Have you ever made a profitable trade only to feel a bit clueless as to why it worked out so well?
Sure you have. We’ve all been there at one point or another in our trading career. But unlike most profitable trades, the one made for the wrong reasons or without knowing why you did it is a loss.
Why is that, you ask?
There are several reasons, all of which we will discuss in this article. In it you will learn why this behavior is not only disastrous for your trading account but can also undermine your entire journey of becoming a successful Forex trader.
Let’s start with the obvious. Taking a trade for reasons unknown is like getting lucky at the blackjack table. All of a sudden you think you are the best player there.
So what do you do right after the big win?
Gamble everything you just won, of course. Inevitably this reaction causes you to lose all your winnings and then some.
Unfortunately an emotional response such as this doesn’t stop at the casinos in Vegas. It plagues many Forex traders and is one of the leading causes as to why most traders fail to gain any real momentum when attempting to build a trading account.
The market is a ruthless teacher and one that has little tolerance for a trade (or series of trades) put on for little or no reason. In fact it has no tolerance for this sort of behavior and is not afraid to hand out lessons in humility.
Confidence is an important attribute for any Forex trader who hopes to succeed. But misplaced confidence that arises from a profitable trade taken on a whim is sure to get you in trouble.
Overconfidence can be an issue regardless of whether you took a particular trade for the wrong reasons or not. But the overconfidence that ensues after profiting from a trade in which you had no business taking is especially dangerous.
The use of price action to trade the Forex market is often simple but never easy. So when you end up with a profitable trade based solely on luck it makes trading seem easy. This is especially true if you experience a lucky streak in which you have two, three or even four winners in a row.
This feeling inevitably leads to putting on more trades than you should and most likely over-leveraging those positions. And while good trading should be effortless, consistent profits require a trading edge and no small amount of discipline to attain.
It’s important to stop and ask yourself, am I in this for a few profitable trades or do I have a larger goal in mind? Perhaps that goal is to become a full-time trader or even start your own fund some day.
Regardless of your specific goals, it’s critical that you understand that trading price action can be extremely simple but only once you’ve developed the discipline to follow the rules.
What do most kids do with the money their grandparents give them for their birthday? I know what I used to do – spend it.
I would spend that money so fast you would have thought it was burning a hole in my pocket. And spending it was completely effortless in a way that caused no second-guessing or remorse after the fact.
Granted I was a kid, and what kid feels buyer’s remorse? But if I compare the effortlessness of spending the money I got on my birthdays with spending the money I made mowing lawns all summer, there was an undeniable difference.
What was the difference, exactly?
Put simply, effort. There was no effort required to receive money from my grandparents therefore I spent it without hesitation. However the money I earned while slaving in the heat all summer mowing lawns was much harder to part with because it took effort to earn it.
Now let’s apply this same principle to trading Forex. When you make money on a trade in which you took no effort in evaluating, spending the money earned is effortless. This feeling of “found money” will more often than not lead to over-leveraging your account on the very next trade.
If, however, you profit from a setup in which you evaluated and traded based on your trading plan, that money becomes much harder to part with.
Why? Because it took some effort to achieve. You therefore feel more of a responsibility for how it gets put to use on future trades.
Becoming a successful Forex trader is a process, and a long one at that. Like any process with an end goal it’s important to continually build upon a strong foundation. In other words, do more of what works and less of what doesn’t.
While a profitable trade taken for the wrong reasons may add to your bottom line, the mere act of taking the trade undermines the time and effort you’ve put into the process up to that point.
Being successful in the Forex market is habitual. No full-time trader or fund manager wakes up in the morning and says, “I wonder how I should trade the markets today”. They already know what works so they simply trade in a manner that fits their profitable style of trading.
You can’t form those successful habits if you are constantly undermining your own trading strategy. Every time you put on a trade for little or no reason other than to experience the rush of having capital at risk, you break up the process of creating profitable habits.
The most effective way to stop taking trades for the wrong reasons is to ignore the profits. Forget about how much money you could make on a trade or trying to meet weekly or monthly trading goals.
Instead focus on your journey as a Forex trader. Refine your trading plan or reevaluate your mental approach to the markets. Do whatever it is that you need to do to become the best trader possible. But above all, forget about the money.
If you stay mindful of the process and work on your craft every single day the profits will eventually find you.
Have you experienced the difference between a profitable trade based on pure luck and one that was strategically placed and managed?
Share your story or ask a question in the comments section below.