Mastering The Most Difficult Aspect Of Successful Forex Trading
Any person that wants to be a successful forex trader needs to have a deep understanding of the single most important part of the equation. Indicators? Strategy? Trading Plan? Risk Management? No. The answer is “you”.
You need to have an understanding of the type of person that you are so that information can be accounted for in your approach and strategy. Each trader must realistically assess their strengths and weaknesses so they can understand how it will impact their trading decisions. The person doing the trading is the weakest link in the chain. Thus, we want to understand and reinforce this link so it becomes as strong as the rest of the chain.
Making A Personal Assessment
Start by assessing yourself. Sit down and draw up a list of your strengths and weaknesses. Spend some time determining if they will affect your ability to make good decisions while trading.
When you're done, show it to someone who knows you pretty well and ask them if you missed anything. The perception of a third party can be invaluable for identifying shortcomings we overlook in ourselves. If I use myself as an example, I come out with something like this-
Strengths – logical nature, strong critical thinking, comfortable with risk
Weaknesses – prone to over-managing projects, impulsive/emotional decision making
Relatively short lists but all important points. I address all of them through my strategy and trading plan. I know from having a logical nature and good critical thinking that I'm going to do well with Technical Analysis. However, I need to ensure that my weaknesses don't negatively impact my trading. To do that, I decided to End of Day trade the NY session on daily charts primarily; 4H charts as a secondary. I always use a 2:1 Take Profit to Stop Loss so I can do my analysis (my strength), have time to ensure the decision is correct, execute it, and then force myself to leave it alone until it hits one or the other.
I know that because I over-manage and will make impulsive decisions if I have the opportunity that short-term trading like scalping isn't suitable for me from a psychological point of view. Long-term also works better because I am a part-time trader and it fits better with my other life commitments.
Developing Your Patience
Are you a patient person? Whatever your answer is- you're going to need more of it. New traders often lack the ability to differentiate between an optimal set up and an almost optimal set up. They see a majority of their criteria filled and they jump into the trade before it has filled ALL of the criteria that should make the trade successful.
As a hunter, you can be the world's greatest shot with a rifle, able to hit a fly from two miles away. All that skill means absolutely nothing if you don't have the patience to sit for hours and wait for your quarry to present itself. Forex traders are hunters and our quarry is the optimal set up. We have to be patient and wait for our quarry to step out into the clearing, providing confirmation that it is what we are hunting and offering a clean shot.
Combating this tendency isn't as difficult as it probably seems. The key is to have very clearly defined entry and exit criteria. Develop a check list of points to tick off that is in accordance with your strategy. Write in big, bold letters across the top and bottom
“DO NOT TRADE UNLESS ALL POINTS ARE MET”
- this will put that thought immediately into your head when you begin to compare a set up to your check list. A tangible list is beneficial because then you don't forget a point while analyzing.
The final component is discipline. You will build and exercise that as you force yourself to stay in tune with your checklist. When in doubt- just stay out. It's far easier to lose money than it is to make it in forex. You must remember there will always be more optimal set ups provided you have the patience to wait for them.
This post was written by Dennis Hall, a US based private part-time forex trader. Don’t forget you can test out your strategies on our demo account and also request a personal demo guide by one of trading platfrom experts. We’d be more than happy to show you around the platform.