We are all human and to be human is to err. There is no place, perhaps, that you could learn that faster than in forex trading. You will be tempted to chase the market or approach your positions, not with what the market is telling you but, with what your emotions are telling you to trade on. You may think averaging down or jumping in and out of various positions is exciting and profitable but this kind of erratic trading, or even a steady position that is going down, can wipe you out in a single day or a single trade. It is important to avoid common pitfalls and the pain you will feel if you fall prey to them.
Take control of your trading and set yourself up for better outcomes by following a few rules you set for yourself. Here are three that serve new and seasoned traders well:
Business and market news is available around the clock. This onslaught of constantly available information and occasional market hype, like in the case of Facebook’s IPO, for example, can create the temptation to set your market positions based on expected news. Knowing that highly favored and popular companies are going public or knowing that all indications point toward an adjustment in interest rates up or down by the Federal Reserve can compel you to preset your positions based on upcoming news announcements. Since the market is not operating in a systematic, predictable way, sometimes the increases or decreases you expect will not occur. Trying to guess these things ahead of time based on news reports and other unpredictable stimuli is a path that can wipe out your capital. Stay away from this fool’s gold tactic.
Avoid jumping into the market volatility that you feel is on an upswing following news
So you avoid making trades or pre-positioning based on news reports that have yet to be made. What about news that has already been announced? You still should step back and allow the market pattern to emerge. Very often following a big news making announcement the market surges or dips. During those times you may want to enter a position to ride the bull or bear but usually the periods of high market activity right after news are full of volatility where the points are up and down. Do not be so hasty or pressed to enter your position. See as fully as possible where the market is going before you make your move. The fear in not making the move immediately is that you will lose out on fast and easy gains. The fear you should also be mindful of is entering too quickly and losing all together. You can proceed once you see what is really happening. This is calculated risk.
Establish and stick to a trading plan that works and look at the hardcore numbers
The best way to hedge against the up and down, illogical and volatile waves of the market is to create, test and stick to a trading plan. You should test your strategies with very low amounts of your capital to see how your strategy works. Be mindful of the trading day parts in your strategic plan as well. Mornings when the market first opens tend to be the bounciest part of the day. Set up this plan and have rules for yourself so you are never left to emotion and always do what you decided in advance when a cooler, calmer, rational mind prevailed in your planning process. Most important, as part of your planning, look at what the hardcore numbers and data are for your trades. If your strategy is not working keep adjusting it and get training and mentoring until it does. The last thing you want to do is become frustrated and move from disciplined trading to high stakes gambling. Implementing your forex trading strategies with a plan and based on the real results will ensure that you do not get caught in these various pitfalls.
Craig Harris is a successful and esteemed mentor to thousands of students, as well as trainer of foreign exchange trading at Craig Harris Forex.