How to make a little and lose a lot trading Forex
Forex provides significant profit opportunities for aggressive
traders because of such factors as twenty-four hour liquidity, ultra-high
leverage and easy market access. But for some reason,
many of us insist on giving in to our masochistic streak, so here’s a list
of practices that are sure to cause you enormous pain when trading Forex.
Take too large a position
This generally occurs when the trader either misjudges or
fails to study the likely swings of a given currency.
Frequently, new traders simply select a lot size that “feels right”
without evaluating the level of risk that such a trade contains.
Often, when the trader has encountered a few successful trades, he/she
increases the size of the trades without fully considering the potential P&L
(more L than P) swings that can easily occur. The considerable leverage that
forex affords represents a constant temptation to make this mistake.
Fail to set stops realistically and fail to honor them once
you set them
Stop losses represent the
literal definition for the amount of risk the trader is prepared to assume
and most traders calculate them in pips, not absolute dollars.
If you’ve ever stepped into a casino, you know that are required to
convert your money into chips. This is done for several
reasons but one subtle effect is that of desensitizing you to the actual amount
of cash that you are wagering. Setting stops off
of a position on a chart tells you what level you wish to exit,
not the cost. Viewing your stop loss
in pips rather than cash can provide the same effect as that of chips in a
If you plan to stay alive
trading forex, each time you set a stop a certain number of pips away, perform
the simply conversion to cash and recognize that this represents the amount
of money you are prepared to risk on the trade. Then
add a few for slippage (the difference between where your stop is set and
where you are likely to be executed) and then honor the stop.
Failing to honor the stop is equivalent to not determining one in the
first place, a surefire way to eliminate all of your trading capital.
Stop losses are the single most important tool in your trading arsenal.
Develop a stubborn streak
(see “failure to honor stops” above)
Read TRCI’s three golden rules of trading and be sure to ignore
them as a quick way to end your trading career.
“Panic when everybody else panics… but try not to panic last.”
“If you find footsteps on your face, get up and follow them.”
“We usually can’t afford to be right… in the long run.”
Convert failed trades into “Investments”
When entering a trade, consciously or not, the trader has
an idea of how long he/she plans to stay in the position.
If the trade works, the exit usually takes care of itself, but if the
trade fails to follow the desired path, one frequent trap is to view it through
a different time perspective. This can be dangerous
because each adjustment moves the position from a trade to an investment.
Such a move permits a lack of discipline to enter into the process
and can lead to a potentially damaging phenomenon called “hope”.
Once hope becomes the dominant factor in decision-making, discipline
will likely be ignored with disastrous results. When
this occurs, stop losses tend to show up on the endangered species list.
We concede that the truly creative trader that wishes to endure
pain and suffering can find a plethora of ways to get the job done.
The above list represents the ones that we have found to be most effective.