To exchange two currencies one should sell one currency and buy the corresponding amount of another. If you think one currency will appreciate against the other you can exchange the second for the first and stay in it. If all goes to plan you can exchange the first currency back and collect the profits. Simple as that.
But is it? Some frightening statistics for you: 90% of traders lose their account and 10% actually go bankrupt. Most traders are above average in intelligence, education and income. So how can so many fail?
Foreign exchange, by its nature is a volatile and inconsistent market. In order to trade successfully it is essential for the trader to take into account technical and fundamental data and make an informed decision based on their perception of market sentiment and expectation. Timing is everything. Also a trader must be well informed in the correct risk management techniques relative to their account size.
Many new traders believe that they can trade consistently with 80% accuracy, can buy a system that is 100% accurate, can turn £1,000 into £100,000 within a few months and quit their jobs to make a living full time from trading.
Sadly for the most part, these are misconceptions. Trading is not an exact science. There is no magic formula. It is all about probability. It is the art of correctly applying a set of carefully thought out rules and apportioning the likelihood of an event to result in success.
Imagine two traders get the same signal at the same time and act on it. One’s action may result in profits while the other’s results in losses. This can occur if each trader made different combinations of decisions during the course of the trade.
These could include scaling in and/or out of the trade or setting or not setting profit objectives prior to entry. The trader who made the most effective overall combinations of decisions will generally have the better trade results in the end.
Naturally, at times pure chance gives better result to the worse trader.
In order to trade successfully some guiding principles should be observed. It is important to be cautious. Only trade with money you can afford to lose. Trading is exhilarating and can become addictive.
The more involved you are with your money, the harder it is to make a clear-headed decision. Money you need to survive should never be traded. If you are unsure about a trade, stay on the sidelines. Don’t ever equate your success or failure in the markets with who you are as a person.
Learn how to gauge market sentiment. If you are in the right direction with a trend your trade will be successful. Of course, trends can reverse at any time.
However, technical and fundamental data can indicate the age and strength of a trend. It is possible to be right about a potential market movement but be too early or too late with your trade.
Timing means knowing what’s expected and taking into account all considerations before trading. Technical analysis can help you identify when and at what price a move may occur.
As humans, our natural tendency is to try to influence our surroundings. While this has helped our species to succeed, it is dangerous for a trader.
A good trader must accept that they as an individual cannot influence the direction of the market. They must achieve a state of impartiality.
Becoming euphoric when hitting a winning streak is nearly as detrimental as becoming depressed following a string of losses.
Reaching the stage where you can comfortably accept loss in the knowledge that your trading method will create profits in the longer term is the state all good traders should aspire to.