What defines a successful Forex trader? It is not the trader who thinks it is easy, nor the trader who takes a hit-or-miss approach similar to flipping the coin.
Successful traders have to treat trading as a business and have the motivation to get better. Does that mean that you have to trade eight hours a day? Not at all, although the more time you spend the better. What does it take to be successful?
With more than 10 years of knowledge from our monitoring of Forex traders, and from our share of trading, we will try to right some of the wrongs before they send you down trading paths that will cost you money. For some of you, the characteristics may come to your mind after your ownself-analysis. Hopefully, it will force a change. For others, you may have already come to the realization and changed. For still others, you may look stay the same.
Most of the Forex traders have an opinion as follows, “All I have to do is flip a coin. If the flip says ‘buy,’ either I will be right, and the price will go up, or I will be wrong, and the price will go down. I am willing to take that bet.”
If this is easy like that, everyone would be trading rather than looking for the next answer to the same question of how to trade successfully.
However, it does seem easy. If the event of the next price movement were isolated, and not dependent on any outside forces like fundamental analysis or technical analysis, a trader could flip a coin to determine whether he or she should be bullish and buy, or be bearish and sell.
What is important to realize is that the 50-50 probability of the price moving higher or lower is for the next price change only, which is typically a one-pip move. That is, if the price of the USDCAD is at 1.3512 for example, there is a 50-50 chance the next price move will tick up to 1.3513 or down to 1.3511.
If there were no bid-to-ask spread, the 50-50 probability of making a pip or losing a pip from a standing start would be correct. However, in Forex trading, there is a bid-to-ask spread that is changing the odds for success slightly against the trader. This spread is the property of the market makers or brokers who quote the market prices 24 hours a day, 5 days a week.
For example, the USDCAD, which is the most liquid currency pair, tends to trade at around a two-pip bid-to-ask spread. Assume the current price in the market is 1.3510 Bid/1.3512 Ask. If a trader flips a coin that has “buy” written on one side and “sell” on the other, and the random flip says to “buy,” the trader would need to buy at the asking price of 1.3512.
If the deal were immediately liquidated, the best the trader could do would be to sell at the bid price of 1.3510. If this were done, the trader would incur a two-pip loss on his long position.
Taking a two-pip loss is not the definition of successful trading.
To make a profit of one pip, the trader would need the bid price to move up to 1.3513. This would be the minimum price that would guarantee the trader a profit. If the market bid-to-ask price is 1.3510/1.3512 when the trade is initiated, three successive price moves up would be needed to make a profit. That is not as easy as a 50-50 proposition from a standing start.
You Have to Work at It
The message from the example is this: The profitable trader has to make eight pips, not just one. How do you do that? By working at it. By trading smart and looking for and anticipating trends that make the eight-pip hurdle easier.
Of course, you need to understand is trading is not easy. It takes effort. It is more than an auto-execute program that wins 90 percent of the time. It’s not only about the wins in Forex trading, but about the quality of the wins and about limiting losses.
This simplified example illustrates the hurdle that traders have to overcome to make money. Traders who simply take the approach that trading is a 50-50 proposition and assume that trading is easy will soon find out that the bid-to-ask hurdle is changing the odds against them. As a result, to be successful, traders need to do more. They need to look at the market with a more intelligent and logical focus and in the process changing the odds of winning back in their favor by trading trends.
The fear
Many of the traders when they start trading—and even after they have done it for a while—are not ready for the frequent price action, and their lack of preparation is manifesting through increased fear. What does fear is doing to your trading? It often leads to trading errors.
Price action change and volatility, as well as the pace and momentum of it, are causing fear.
Fear is an emotion that traders need to control but most cannot or don’t know how to. Most traders do not understand fully what causes fear. Not knowing what causes fear makes figuring out ways to control it difficult, if not impossible.
Understanding that Forex trading will always be volatile is a step in the direction of understanding, facing, and controlling one aspect of traders’ fear. If you know that the market will fluctuate and not just go up in a straight line or down in a straight line, you are more able to face that price action with less fear.
The fact is that most retail traders have fear, and that fear will lead to closing out positions too quickly. It will lead to overleveraged positions. It will lead to ignoring stop levels. It will lead to losses.
Fear has to be defined and, more importantly, controlled. So be aware of the fear as it is a natural feeling don’t run away from it.
Counter-trend trading
The final thing that most Forex traders don’t do is anticipate trends. Anticipating a trend is not a rocket science. After all, most successful businesses, whether they are large or small, anticipate trends.
Google anticipated the need for an efficient search engine and also an- ticipated that businesses would pay to have sponsored links to their sites. Facebook anticipated the need for a social networking site. Amazon anticipated a need to download books online and manufactured the Kindle to satisfy that demand. Apple seems to magically anticipate trends with all its product offerings.
Trading with the trends is the most important thing. There are two big reasons for this.
One, trends are generally fast and directional and follow along a fairly consistent path of higher highs and higher lows for an uptrend and lower lows and lower highs for a downtrend. If a trader catches a trend and is able to stay on it, profits can be a multiple of the risk taken.
The second reason that trading with the trend is so important is that doing so prevents oversized losses in the account from trading against the trend. It goes to reason that if the profit-to-loss ratio of trading with the trend is potentially high, then the reverse would be true if a trader positioned counter-trend.
The fastest way to fail in trading is to be on the wrong side of a trend, not recognize the trend, fight the trend, overleverage against the trend, and ignore the trend. In addition, the longer a trader delays the process of getting on the trend, the greater the chance the market will reverse and really twist your mindset as fear is increased.
So how do improve your chances of trading a trend?
The best way to catch a trend, trade a trend, and stay on a trend is to anticipate the trend. Look at any chart. There are trends.
Most of the traders can recognize a trend in hindsight. What most retail traders do not do is anticipate a trend. If you don’t anticipate a trend, how do you know when one may be developing?
Do you look to anticipate a trend? Do you know of any market clues that would help you predict a trend-type move? If you had an idea a trend was on the horizon, the only thing you would need to do would be to get the direction right.
Do you want to be the common trader who thinks trading is easy, who doesn’t understand fear, who relies too much on counter-trend trades yet does not pay attention to anticipating the trends and trading with it, which would keep risk down? Do you want to say you want to trade the trends but you never so? Do you want to be in the 95% of the traders and continue to lose money doing it your way?
If you want to change from the norm—then take that look at yourself and make that change.
Look at yourself in the mirror. What do you see? A trader who thinks trading is as easy as making a pip or two, or a trader who realizes that to be successful it will require some work. It requires catching the trends. What is your bias?
