A trading environment is a fast-paced space with many opportunities but with equally as many potential pitfalls. With research suggesting that around 80% of traders will lose money and just a small 1% will go ahead and achieve profitability on a long-term basis, the probability of not making it as a successful trader run far higher than what would normally be considered a sensible move.
Why would you even consider jumping into something where the odds are stacked so highly against you? If these were a business and it had an 80% chance of failing most would run mile. Yet so many traders do get involved despite knowing that the odds are most certainty no in their favour. Why?
One of the principal reasons is the rewards that successful trading can bring, not just in monetary terms but also the independence, satisfaction and potential of branching out on your own in a financially self-sufficient nature. The allure of these benefits, enjoyed by those successful few, is sufficient to draw in the crowds.
So whilst the odds are clearly stacked against traders, the possibility of success does exist. Just through simple research of the trading industry you can quickly come across stories and profiles of successful traders, who rapidly grew small initial sums in to large fortunes.
Those that do trade successfully do so because they have found “an edge”, something which helps them consistently beat the market. That “edge” almost always comes down to how well a trader manages their emotions when trading. The way that a trader responds during a period of market adversity which could be uncomfortable for the trader is crucial.
Market behaviour and the two principal emotions which will influence a trader’s decisions are fear and greed.
Fear and Greed
Fear can be a performance inhibitor in trading. Fear of losing is one of the biggest reasons that some traders never even get off the ground. This striving for perfectionism can mean that a trader never progresses past the demo account stage.
Greed – as success in trading is measured in monetary terms, i.e how much you earn. Greed is therefore a focus on money, earning more. Greed can result in a number of practices which are detrimental to trading. Perhaps the most common is overtrading, whereby the want to earn more puts the trader on an impulsive path as they chase profits or attempt to make up losses.
Greed can also encourage a path of more excessive risk taking. This sees traders taking much larger positions than they would normally consider of even turning a blind eye to money management in a bid to make more.
The less that emotions entre your trading the more likely you are to succeed. The best way to do this is to make a comprehensive trading plan and then stick to it. The plan is put together when the trader is calm and rational, without the fear and greed emotions that surface when a trade is open and drive emotional trading. A comprehensive trading plan is an absolute must to become a successful trader and can help traders achieve that edge that pushes them ahead of the rest.
When trading, there are two principal categories under which investors analyse the forex markets in order to take trading decisions. These two principal categories are fundamental analysis and technical analysis.
Let’s take a brief look at both categories:
Technical analysis is a way of analysing the fx market by looking at price action. It is a way of forecasting future price movements by analysing past price movements. Technical analysts use charts and other tools to attempt to identify patterns within the price action.
The underlying basis to technical analysis, is that the price, in this case of the currency, already reflects everything that could impact on the price. This means that there is no need to consider factors separately, such as economic data or geopolitical events. Technical analysts believe that the market moves in trends, be those short term, medium term of long term, and that history tends to repeat itself. In other words, price action has a repetitive nature, which make it possible to predict future movements.
Unlike technical analysis, which considers price patterns, fundamental analysis is a method of looking at the forex markets by analysing key factors which could impact on the supply and demand of different currencies. It is a way of understanding the dynamic of a market, the factors which strengthen or weaken a currency.
Fundamental analysis aims to provide a more holistic picture in order to build an understanding of the strengths and weaknesses of the currency or currency pair. Key factors which could affect the supply and demand of a currency, and therefore its value include, economic, politics, natural disasters and social factors. In other words, fundamental analysts use all the information available to them to gauge the strength or weakness of the currency.
Technical vs Fundamental
Both types of analyses are useful for examining market action. Fundamental analysis looks to understand the causes behind what drives the forex market, this tends to be associated with longer term trading. Meanwhile technical analysis can provide more detailed entry and exit points and tends to be more associated with short term trading. Your trading style and the length of time that you are looking to hold trades could indicate which type of analysis is best suited.
Whilst some traders will stick to one category religiously, which is single method approach, others will combine both fundamental and technical analysis in order to take trading decisions.
Whether you choose technical or fundamental analysis, or a mixture of both, it is important to use a broker which provides you with the necessary tools to carry out the analysis. Vantage FX is an award winning Australian forex broker. The provide their clients with a comprehensive charting package, plus MT4 meaning that their clients can perform comprehensive technical analysis. They also give their clients access to a updating news feed and commentary meaning that clients have the potential to stay up to date with FX news.