Sticking to your strategy is one of the hardest things to do as a forex trader, especially when your emotions are running riot mid-trade. This means keeping your stops where they were when you entered the trade, except in those circumstances where you intended to trail your stops from the off. This is a good maxim for helping to control your losses and keep your emotions in check when trading.
Trading isn’t easy, and that’s why most traders fail. The reason why they fail isn’t always because they have bad ideas – more often than not, it’s because they allow their emotions to intrude on the process. This could take the form of letting losses run too long, or closing out their trades too early. You need to determine the level of risk you are comfortable with for each trade, and stick to this like glue. Before you place the trade, your mind is in a much more rational, objective place because your decisions are unaffected by price action. When you have an open trade, you will want to stick with it until it becomes a winner, but this doesn’t happen every time. To combat this, you need to work out the worst case scenario for the trade, and place your stop based on a technical or monetary level.
Risk – Predetermined
It can’t be stressed enough that the level of risk has to be predetermined before you enter the trade, and that you have to stick to these parameters once the trade is open – don’t let your emotions force you into a premature change. A trade is little more than an educated guess, no matter how sure you are that you are right. The market is simply too unpredictable and irrational to think any other way, with so many external factors that can affect the price of a currency such as central bank intervention, option barriers, and other unaccountable, non-fundamental influences. Setting your stop early on allows you to prepare for these uncertainties.
Reward – Unpredictable
While risk can be calculated, there is potentially no limit to the amount of reward that you could get from a profitable trade. When currencies move, the movement can be small, or it can be massive. That’s why money management is so important, and techniques such as trading multiple lots – which we covered in Part 3 – can be highly useful in this regard. This is easier to do when trading mini or micro-lots. Using this technique, you can lock in the gains on your first lot, and move the stop to the break-even on the second lot, which puts you in the position where you are no longer risking your own capital, and you can take any extra profits using the second lot.
Riding the Trend
In the FX market, trends can last for days, weeks, or sometimes months. That’s why most trading algorithms in the FX space are focused solely on trends, as any trend moves that they catch will offset any whipsawing losses in range-trading markets. Although there is money to be made by scalping in range-trading markets, there are clear advantages to a trend-based strategy. So, if we are in a ranging market, we can bank the gain using the first lot and even if we get stopped out at the break-even on the second, we will still have a profit. However, if a trend does begin, we could hang on to that second lot and see how far it could go, as it could turn out to be a big winner.
Successful trading is all about striking a balance between money management and strategy. No strategy is 100% reliable, but you can learn a lot from when it fails, and if that strategy has worked more often than not for you in the past, then you can accept losses as being part and parcel of being a forex trader. Successful traders see the big picture – they’re all about getting the overall trading approach right, and not worrying about individual trades too much. Once you have integrated this rule into your trading style, you can keep your emotions largely out of the picture whether you are making a small trade or a massive one. After all, winning is all about luck – but losing is something you have some control over.
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