FX Do's and Don't's
Do’s
1. Cut your losses and let your profits run
To be successful in trading currency markets,
individuals must be committed to cutting losses and letting profits
run. Often, people take profits too quickly in order to prove themselves
correct. The basic failing of most speculators is that they put a limit
on their profits and then fail to limit their losses. Everyone dislikes
being wrong and individuals will often let their losses run, allowing
them to balloon in the hope that eventually the market will turn around
and prove them right. After further drawdowns, the unsuccessful trader
can become attached to the trade and begin hoping for a small loss
instead of a profit. Don’t fall in love with your trades!
2. Be aware of the trend
Remember
the trend is your friend. It is vitally important that a trader be
aware of the strongest underlying force in the market, either bullish or
bearish, especially when both the fundamental and technical factors are
aligned the same way. When a market is demonstrating significant
strength, it may be unwise to attempt to go against the trend.
3. The market always looks its worst at the bottom
It
is important to remember that market sentiment and consensus are most
extreme at major turning points. Sentiment is usually most bearish, for
example at the bottom of a bear market, and most bullish at the top of a
bull market. Therefore, be prepared to treat each day objectively by
not allowing emotional fervour to take over and cloud your judgement. It
is often said that a market will be at or near its peak at the time the
levels and stories hit the newspaper headlines.
Don’ts
1. Don’t trade too many markets
It
is difficult enough to successfully trade and understand one specific
market. It is almost impossible for an inexperienced trader to be
successful in several markets at the same time. The fundamental,
technical and psychological information necessary to trade successfully
in more than a few markets is likely to be more than you have the time
or ability to accumulate. Take the time to know each market you trade
well and avoid the temptation to jump around and chase volume or
volatility.
2. Don’t try and buy the bottom or sell the top
Attempting
to pick tops and bottoms in a market is an extremely dangerous
exercise. Be content to wait for a trend to develop and then take
advantage of this trend once it has been established. If you miss a
trade, remember that there are always more opportunities coming.
Similarly, don’t overstay your welcome; be prepared to take your profits
and go on to better opportunities.
3. Don’t add to losing positions
While
there are some extraordinary individual traders whose trading method
centres around averaging, it is generally held that adding to a losing
position is too dangerous for most traders to contemplate. Averaging
usually occurs when traders refuse to admit their mistake. Traders are
often tempted to add to a losing position to improve the average price,
but it should be avoided. Remember that a margin call is a wakeup call
indicating that something has gone wrong and you need to re-evaluate
your trade.
4. Don’t increase your volume too quickly
Most traders in the currency markets
start off trading smaller sizes, and after some success over a period
of weeks or months they increase their volume. You should be aware that
many of today’s great traders spent their first year trading the minimum
transactions size, and that traders who suddenly increase their volume
after a few small wins can be at a higher risk due to overconfidence.
5. Don’t allow your position to control you
Remain
in control of the situation and yourself. If you have a position that
is too big, its sheer size, rather than its merits, can cloud the
situation and affect your judgement. If your trades are keeping you up
at night or making you nervous, trade smaller amounts that you can be
more comfortable with.
6. If you cannot afford to lose, you cannot afford to win
A
successful trading method must match the goals and personality of the
individual. This includes both the financial and emotional makeup of the
trader. Losing is a natural part of trading, and if you are not in a
position to accept losses psychologically or financially, you have no
business trading. Remember that successful traders are usually only
right 30-50 per cent of the time; it’s how you manage losses that is key
to your long-term success.
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