Most of the novice Forex traders put their 100% effort into planning their perfect entries. They tend to use multiple tools and strategies to make sure their trades are placed well. But the key element they miss while trading is their exit strategy. As surprising as it sounds, most of the beginners are hardly worried about their exit plans. This is an extremely dangerous situation to be in. One must know how and when they are going to exit their trades before even placing the order.
We want to explain this by using a simple statistic. There’s this rule called 90/90/90 in the world of trading. It essentially means 90% of the traders lose 90% of their trading capital in the first 90 days of their trading journey. Shocking, isn’t it? Traders put themselves in this situation by not giving much importance to protecting their trading capital. Their entire focus will be on generating the maximum amount of profits in very less time.
The most fundamental thing one should understand about Forex trading is that the number of trades they take, do not matter. Forex is a 24 hours market and operates five days a week. There are many currency pairs that have high volatility, and the trading opportunities this market offers are endless. So what’s the point of taking 10 trades a day or 20 trades a week? All you need is that one or two trades a week that has a high probability of winning. Yes, that is all you need to be a successful trader in the Forex market.
Greed is THE most important psychological factor one should have control over, before getting into the world of trading. Greed takes over your logical thinking capacity and pushes you to trade more and more even when you are not sure of winning.
Let’s understand this with a simple example. Consider you are leverage trading EUR/USD pair, and you normally do not exceed 10X leverage. You started seeing the charts and found a potential buy signal. Instead of sticking to your 10X leverage strategy, you want to do a 100X leverage as the greed kicks in by seeing a sure shot trade. However, due to some news event, you end up losing that trade. This will eventually result in a margin call and you losing all of your account balance.
Therefore, always remember to stick to the plan. Sticking to one strategy that works for you well is crucial than trying a million strategies while expecting more profits. Financial discipline is more important than having financial knowledge.
As Warren Buffet says, ‘You don’t have to be smarter than others. You just have to be more disciplined than others.’
Usage of Risk/Money management is more crucial in trading than having more knowledge on understanding technical patterns etc. In the long term game of trading, these risk management principles are the ones that make you rich. So with all these being said, you might think that we are forcing you to trade conventionally with fewer profits. That is not true.
Let’s do some basic math. Consider you take only one proper high probability trade a week and want to risk only 2% per trade with a minimum RRR of 1:1. What is the estimated % of the profit you make per year when your trading capital is $50,000? 20%? 30%? Nope, it is 150%. Surprised yet? Trading is the game of compounding. If you just trade with minimum risk as discussed above, at the end of the year, your capital will be $125,909. Your profit is $75,909, which is 150%. There are many ways to make money in the Forex market. But we should learn the art of not losing money to become a successful trader. Protecting your account should be your utmost priority. Period.
Lastly, we want to mention that trading is a game of probabilities. Knowing when to be certain and when not to be, is also the key. If there is any uncertainty, we recommend you to expect the worst and do not hope for the best when you are risking your capital. Many money management techniques must be incorporated into your daily trading activities to stay profitable. Some of them include using the stop-loss order (and learning how to use them perfectly), taking profits along the way, optimal position sizing, usage of trailing stop to mitigate the risk, etc.
It is very hard to control our emotions. So the only way to become a profitable long term trader is by setting strict Risk Management rules for all the trades you take and following them with paramount discipline.
We hope you had a good read. Watch this space for more informative and interesting content on Forex education. Happy Trading. Cheers!