One lesson of life that is pervasive in nearly every activity that we pursue is that we must all learn to manage our expectations of potential outcomes and the efforts that will be required.
We soon learn that winning the lottery or having a great job fall into our laps are foolish expectations to build a life strategy around, but the realization of a truth does not necessarily guarantee that we will be mindful of it when a new activity comes along. Many newcomers to currency trading have learned this lesson the hard way by failing in the first three months of trading, but every successful trader understands that managing expectations is at the heart of his disciplined approach to the market.
Managing expectations is part of the psychology of trading, a new discipline that has received much attention in the past two decades. Self-awareness is key to understanding how we view the forex market and how we interact with it. Expectations can apply to each of these phases and should be addressed up front:
- Your Self Image: Are you really cut out to be a forex trader? A number of points may contribute to answering this question. If you are losing sleep at night due to the intensity required or the necessity of accepting losses as part of forex reality, then perhaps your approach needs a review. You do not have to be a “scalping” day-trading expert to win in online forex. Adjust your timeframe approach to a “swing trading” genre to ease the tension a bit and see how you fare. Trading is also about discipline and following a set of rules to the letter. If your free spirit would rather not be so encumbered, then once again, trading may not match up with your personality type. If you feel comfortable with your trading style, then confirmation is always a good thing to have;
- The Forex Market: The forex market is all about establishing equity in exchange rate pricing, not selling a product or commodity. As a retail forex trader, you are engaged in speculation, plain and simple. Intrinsic value is nowhere to be found. Relative value is the name of the game, and no single trader has the resources available to outguess the market. You must ride the waves, gauge momentum, and rely on your technical tools. Losing trades will be plentiful. They are to be expected and accepted. Recent published statistics suggest that there are three losing trades for every winner! Experts may have a better track record than the average, but they, too, must manage expectations in this area. The Rule is simple – cut your losers early, and let your winners run. One good winning trade will nearly always offset three small losing ones, if you manage the value of your losses in a tight fashion;
- Forex Trading: The act of trading must be very disciplined, according to a step-by-step trading plan that incorporates prudent risk management techniques. Instincts based on knowledge and experience may guide your effort, but shooting from the hip with no stop-loss orders in place is a recipe for disaster. Sooner or later, you may find yourself shooting at a tank with no opportunity for a return volley. Never risk capital in forex trading that you cannot afford to lose and follow the “2%/6%” rule for money management. You should never put more than “2%” of your forex account balance at risk in one position, nor should you have more than three such positions, “6%”, open at any one time.
Related posts:
