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Stage 1: Greed is the
first thing a new trader will face when starting out in the
forex world, particularly when the individual has a grasp of
trading forex and the
huge amount of money that can be made in a small amount of
time. Greed
involves over trading and refusing to exit a trade when it
is blatantly obvious the
move is over. Or, on the other hand the inability to realise
that their predictions
were wrong resulting in them being unable to cut their
losses and accept that
the trade was a mistake. Usually this emotion of denial is
formed due to the new
trader having a small does of success in his totally random
guessing of the
market direction. This small dose of success leads them to
believe that the forex
market is actually easy money (which it can be once you get
it right) and for
some reason they have an expert talent that enables them to
predict the markets
direction perfectly (which they do not have).
When the market decides not to participate in agreeing with
this random traders
decisions they have trouble accepting that they were in fact
wrong and if they
were to stay in the trade long enough it would come back in
the anticipated
direction. Then they will prove once again that they are in
fact a master trader.
At this point most traders lose their entire trading account
trying to prove themselves in the market. Whether the
trader moves on and learns from this
mistake is usually dependent on the size of the trading
account lost and the pain
of blowing out a first account.
Stage 2: This is usually
the most exciting and most sole destroying stage of
trading, at this point you actually do have a clue what you
are doing and you are
at a stage where you are back trading at the same size
account you were before
it was eaten up by the market in stage 1. This is the stage
that highlights every
flaw that will need to be addressed in your character in
order for you to succeed
at forex. This is the point many of you reading this book
will find yourself at soon
enough, you will have the ability to make huge amounts of
money from trading
forex, you will have a solid system but only your fear will
stop you from
becoming a truly successful trader.
Let's look into this a little more, now we know that a good
system can have a winning edge of 70% this means that
out of 100 trades you can expect to have
around 30 losses. The only thing you have no idea about is
when these losses
will hit and how many you may have in a row.
You begin trading with a nice string of winning trades which
send you on a high
making you feel like you have conquered the world but
suddenly you hit a loss,
then another and another. Soon enough you have lost 4 trades
in a row, you are
now far from feeling on top of the world if you were trading
3% of you account
on each trade you have lost over 12% of your account or in $
value if you had a
$100,000 account you have lost $12,000. At this point it
hits home that you have just lost the equivalent of 6 months
of wages from an average persons wage in just a few days.
You are now very wary of making another trade and when the
moment comes you decide to sit on the side lines and watch
how it plays out.
The trade does exactly as you anticipated but yet you still
feel a little hesitant to make a trade so you sit on the
side lines for the next trade which was also a
winner. Ok so the losing streak is over you place a trade on
the next signal and
guess what, yes you lose again! If you had not let your fear
take over your trading decisions and you had followed your
system at this point you would be
way ahead and in profit instead you are heading for a 20%
loss in your account.
Now you might clearly see what is wrong here but when those
emotions come
into play it is often difficult to see the light. Trading
forex is about having the
discipline to follow the rules and trade your system no
matter what your gut is
telling you. Obviously you don’t want to follow your system
into the ground, I
generally have a cut off point at 50%, so if my trading
account ever gets drawn
down by 50% I stop trading completely until I figure out
what went wrong. But
until this cut off point is met I follow my system without
fail.
Stage 3: This is the
turning point for most traders, this is the point they
either
decide that trading is not for them and hang up their
trading shoes or the light
goes on in their head and they really start cooking on gas.
Those who make it to this stage are usually no longer
concerned with the day to
day results of trading, winning a trade is no more exciting
than losing a trade
because they know that it is simply the law of average
playing out on their
trading edge and overall they will always be in profit.
Goals
The importance of short and long term goals in trading can
not be stated clearly
enough. Coming into the forex market you will be thinking
all sorts of ideas like
being able to make a million in one year, you need to clear
your head of this for
the moment and focus on two goals. Now I'm not saying you
can't make a
million in this business, you can make a whole lot more than
a million, but
without using goals to get you there, you may well get
frustrated and give up.
These goals have to be realistic, one for the coming month
and one for the
coming 6 months to a year.
Always keep your goals easily within reach, once you have
reached your goal
create a new one, but still within reach.
For example when I first began trading my monthly goal was
to finish in profit
even if it was $1, a profit is a profit and that is better
than 95% of traders out
there. Once I achieved a profit every month for 3 months in
a row I created a
new goal. My new goal was to finish the month with more than
15% increase in
my account size. Do you see how reachable goals keep your
feet on the ground
and give you something to focus on?
Trading in the forex market is all about knowing your edge
and exploiting it to
gain profits over the long term. A casino has a very small
edge yet they make
millions and never loose in the long run, do you know why?
It's because they are
consistent
, they are playing their edge consistently and the law of
averages
states that they will always come out on top.
If you are coming into this business with the idea that you
will be able to avoid
losing trades then you are badly mistaken. Losses are part
of this business and
you must accept them openly like bills you pay in any
business. Always keep in mind your short and long term
goals, remember you are playing the odds and
they are highly stacked in your favour, far more than any
casino.
Just because you have a losing trade today does not make you
a bad trader it is
simply the laws of averages playing out. If your system has
a 70% winning edge
then you know out of every 10 trades you will lose 3.
If you step back to think about this logically as a long
term business it really
becomes clear that discipline and consistency are essential
if your edge is going
to play out in the forex market.
Trading the forex market is possibly the most profitable
business in the world.
Try to keep in mind that you are learning a skill that will
change your life forever
so if you have trouble in your first few months of trading
don’t worry about it.
Remember a doctor or surgeon has to study, practice and work
for at least 10
years before they receive a large salary.
Here are the steps I followed when coming into this
business, even though I did
feel a little held back, I believe it saved me a lot of
money that I would have
otherwise lost to the market.
1. Demo trade until you have at least 2-3 months with
each month ending in
profit following your trading plan.
2. Move to a mini live trading account with
$500-$1000. This stage is not like
trading a demo account, It’s real money and greed and fear
come into play. I personally recommend you trade this
account until you at least double the starting capital while
using strict money management of no more than 5% risk on
each trade, preferably 2%.
3. Ok now you have doubled and over you original
starting capital and even
though it has taken you a while you feel on top of the
world. It’s time to increase the account size and take it to
the next level but I would keep the account under $20,000
until you have proven once again that you can double your
starting capital. Once you double your capital again you
will now have in the region of $40,000 which is a fair size.
It is now up to you how you fund you account but remember
don’t put all you eggs in one basket.
If you don’t have capital to fund your account once you get
to stage 3 do not
worry, using the money management outlined earlier you can
build your small
trading account using compounding and you will be surprised
how fast it will
grow. Following these steps enabled me to learn to build
wealth in this business
without losing a large amount of money, I hope they will do
the same for you.
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