The
problem with many traders is that they take
shopping more seriously than trading. The average
shopper would not spend $400 without serious
research and examination of the product he is
about to purchase, yet the average trader would
make a trade that could easily cost him $400
based on little more than a “feeling”
or “hunch.” Be sure that you have
a plan in place BEFORE you start to trade. The
plan must include stop and limit levels for
the trade, as your analysis should encompass
the expected downside as well as the expected
upside.
Cut your
losses early and Let your Profits Run
This simple concept is one of
the most difficult to implement and is the cause
of most traders demise. Most traders violate
their predetermined plan and take their profits
before reaching their profit target because
they feel uncomfortable sitting on a profitable
position. These same people will easily sit
on losing positions, allowing the market to
move against them for hundreds of points in
hopes that the market will come back. In addition,
traders who have had their stops hit a few times
only to see the market go back in their favor
once they are out, are quick to remove stops
from their trading on the belief that this will
always be the case. Stops are there to be hit,
and to stop you from losing more then a predetermined
amount! The mistaken belief is that every trade
should be profitable. If you can get 3 out of
6 trades to be profitable then you are doing
well. How then do you make money with only half
of your trades being winners? You simply allow
your profits on the winners to run and make
sure that your losses are minimal.
Do not
marry your trades
The reason trading with a plan
is the #1 tip is because most objective analysis
is done before the trade is executed. Once a
trader is in a position he/she tends to analyze
the market differently in the “hopes”
that the market will move in a favorable direction
rather than objectively looking at the changing
factors that may have turned against your original
analysis. This is especially true of losses.
Traders with a losing position tend to marry
their position, which causes them to disregard
the fact that all signs point towards continued
losses.
Do not
bet the farm
Do not over trade. One of the
most common mistakes that traders make is leveraging
their account too high by trading much larger
sizes than their account should prudently trade.
Leverage is a double-edged sword. Just because
one lot (100,000 units) of currency only requires
$1000 as a minimum margin deposit, it does not
mean that a trader with $5000 in his account
should be able to trade 5 lots. One lot is $100,000
and should be treated as a $100,000 investment
and not the $1000 put up as margin. Most traders
analyze the charts correctly and place sensible
trades, yet they tend to over leverage themselves.
As a consequence of this, they are often forced
to exit a position at the wrong time. A good
rule of thumb is to trade with 1-10 leverage
or never use more than 10% of your account at
any given time. Trading currencies is not easy
(if it were, everyone would be a millionaire!).
