Are you trading to supplement your income or to cover your day to day financial obligations?
One of the most important yet least thought about components of trading is “Trading Psychology”. As far as I’m concerned it’s second behind ‘capital management’ with regards importance for your overall longevity and success as a trader. Funnily enough both topics are largely ignored by most new traders until it’s too late and they have blown up their trading account for the 3rd time.
Trading is all about emotions and most importantly confidence. When you’re winning you’re on cloud nine and you feel invincible. But when you’re losing it can be soul destroying and downright depressing. So if you’re planning a career as a trader you need to think long and hard if this lifestyle is for you!
But before we talk about ‘careers’ as a trader let’s focus on the two most common types of new traders to the forex market:
1/ those trading to supplement their current income, or
2/ those trading to cover their current financial obligations
These two groups may seem very similar but they couldn’t be further apart.
Which Type of Trader Are You?
I’ve worked with thousands of new traders and I can usually tell what group a trader belongs to after only a few minutes of talking with them. But an even clearer sign is tracking peoples profile as they move through the website.
Type 1/ A trader that is trying to supplement his/her income will 90% of the time go through the FX Pro trader course methodically. They will answer the quizzes and then ask questions about certain areas they don’t understand. It’s called ‘Learning’ and is extremely important when undertaking any new career or hobby in life let alone one where you’re risking your hard earned cash on.
They are not in a hurry to make $100K out of a $5K investment. They are methodical, clinical and patient. This trader has a very high chance of success!
Type 2/ A trader that is trying to cover their current financial obligation hasn’t got the comfort of having ‘time’ on his/her side. They trade to make a fast buck and that’s a recipe for disaster.
Usually a trader who has the pressure of mounting bills, will over trade and over leverage their account with no capital management protocols. This is primarily because they are on a timeline to their next payment.
If they make money they think they’ve found the Holy Grail and this usually results in bigger and more frequent trades, until they hit the proverbial brick wall and they run into trouble.
Once their capital starts to diminish the ‘trading demons’ come out and starts messing with them. They start second guessing every trade they put on and after a short while they’ll be closing out positions as soon as they put them on because they think the market is going to move against them.
This emotional rollercoaster continues until their account is down to zero.
So How Do You Avoid This?
Put simply you need to be honest with yourself before you start trading, before it’s too late!
If you do recognise yourself as a ‘Type 2’ trader then stop and take stock of your current trading history.
If you are losing money then stop trading and start learning!
If you’ve been making money then ask yourself the question: ‘Do you know why the currency moves went your way?’ If you don’t know then you may have simply had a lucky run which could turn against you at any time.
Either way it’ll only take you a week to get up the curve, so take a time-out and get the knowledge under your belt before you become another statistic.
The forex market is a funny beast and it can’t be pushed around like most things. It will give you the cash when it’s good and ready so be patient and wait for the good trade set ups. If you try and fight it and force your positions, when the good trade set up is not there, then you’ll more than likely come unstuck!
Your entire trading performance will obviously come down to how well you manage your cash but also just as important will be how well you manage your emotions. And I’m not just talking about when you’re losing as I’ve seen more carnage in traders accounts just after they’ve made ‘bucket loads’. There’s nothing worse than feeling invincible because you start trading without any stops.
For whatever reason once traders start making a lot of cash they forget all the rules and protocols that got them there in the first place. So it’s not just those in a hurry that can come unstuck from being over confident.
If you are patient to wait for good market conditions (trending markets), and good trade set ups and then stick to your capital management protocols then you are more than likely going to be a profitable long term trader. You’ll be telling your grand kids about the day you started trading and how ‘by learning & sticking to the rules’ you made enough money to buy the castle they are playing in!
If you don’t manage your emotions and your capital then becoming a profitable long term trader will only ever be a fantasy!