Lessons from the Pros

New Year’s Resolutions

In keeping with the seasonal spirit, I thought that I would offer some suggestions for 2010. We all try to make New Year’s resolutions in an attempt to get ourselves on the right track for the months ahead. As we know in the reality of life, these good intentions are often forgotten quickly and we fall back into old habits we were trying to break in the first place! We are all guilty of this, as we are only human but I would highly suggest that where your Forex trading is concerned, you can never afford to be slack. Now is the perfect time to write yourself up a solid set of rules, set them in stone and stick to them no matter what. If you can’t enforce discipline in your trading right now, then frankly you never will. That is simply the truth of this business. So, if you are in the right frame of mind to start 2010 as you mean to go on, then join me as I go through a list of my personal suggestions for your Forex New Year’s resolutions.

“Keep control of your position size – large wins at the start suggest over-exposure.”

Forex trading makes the use of high leverage, meaning anyone can take positions of very large size with very little capital. As much as this sounds great on the tin, it is also a double-edged sword. Yes, you can make exceptional gains on a very small account, but you can also easily liquidate your funds in a very short time as well. Don’t be tempted to load up on your trades, just because you can. This is the greed talking to you and you are effectively making a deal with the devil in the process. Keep it steady and low risk – this is the true path to consistency.

“Clearly recognize the difference between gambling and trading.”

If I had a dollar for every time somebody has told me trading is gambling then I could give up all my work right now! Trading and gambling are two completely different things (see my previous article for more information). Professional traders look only for high probability, low risk opportunities in the market: nothing more, nothing less. Each and every trade should be thoroughly planned in advance, with the risk defined and the profit targets objectively identified. A trader should never just jump into the market on a reflex action. Emotions are a killer for any novice. If you want to make your trading more like gambling then I suggest trying to trade the major news releases or not using stop losses to protect your capital…but do so at your own peril. Gamblers are hopeful. Traders should be objective and rule-based.

“Don’t add to losers.”

Ever heard of dollar-cost averaging? In my opinion this is the most ridiculous concept around. Just because you are losing on a trade doesn’t mean that it is a good idea to double up your position size to give yourself a better chance of making your cash back. There are no short cuts in the markets and remember that if that trade carries on against you then you will lose even more. A trader should never chase his or her losers. Put your stop loss in place and stick to the plan. If you are wrong, you will be wrong for very little. Just accept it and move on. The minute you start to focus too much on the money is the moment you are losing sight of your plan. Trading is the art of not losing money – not giving it away recklessly.

“Have a maximum loss limit per trade.”

Every consistent trader I know has a maximum risk allowance per trade. This is a fundamental tool in the process of controlling loss and if you are trading actively I would highly suggest never risking more than 1-2% of your starting account on any given market opportunity. This way, if you lose, you lose small. I have heard of people risking sometimes 10-15% of their account on a day trade! Just think, after less than ten losers, the account is blown and goodbye trading career. Remember that the math of the market is stacked against you from the very start: If you lose 10% of your account on 1 trade, you then need to make 11.1% on the remaining balance to get back to where you started. If you lose 50% of your account then you need a 100% return on what’s left to get you square. Sobering numbers I know…Keep your losses small and you are giving yourself a genuine fighting chance of a far longer career in the world of trading.

“Don’t fall into the trap of over-trading.”

Setting yourself a daily profit target is a good idea if you are day trading, however if not properly applied it can be as much of a hindrance as it is a help. You see many newbies fall into the trap of hitting their daily profit targets and then stopping for the day. This may seem like good discipline on face value but things often change on a losing day. I have met many students who have had 3 or 4 successful days of hitting their target, only to give it all back in just 1 day. Typically, none of us like to lose. It makes us feel bad and after a winning streak, a few losers can dent the ego of the emotional trader, forcing them to chase the market for revenge in a state of emotional turmoil. They soon start taking unplanned trades and loading up to catch up. Think about this: You are not going to win every day but if you limit your wins and don’t control those losers on a bad day then things are soon prone to unwinding before your eyes. Maybe it would be a better idea to trade more when you are winning and less when you are losing?

“Write up a detailed trading plan.”

In my experience from teaching students, the single biggest problem I encounter is that the vast majority of novice traders do not work from a trading plan – big mistake. To be consistent in the market, one has to be methodical and objective at all times. This is where the trading plan comes into its own. I tell my students in the ongoing XLT program that each trade should be planned well in advance with all the possible questions which could arise during the trade, answered in advance. This is to stop that “inner monologue” from forcing you into making bad decisions. We all have to accept that we have absolutely no control over the market and that each time we place a trade, we cannot affect its outcome in any way whatsoever. Therefore, take control of what you can influence: yourself. This is the vital aspect of using a detailed and disciplined trading plan as a guide. If you fail to plan then in my eyes you are also planning to fail.

I hope that the suggestions for moving forward in 2010 have been helpful. Even though I have been trading for some time now, I realize that I am just like everyone else out there and could easily fall foul of taking my eye off the ball now and then. Therefore I regularly review my practices throughout my trading and always look to see how I can improve in consistency. In a way I am keeping myself in check, always understanding that I can be just as emotional as anybody else, so I need to make sure that doesn’t happen. Stick up post-it notes around your office, keep a journal or talk to other consistent traders to see how you can improve. This is all part of the never-ending educational journey in the market. Like I have said many times before, if you stay disciplined and give yourself a real chance for longevity, the market itself will become the greatest teacher of all. It is not your enemy, so don’t let it be. The only enemy all traders face is the one looking back at them in the mirror. Thanks to each and every one of my readers for their continued support over the last few months. Make 2010 a good one!

Happy New Year to you all,

Sam Evans sevans@tradingacademy.com