3 Habits that will kill your trading and how to cure them
Being a successful forex trader is not easy. That's not because it is hard to do – it isn't. It doesn't have to involve complex theorems from the realms of rocket science. Some of the best traders in the world use very simple trading systems.
Legendary commodity traders Richard Dennis and William Eckhardt developed the famous 'turtle trading system,' which is very simple to follow and can be downloaded for free. It was also very profitable. However, this is not to advocate this system for forex traders – different people have had different experiences with it. But it is a great example of a successful trading system, which has simple rules.
So where do so many traders go wrong? By their very nature markets are unpredictable therefore there can never be total certainty that any single trade will result in a profit or a loss nor by how much. And humans find uncertainty hard to cope with, which creates a flurry of emotions, such as fear when it's all going wrong or euphoria when it's all going well.
3 Common bad habits:
Bad habit number 1: Not sticking with a trading system or not having one. A trading system should set out in detail the conditions for entering a trade and when to cut losses and take profits. It should also establish trade sizes. But once a trading system has been decided upon, after testing, it needs to be adhered to strictly.
Bad habit number 2: Over-confidence. This is where traders over-estimate their abilities and that leads to reckless risk taking and over-trading. Typically too much capital is at stake per trade and that sees a trader's capital quickly wiped out.
Bad habit number 3: Another very common mistake is to add to losing trades. Traders do this because they believe they're right and the market is wrong or hope the market will just comes back around. But remember the market can move against a position far longer than any trader can remain solvent.
3 cures for bad trading habits:
Cure number 1: Find a trading system that suits your temperament and your circumstances and test it thoroughly to make sure that it is profitable over the long run.
Cure number 2: Keep your trades small relative to your capital. Top traders typically risk just 1-4% of their capital per trade. That means they can survive a long string of losing trades and still have sufficient capital when the markets turn favourable again. Smaller trades also mean there is less at stake and therefore less emotion.
Cure number 3: Accept that trading involves losses and take personal responsibility for them. The only way to deal with this is to cut losses within the rules of the trading system and never add to losing trades. And only take profits within the rules of the system. The name of the game is to be profitable over time, over many trades, and not to be 'right,' so never take losses personally.