This is the third and final article in a short series regarding preparation for trading in the FX markets. While the lessons in all three articles are important, this is the most important.
Any new job or career is going to throw up challenges and trading is no different. Based on my own trading and my experiences as a trading educator, I have no doubt that the greatest obstacle that a new trader faces is emotional control – or lack of it.
Being mentally prepared for trading and the emotions of trading is at least half of your battle on the road to a successful trading career. I am not a psychologist and there are plenty of others who will know the theories of emotional control better than me. Safety in the Market students may like to go through the newsletter archives and read articles by one of our previous instructors, Sinan Koray, who knew this topic very, very well.
In this article, I want to focus on mental preparation – that is, putting yourself in the best possible mental frame of mind. I will focus on what I do each trading day to stay in control of my emotions and I will also share some techniques for traders who are approaching a new market, so they can ‘lessen the shock’ when they take their first trades.
I will begin with the concept of a routine. Hopefully, you read the previous article in this series, Preparation for FX Trading 2 – Trading Plans and Business Plans. Having a Trading Business Plan is all very well but if you don’t follow it every time you trade (or at all), it is just a waste of paper.
Having a daily routine that you can tick off item by item as you complete it will ensure that you get the most out of your Trading Business Plan and give you the best chance of success.
Your routine should consider the following stages of a trade:
- Before you Trade
With the leverage available in today’s markets, even a small trader can easily take a position size in excess of one million dollars. For example, a $5,000 margin will allow you to control a $1,000,000 position in the Australian Dollar against the US Dollar.
Before you even begin to look at your potential trades, make sure you are in the right frame of mind. Start by re-visiting your goals to remind yourself why you trade.
I would also recommend that you stop and analyse yourself (or have someone else analyse you – your trading partner, your spouse, for example) and rate your emotions. Are you calm or stressed? Are you at peace or are you angry? There is no right or wrong answer and this is not a time to consider WHY you are angry (it’s my wife/children/boss’s fault), this is a time to recognise that you may need to calm down to ensure you make good trading decisions.
Two powerful techniques I learned from Sinan Koray were keeping a journal and meditating. I find that writing my thoughts out in a personal journal can help get them off my chest and I find that meditation leaves me calm, relaxed and in a much better frame of mind to confront a trillion dollar market like Foreign Exchange.
- Choosing a Trade
Once you have the right mindset, you will be in a much better place to choose a winning trade. This is where your Trading Plan comes to the fore. If you have done your homework and have a plan that you have tested and have full confidence in, this should be a relatively easy and stress-free operation.
You will either run a scan or go through your individual markets, looking for trade setups. You will then rate the strength of your setups, perhaps using a checklist. Finally, you will choose the best looking setup(s) and complete the necessary paperwork (i.e. a written trading plan).
If you are finding it hard to choose a trade, or you are taking too long, or you are lost, or you don’t have confidence in your system, you need to go back and review your plan.
A doctor would not perform open-heart surgery if they did not have confidence in their plan, methods and ability. Taking a trade may not be a life or death situation, but it could mean the life or death of your trading business. If making money from a successful trading business is important to you, you must make sure that you do it right.
- Placing a Trade
Once you have chosen a trade, it should take two minutes at most to communicate the details to your broker, either by email or via your broker’s internet trading platform.
There should be no mucking around, no thinking about it. It should be an automatic process. If emotion intrudes at this point (such as the fear that you have picked a losing trade or that your trade cannot lose and your greed is telling you to double your position), you should stop and recognise this and perhaps reconsider your confidence in your plan.
- After the Trade
The best piece of advice I can give you once you have placed a trade and you have your stop loss in place is to leave it alone! Don’t touch it, don’t fiddle with it, don’t check the market twenty times a day – just leave it alone and come back the next day to check on it.
Many a good trade has been ruined by fiddling. Legendary trader Jesse Livermore said: “many a man can be right, but far fewer can be right and SIT TIGHT.”
After the trade has been completed, you should update your records, noting whether the trade was profitable or not. You should also write down anything else of relevance about the trade, including your emotions before, during and after the trade. This can be handy when reviewing your trading.
No two traders will have the same routine because we are all different. You need to find the right routine for you, the one you are most comfortable with. Having a good routine will give you a focal point when trading the largest market in the world – Foreign Exchange.
Finally, you must know your market. David Bowden said that a trader should “know their market like a cow knows its calf”. Do your homework. Do your research. Do everything you possibly can to understand what you are getting into.
If you want to trade the Australian Dollar against the US Dollar, open a chart of FXADUS in ProfitSource and review its entire history. Study the bull markets. Look at the bear markets. Analyse the sideways moves. Use the Average Range to tell you how far it normally moves. Look for any gaps or large range days or market crashes, such as that which occurred in 2008.
Use the Walk-thru mode to open a chart back five or ten years ago. Then, day-by-day, step through the chart and apply your trading plan to see how it would have performed and what it would have felt like.
For the past six years, I have been signing off my Trading Tutors newsletter articles with the words I learnt as a Cub Scout – “Be Prepared!”
If you are going to take on the biggest market in the world, you should be prepared for what it might do. There is no excuse for not being prepared – financially, intellectually and mentally. Study the history. Test your system. Don’t trade until you are confident in your system and your ability.
That brings us to the end of this three-part series of articles on Preparation for FX Trading. If you have read all three articles, thought about them and compared them to your own trading, congratulations on the effort and I wish you a long and successful trading career.
Trading in the FX Markets is a challenging endeavour but one that has the potential to be extremely rewarding for anyone who fully sets their mind to it.
If you would like to learn more about some of the techniques I use in forecasting a currency market, I will be presenting an online Currency Forecasting Seminar on Saturday, September 22, 2012 that will take you through detailed forecasts on the Australian Dollar/US Dollar, the Euro/US Dollar and the US Dollar/Japanese Yen currency pairs. (Click here to watch a short video on the seminar.)
There are still some seats left for what should be an enjoyable day. You will learn things about each of those currency pairs that you won’t learn anywhere else.
For extra reading on Trading Psychology, try these articles from the Safety in the Market archives: