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Developing costly habits as a Forex trader is all too easy. There is no boss to tell you what to do and when to do it, and you can risk as much or as little as you like.
While these types of freedoms are what attract many people to trading, they can also create habits that are difficult to overcome. In fact, many traders don’t even recognize the problem until it’s too late.
That’s why I wanted to share with you three of the most damaging trading habits. I’ll also discuss a few ways to know if you’re on the right track—and what to do if you aren’t.
I could have made this post much longer than it is, but I wanted to highlight three habits in particular that I believe to be the most destructive.
Once you finish with this post, be sure to check out 50 Signs That You’re on the Path to Success. It will help to bring things full circle and give you a good idea as to whether or not you’re on the right track.
Read on to find out if you’re guilty of one of these costly habits and what to do about it.
Two of the most common questions I receive are, how much money do I need to trade full time? And, what account size do I need to make x amount of money per month?
It would be unfair for me to answer either question. The answers will vary widely from trader to trader and depend on everything from your trading style to your cost of living.
Perhaps this is one time when a question is best answered with a question.
For instance, why ask how much money you need to trade full time? Similarly, why ask what account size you need to make x amount of money per month?
Some may say they are just curious. No harm there, right?
Maybe so, but my experience tells me otherwise. Traders who are concerning themselves with making thousands of dollars per month before they even have the right process in place are severely misdirected.
It would be like asking how much revenue your business can make before having a valuable product or service to sell.
However, focusing on making thousands of dollars per month exposes yet another costly habit among traders.
It leaves them in a position where they’re trying to make money. Instead of scanning their charts for setups, they are trying to rush things and double or triple their account every month.
This usually forces traders to do one of two things, or both.
When we step back and analyze this from a distance, it isn’t too surprising. After all, if you’re trading to make $3,000 with a $10,000 account, the only way to do it would be to overtrade or overleverage your account, or both.
So what’s the solution? Focus on slow and steady returns—but only after you have developed a trading edge that suits your personality.
If you’re averaging anything above 2% profit per month, you’re doing something right.
On the other hand, if you are trying to make 20% or 30% profit per month, you are doing something very wrong.
You need a sizeable account to make sizeable returns. The only way to get there is to focus on the trading process, keep your risk small, and choose quality over quantity.
What does it mean to be a trader? Is it the ability to buy or sell within a market or is there something more to it?
A trader is someone who trades, true enough. However, nobody enters this business with the hope of buying and selling currency pairs. The goal is always the same—to become consistently profitable.
So, what is it that separates the profitable from the unprofitable?
There are several factors that come into play, many of which I have written about on this website. But there is one critical piece of the puzzle that stands out among the rest.
What is it? Patience.
Most new traders make the mistake of thinking that they must be doing something at all times. It’s a habit that leaves them feeling like they’re somehow losing if they aren’t risking capital.
On the other side of the market, we have the profitable traders. These individuals understand that becoming profitable is about knowing when to trade.
They know that 99% of the time there won’t be anything for them to do. Even when they have an open position or two, they know that the best course of action is to not interfere.
You could say that these traders have adopted a minimalist approach, both in the number of trades they take each month and their interaction with open positions.
But make no mistake, nobody enters the market with this level of patience and discipline. It takes years of practice to get it right.
It’s also much more than just a way of trading (or rather not trading). It’s a complete mental shift. It isn’t enough to just tell yourself to stay patient. You have to work on seeing the market in a different light.
For instance, those who struggle look for something to do each day. They wake up and check the markets first thing and start searching for something to do.
On the other hand, profitable traders scan their charts briefly. If they don’t see something worthwhile, they know to walk away and come back later in the day.
It’s a quality over quantity approach to the markets. The truth is, it only takes one good trade each month to make a considerable return.
There’s no need to take 20 or 30 trades per month, and profitable traders know that.
News is a key driver of the Forex market. It moves when there isn’t any news, but events like central bank rate decisions and non-farm payroll are catalysts for all markets, not just currencies.
These and other events also create the most volatility. That is, they cause the market to fluctuate quickly within a short period of time. And we all know that volatility can produce profit. After all, you can’t make money if the market doesn’t move.
However, that movement can easily trigger losses, and in a short period of time too.
This is what happens to most who try to trade the news. They see the volatility as a chance to double their account. Instead, they usually end up with a massive loss or worse, a blown account.
There are three reasons why trading the news is a bad idea.
If you want to succeed as a Forex trader, you need an edge. It includes everything from the strategies you employ to the currency pairs you trade.
The problem with trading the news is that you have no edge. You can’t possibly know whether a central bank will raise, maintain or cut the interest rate.
You could venture a guess, but you won’t have an edge. In fact, guessing is the opposite of what having a proper trading edge is all about.
Markets don’t move in straight lines. This is particularly true following a volatile news event like non-farm payroll or a Fed rate decision.
It only takes watching a 5-minute chart following the news to see that volatility goes both ways. Although the market may finally make an extended move higher or lower, it’s not without a lot of indecision along the way.
So, even if you guess the eventual direction correctly, there’s a strong chance you will get stopped out long before you see any profit.
Even if you guess the outcome of a news event correctly and don’t get stopped out too soon, there’s still a third hurdle to overcome.
How will the market react to the outcome?
The answer to this question is as unpredictable as the outcome of the event itself.
For instance, the non-farm payroll figure could come out well below expectations. However, that doesn’t mean the U.S. dollar will move lower against its counterparts.
Here is one recent example where the average hourly earnings, non-farm payroll, and unemployment rate all disappointed.
Most traders would assume the U.S. dollar would move lower on such dismal numbers; thus the EURUSD would rise.
As you can see, market participants had other plans.
Note how the EURUSD sold off following relatively poor figures out of the U.S.
This proves that it isn’t enough to just look at the numbers. In fact, without paying attention to the market’s reaction, figures like those above are rather meaningless.
So you see, there are three reasons you should avoid trading the news. There’s far too much uncertainty and volatility surrounding events like the ones mentioned above, making trading them a pure gamble.
A better approach is to watch for buy or sell signals once the dust has settled. This is what I do, and it’s how I’m able to trade Forex without watching the news.
Some costly trading habits are easier to spot than others. Similarly, some habits are more damaging than others. In my opinion, the three we just discussed are arguably the most damaging and often unsuspecting.
It’s important to understand that you won’t make $100,000 per year with a $10,000 account. And if you do, you’d be wise to pull some of those profits out because it isn’t sustainable.
It’s better to keep your risk low with the goal of small and steady profits over time than go in with an “all or nothing” mindset.
The best traders in the world know that 99% of the time there won’t be anything for them to do. Having the patience to wait for the very best setups is what will take your trading career to the next level. Constant action, on the other hand, is a habit you should avoid at all costs.
Instead of trying to trade the news, try “reading” the price action that follows. There’s far too much uncertainty and volatility during high-impact news events to attempt trading the initial reaction.
By trading the aftermath, you avoid the volatility and also get a better perspective of whether buyers or sellers are in control.
Are you guilty of any of these costly trading habits? Did this post help?
Leave your comment or question below and I will get back to you shortly.
Justin Bennett is an internationally recognized Forex trader with 10+ years of experience. He's been interviewed by Stocks & Commodities Magazine as a featured trader for the month and is mentioned weekly by Forex Factory next to publications from CNN and Bloomberg. Justin created Daily Price Action in 2014 and has since grown the monthly readership to over 100,000 Forex traders and has personally mentored more than 3,000 students.Read more...
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