Achieving success in the complex world of currency trading can be a daunting task. Newcomers to the genre are frequently discouraged by the apparent length of time that must be invested in acquiring knowledge and free demo experience before active trading with real money can commence. Forex trading is high risk under high stress conditions. Specialized training is a must, but many beginners stumble early on in their learning process due more to psychological factors than most anything else.
Next to knowledge and experience, controlling one’s emotions is paramount. Studies in trading psychology have continually confirmed that our minds can become our worst enemy, especially when the conditions involve real money and high stress, as with forex trading. Even Warren Buffett, who most likely never traded currencies for a living, has acknowledged the need to block the influences of the mind. He claims what is “needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”
Early on in one’s forex education, a great deal of emphasis is placed on the need to have a step-by-step trading plan to guide your actions in the market before, during, and after you close a position. The reasons for this early guidance hearken back to the wisdom imparted by Mr. Buffett above. Your “intellectual framework”” must be allowed to operate freely without emotional intervention. A detailed trading plan or system suggests a disciplined approach to the market is necessary, but what exactly does that mean?
The best answer to that question is that you must treat your trading activity in a very businesslike manner, making decisions in a logical straightforward fashion and following a list of tasks that you repeat over and over until they become rote. A well-honed “habit” is the best way to counter stress and an overactive mind. Professional athletes and anyone else engaged in a profession where performance under pressure is required and easily measured has learned this lesson at some point. Practice re-enforces the habit and allows internal talents to be unleashed without mental encumbrances.
The first task every day should be to obtain a “lay of the land”, so to speak. Review financial market outlooks from experts to anticipate potential opportunities in your chosen currency pairs. You may never be able to out guess the market on fundamental information alone, but you can determine if there is a consensus among experts that have the resources and networks to guide their efforts. Review the recent trends for your pairs by viewing a variety of time-frames. What may look like a healthy trend on a 5-minute chart may be a minor blip on a 1-hour chart, where the prevailing trend is in the opposite direction. Unless you are an adept “scalper”, trading against a major trend is asking for trouble.
The remaining steps in your plan will include:
- Rules for assessing the risk/reward potential of a contemplated position that fits your established framework for selecting potential trading opportunities;
- This process will establish a “target” price level for exit consideration and set an appropriate lot size for your position;
- Rules for when to make a market entry and for establishing a stop-loss order at the same time as the execution order is placed;
- Exit rules will dictate when to cut off a loser, how to let a winner run, and when to close a position.
Fine tune these steps on a practice demo, but remember to be methodical, acting like a businessman making a logic-driven decision is key. Keep in mind that Forex trading is risky and not suitable for all investors.