In Forex trading, your number one enemy is yourself. By now it’s pretty common knowledge that the vast majority of day traders lose money. Depending on the report, somewhere between 70%-95% of full time traders fall into that category. What is remarkable is that by contrast, the S&P500 has increased by an average of 9.75% annually since 1965. That is to say, a novice investor could create a portfolio that very simply included several of largest companies listed on the NYSE and expect a positive return for their money. Even more pointedly, someone could just store cash in a CD, or a diverse portfolio of currencies and come out better than the average currency trader.
What’s that? How can it be that some average Joe can just buy some mainstream stocks, or save his wealth in cash and come out ahead of the majority of people who have made trading their profession? After all, these professionals have to some degree or other made themselves more knowledgeable of price movements via books, seminars, webinars, trading experience, back-testing etc. That it’s possible for someone who is better informed to be less successful than someone who is less informed is extraordinary and is a phenomenon that deserves our attention!
The answer to the question just posed essentially boils down to one word, EMOTION. When someone buys a basket of currencies and lets it sit, when someone stores cash in a bank, or when someone buys some mainstream stocks and lets them sit for years, there is essentially no emotion involved. Perhaps they will still come out with loses, but emotion can’t be assigned as the fault. In contrast, for Forex day traders, an additional hurdle is set in place between you and your profits, and really it’s more of a mountain than a hurdle.
Emotion therefore has to be eliminated from your trading, and the solution is in the method. Whether you are trading using raw price action, technical indicators, or a market research based approach, you have to have a plan of action that covers 100% of possible outcomes. If you are considering buying a currency, you should only consider doing so because your method has provided you with a buy signal, not because you think to yourself, “Surely this can’t go any lower” or “The USD is really taking off right now. I’d better get in before I get left behind.”
Your exit point from the trade must likewise be methodical, not emotional. Before you even buy, you should already have your exit strategy in place. Regardless if that strategy is time based, stop loss based, or indicator based, your method must cover 100% of price action possibilities, and you must execute according to your method even if you have to take a loss this time around. Additionally, do not attempt to switch methods while the trade is active. The method you start a trade with is the method you should end the trade with.
Study hard, back-test your methods extensively, do paper trading if you are a beginner, and above all stay emotion free. That is how to avoid the pitfalls of forex trading.