To trade in the Forex market successfully, you need to have a trading plan that you execute consistently. But simply having a plan is not enough. You must be able to follow and execute your plan consistently. But all too many traders stray from their plan, and more often than not, they get burned. This happens to even the most experienced traders. To prevent ourselves from straying from our trading plan, we must first recognize the pitfalls that we face when trading. Only then can we make the necessary changes to our mind-set and remain on track.
The pitfalls that threaten a trader's success are many, but almost all of them are psychological, meaning emotions can get in the way. These psychological factors are barriers to your success, and can result in serious hits to your account. Traders have even had their accounts wiped out because of these psychological and emotional influences, afterall, they can be extremely hard to resist and keep under control. If we could eliminate making psychological errors, and from letting emotions such as greed, fear, or over-zealousness get in the way, we can become more successful traders.
Since we are human, we can't take emotions out of the equation. They are always going to be there. However, if we can recognize the instances when emotions are governing our decisions, and understand in what ways they can influence our choices, we can become empowered to shift focus from our emotions and back to our plan. Here are the 3 types of errors that our emotions may lure into making:
- Taking a Trade that is not part of your plan. This type of mistake can be excruciatingly tempting. You may find yourself in this position if you are on a losing streak and are desperate for a win. Or you could be on a winning streak and feeling invinsible. You might receive a tip that a large bank is buying a particular currency, but tips are for the most part unreliable (in fact, the tip could be from the bank itself looking for buyers of a particular currency!). All of these scenarios are dangerous because if you lose, you feel miserable about making a preventable mistake that cost you. This can take you on a serious downward spiral as you make subsequent emotional trades as you try to make up lost ground. On the other hand, winning the trade can lead to just as much damage since it may encourage you to make other similar trades that will not be profitable in the long term.
- Passing on a trade that is part of the plan. There are a couple of reasons why a trader may make this error. Perhaps they've lost a couple of trades in a row and are scared of losing another trade only to see you passed on a big winner. Or perhaps they have won a few in a row and think the streak can't last forever. This can be damaging because if a winning trade is passed over, and then makes a trade that doesn't fit into their plan which they end up losing.
- Changing the Rules Based on Insignificant Events. This can wreak havoc on your account balance, and might just be one of the worst mistakes you can make. Perhaps you've got some experience, and while you've had your ups and downs, your strategy has generally been profitable. But what if you then lose 5 trades in a row (which can happen). All of a sudden you may call your strategy into question. If you end up changing your strategy to accommodate a few losers, you could be headed down a very dangerous path. Quite likely you will end up losing far more than if you had stayed the course with your original strategy. While it is wise to evaluate your plan from time to time, making changes based on only 5 trades is an overreaction.
From the Desk of
Aaron Reid
Senior Trade Strategist
BDI PowerGroup
