen. Interest rate changes are different in that they will happen whenever a country’s central bank decides that a rise or cut in the interest rate is necessary.
For most retail forex traders working from home, it is difficult to predict the direction of these announcements other than what is reported in the financial press or online. However, it is important that traders keep themselves informed. The announcement itself will tend to be a time of high volatility in the market and even speculation before the figures are released can have a strong influence on the market.
So traders need to know when these financial reports are happening and either understand how to use them, or stay out of the market altogether at those times. For beginners the latter course of action is usually recommended. This means being aware of the forex calendar and closing trades some time before a major announcement is due.
So it is worth taking some time to understand the forex news and how it affects the currency market before starting to trade. Even traders who plan to trade entirely on the basis of technical analysis need to cover this aspect in order to avoid being caught out.
As a trader, you need to have all the information on how to make your individualized trading system work. This means knowing how to use capital efficiently with minimal risk, how to read the charts to place profitable trades, and how to employ mathematical statistics to make your system win in the long run (i.e. reducing risk of failure).
However, knowing all the specialized knowledge in the world will not necessarily make you a profitable trader. You will need to organize this knowledge and direct it through the use of a strict trading plan.