Forex Trading Tips: 3 Sins of Trading
3 Sins of Trading
It is an often repeated maxim amongst financial cognoscenti that Americans devote more time to arranging their summer vacations than they do planning for their life in retirement. I am certain that’s true, just as it is true that many traders spend more time checking the ripeness of the fruit at their local supermarket than they do selecting their next trade. I am certainly guilty of that sin.
As currency speculators we love to trade, but often we trade for very wrong reasons. I think there are three basic impulses that drive us to make senseless trades.
- . We are bored
- We are pissed off
- We are super excited
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The boredom trade is probably one of the worst because it puts you in the market for absolutely no good reason. You are sitting at the screen. The price action is moribund. The calendar is barren of any event risk but suddenly you decide that THIS support level on the five minute chart is a prime buying opportunity and so you trade it. Basically you are flipping a coin and given the fact that you are paying spread the coin is already heavily weighed against you so you are guaranteed to lose.
The pissed off trade is familiar to everyone who has traded for more than a month. You get into a trade, quite often for legitimate reasons. The market moves against you, stops you out, sometimes to the PIP of your stop, then reverses and blithely rallies in your direction! It just stole your money and you’ll be dammed if you are not going to get it back RIGHT NOW! It’s the right now part that hurts us the most. Just like a trapped animal who is willing to chew off his own paw, when we are pissed off we stop thinking about anything else except getting our money back. The irony of the situation is that by trading when you are pissed off you put yourself into a situation when you are least likely to succeed because you are typically fighting the tape instead of following it.
The excited trade is almost always the result of news. We see or hear a particular piece of information that diverges wildly from market expectation and jump all over the currency pair chasing price at its extreme which almost inevitably results in us buying the near term high or selling the near term low.
There are no perfect ways to correct these bad habits but here are some suggestions on how you can minimize some of their more toxic effects. The boredom trade can be avoided for the most part by never trading between 4 PM – 4 AM EST (2000-0800 GMT). This a by far the least volatile period of the global day where fakeouts are the rule rather than the exception. Furthermore spreads are typically TWICE as wide during this timeframe making any short term trade truly a sucker bet.
Mad about your last trade? Ready to punch the lights out of the monitor? Take out your checkbook and make a donation to your favorite charity. One it is good for your karma. Two it will take your mind off the market. Three it will probability cost you much less than the stupid revenge trade you were about to put on. Now that you’ve centered yourself you can look at the market more calmly and hopefully trade in sync with the flow.
As to trading excited, understand that you have a choice. You can wait for a retrace but will risk the possibility of a runaway market missing the trade entirely or you can accept the fact that you will get terrible execution and will need to seep your stops much wider in order to survive the inevitable retraces that follow. In either case at least you’ll know the risk up front and will be able to accept the consequences of your actions.
Ultimately the only way to minimize these mistakes is by making lots of them . You need thousands of trades to gain the experience necessary to control these impulses. I can talk until I am blue in the face about the woudda coudda shoudda of trading, but you can never truly absorb those lessons unless you put own money on the line. Fortunately the human mind will learn just as easily on $1 per pip trades as it will on $100 per pip trades, so perhaps the best suggestion of all is to trade hard but to trade small until you’ve learned to control your behavior.