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Day traders around the world stick to the one percent risk rule or may even vary it to a little extent to match their trading style. In fact, adhering to this rule allows them to minimize their capital losses, especially when they experience off-days while trading or when the market conditions are not in accordance with their expectations. By simply sticking to the 1% rule, traders can maximize their monthly income or returns through trading. Continue reading to find out why day traders must stick to the 1% risk rule when it comes to trading.
Why 1% Risk Rule Makes Sense?
The 1% risk rule is simple and straightforward. As traders you are not required to risk any amount that is in excess of 1% of the amount in your trading account for one single trade. However, this does not imply that if your account’s balance is $40,000, then you are allowed to purchase only $400 of stock, which in essence is 1% of $40,000. As a trader you could use your entire capital amount or much more than that if you choose to use leverage. Thus, implementing 1% risk rule implies that you undertake effective risk management steps for restricting your losses to just one percent and nothing in excess of that for a single trade. It is important to understand that as a trader, you can never win all your trades and the one percent rule assists you in ensuring that your capital does not decline any further, particularly when the conditions are not favorable.
Traders who are new to the world of trading can stick to the 1% risk rule to get through their initial months of trading. While, many traders may feel that risking 1% or even less for every single trade is a much smaller amount, the fact is that it can provide them with great returns. In case you choose to risk 1%, you must set the profit expectation or goal in the range 1-2% for every individual trade. Hence, when traders enter into a number of trades throughout the day, they can easily gain a couple of percentage points on their account every day, despite them winning only half of their trades.
How to Apply the 1% Risk Rule?
By risking one percent of their trading account on one trade, traders can easily enter into a trade that provides them with a 1-2% return on their account, even when the market may have moved slightly or by a fraction. In the same way, you could risk 1% of the trading account even when the price goes up by 5% or 0.5%. This can be done by utilizing targets as well as stop-loss orders. Thus, traders can apply the risk rule to day trading stocks or to forex and futures. For instance, if you wish to purchase a stock at $16 and have $31,000 in your account and when you check the chart, you find that the price was at a $15.90. Now, you can place your stop-loss order at $15.89, and calculate the number of shares that you wish to purchase while risking nothing over 1% of the amount in your trading account. Hence, the risk that you can take as per your account balance is 1% of $31,000 or $310. Your trading risk on the other hand is equal to $0.11, which is calculated in the form of the difference between the stock buying price as well as stop loss order price.
Now if you divide the account risk amount by the trade risk amount to get your position size then it would be $310/$0.11=2818 shares. Now, you can round this to 2800 and this clarifies the number of shares that you can purchase in a trade, without risking anything over 1%. It must also be noted that 2800 shares at $16 cost $44,800, which is more than the $31000 in your account. Hence, you would require a leverage of a minimum of 2:1 to be able to make such a trade.
This method helps you to trade irrespective of whether the market is sedate or volatile and still earn money. In fact, you can easily use this risk rule for trading in all types of markets. Also, before you trade, you must take slippage into account, wherein one is unable to exit at the stop loss price and thus takes a much bigger loss in comparison to what they had expected.
Variation of the Percentage
Traders who have an amount lesser than $100,000 in their accounts usually rely on the 1% risk rule. While, the 1% risk rule is safer, some traders tend to use a 2% rule, when they register consistent profit. Thus, any percentage that is lower than 2% is useful for traders. Also, traders with more than $100,000 in their account may risk anything between 0.5 % or lower at 0.1% since their position size tends to get bigger. Typically, traders must choose a percentage that they are comfortable with and which is also in accordance with the market liquidity in which they choose to trade.
Traders can easily fix a percentage that they think they are comfortable with and later calculate the position size accordingly for every single trade. While, doing this, traders must also take the stop loss and entry price into account. This will help them to withstand a number of losses in a row and ensure that their capital does not drop too quickly.
Forex stands for Foreign Exchange. Forex market, therefore, is the market of currency exchange. Traders buy and sell currencies to make profit.
Foreign Exchange or FX has a daily turnover of $5.1 Trillion. This is more than any other trade/business in the world. This is mainly because of the round the clock trading that goes on in this market. The Foreign Exchange Market stays open 24 hours a day for 5 days a week. It shifts from one financial center in the world to the other. Starting from Sydney it moves to Tokyo, then to London, then Frankfurt, and lastly New York. By the time the workday ends in New York, it’s morning again in Sydney, and so the cycle starts again.
How it works:
Currencies are traded in pairs. For example, USD/GBP means that you’re making a transaction between the US dollar and British Pound. In a pair, the first currency is the base or transaction currency, and the second is the quote or counter currency. The base currency is the one you are buying or selling against the counter currency. This transaction depends on market predictions. If it appears that the USD will increase in value compared to GBP, a trader will buy USD. If the prediction proves true and the value of USD begins rising, they will hold this position until they have made a reasonable profit, or when they feel the value might drop. They will then close the deal by selling the USD they bought, thus making a profit on the difference between the buying and selling rate.
If things go wrong and the prediction is incorrect, it will result in a loss as the US dollar will have to be sold at a lesser price than the one it was bought at.
These transactions always take place in pairs. So you’re buying and selling at the same time. When you buy USD, you are doing it with the GBP you have. So you pay GBP to buy USD. Similarly, when you sell USD, you buy GBP. The profit is made when the GBP you have after a beneficial transaction are more than the ones you initially sold for the purchase of USD.
Leveraged Trading Position
A leveraged trading position is one where the trader doesn’t necessarily have the full amount he’s making the transaction on. It allows traders to deposit a minimum (called a margin) and be able to control larger positions.
50:1 would mean that the trader is required to deposit 2% or 1/50th of the value of the position they are eligible to hold. This means to buy or sell 100,000 USD; the trader need only have 2000 USD in their account. In such transactions, brokers are involved. They cover the remaining 98%. This system places faith in the trader and allows for more efficient and frequent exchange. The profit or loss on this position will correspond to the actual amount. So where leveraged positions allow higher profits, they also have the potential for incurring higher losses.
There are 8 major currencies:
USD – US Dollar
JPY- Japanese Yen
GBP- British Pound
CHF- Swiss Franc
CAD- Canadian Dollar
AUD- Australian Dollar
NZD- New Zealand Dollar
Major Currency Pairs are made up of USD and any other of these other 7 major currencies.
Minors or Crosses are made up of any two of the major currencies, where USD isn’t involved. So EUR/GBP is a minor currency pair.
Exotic Currency Pairs are the ones which have one major currency and one from one of the emerging economies such as Brazil or Mexico.
The rates of currencies can be affected by any number of things. It could be the interest rate in that country, or it could be a political situation affecting it. While mostly if things follow pattern movements of different currencies can be predicted, sometimes a drop or rise might be unforeseen. This is what makes this market the most promising, as well as the riskiest.
If you get into day trading, you will be involved in buying and selling securities over the course of a single business day based on the small fluctuations in the price of stocks. Day trading is the most common phenomena in foreign exchange. This is because the increased volatility offers the chance to make a handsome profit within a short period.
Day trading, however, is a risky practice. This is due to the volatility of the market and the fast speed required to day trade. Day trading is better suited to experts over beginners because it requires in-depth market knowledge and strict attention.
We are going to check out some valuable tips for day trading in this post. Before we do so, we cannot overemphasize the importance of market research and market observation.
1. Know what you are doing
If you are to succeed in day trading, you must possess strong market knowledge. Whatever it may be, forex or stocks, it always pays well to be attentive to global events and news. One of the reasons why trading is so fascinating is that virtually any event in the world has the potential to pip movement.
In global news as an example, Canada’s journey to marijuana legalization saw shifts in legislation leading to cannabis stocks doing well on the market and posting significant gains. Imagine the number of day traders who made or lost money post that announcement.
A market can be swayed by news related to interest rates, governments, central banks, trade agreements, or even a threat to civilian safety. If you assiduously follow all news related to the market of your choice, you will be in a commanding position to act when the moment is right.
2. Make a smart budget
Successful and competent day traders swear by their budget. How much are you comfortable with risking on each trade? How much of leverage do you have access to or want?
Most of the successful day traders will routinely risk less than 1% or 2% of their account in each trade. If you possess a $20,000 trading account and are OK with risking 0.5% of the capital, then your maximum loss per trade works out to $100.
Your budget dictates how much money you can risk without any personal or financial consequence.
3. Ensure that you have enough time
During the course of day trading, traders are required to pay close attention to tiny and transitory details throughout the day. If you do not have the necessary time to spare for day trading, you might want to skip it until you have enough free time to take in the machinations of the market.
Market tracking and opportunity spotting require fast action on your end. If you are caught up and busy with other commitments, you will miss the opportunity.
4. Be satisfied will less as a novice
If you are a rank beginner in the day trading scene, you should refrain from investing in too many forex pairs or stocks at a time.
As you will have fewer investments to track, you will find it easy to make smart trades. Additionally, if you stick to a particular area of expertise, your market knowledge will be strengthened, allowing you to trade with a lot more confidence.
5. Skip the rush hours in the beginning
There will be a market rush at the beginning of the day and also at the end of the day. There is considerable price volatility due to an influx of orders being placed when the market closes and opens.
An experienced trader has the skills to spot patterns during these rush hours and understands where to trade.
Since you are a novice, it is better for you to watch these rush hours taking place. We recommend not making any moves for the first 20 minutes of the market’s opening and also steer clear of action during the last 20 minutes before the closing bell. This is why we advocate that you give yourself dedicated time to day trade.
The most stable period in the middle of the day. Beginners will have the best chances of successful trades in this time. Rush hour is for the sharks.
6. Be careful of penny stocks
Penny stocks might sound demure with their cheap going rate, but be cautious because they are also one of the riskiest commodities on the market.
Penny stocks are notorious for their lack of liquidity; this makes it easy for imaginative traders to engineer or hype up the prices in stock by “pump and dump” methods.
7. Set up limit orders
Online traders use limit orders to automate their trades. This also allows them to set realistic market exit and entry points that are aligned with their budget. Limit orders are a method by which your buys and sells can be automated while at the same time limiting how much you potentially lose based upon your inherent risk tolerance.
8. Have a plan, be realistic
You won’t find every seasoned professional winning all of their trades. As a matter of fact, a lot of traders win only 60% of their trades at maximum, even though they are following their preferred strategy. Your target is to have a balance that will heavily favor the winning side than the losing side. If you are making more money on your wins than your losses, then it makes it easier for you to absorb the losses.
Have a pre-established percentage of your account to which the risk on each trade is limited. Stick to your market strategy with pre-arranged entry and exit points. This helps you to be somewhat immune to market excitement.
Success will come if you are comfortable in the hectic pace of the environment. Be faithful to your trading strategy; it will enable you to navigate the fast-paced market. If you have discipline, it will encourage you to stick to your strategy over chasing unreal profits.
9. Use all your resources
As an example, spread betting allows you the chance to speculate upon the pip movement of a Forex or stock pair without you entirely investing in it. This allows for a lot of flexibility and makes day trading more accessible to traders who wish to negate the full stock costs and dealing desk fee charges.
You will find thousands of free resources for both established traders and newbies. If you understand the market thoroughly, you will be in a unique position of strength when it comes to day trading.
Day traders are the ones who would buy and sell Stocks the same day. They would usually square off their trades the same day and would not carry it forward to the next day. They typically want to generate substantial profits from small price fluctuations. This is why they are required to involve a large capital for the same. Day trading is usually popular with indexes and stocks which are very liquid. Fortunately, there are useful trading strategies to help the trader’s cause.
They mainly look for volatility in the price of what they trade along with liquidity. The reason is that the higher the volatility the higher the price range within which it moves the same day and offers plenty of scope for making high profits. With liquidity, the day trader can close the trade at any suitable point. The entry and exit points are of critical importance. To achieve this, he usually employs various trading tools like candlesticks, new briefings, ECN, etc.
Candle Stick Analysis
Finding the entry point is essential in this strategy. Several factors are involved when it comes to candlestick and technical analysis. One popular strategy to determine the entry point is called” Doji” reversal pattern. Here the day trader lookout for sudden volume spikes. With this, they get to know the support price levels. Another important factor which demands attention is the Day Highs and Day Lows. Lastly, the Level II predicament for all order sizes and open orders are essential. By following these, you could observe sudden turnarounds necessary for day trading.
Margin trading often becomes susceptible to the sudden and rapid movement of prices of stocks. For your safeguard, you need to keep a strict stop loss for every trade you enter into. You have to keep the physical stop loss based on your risk appetite as a day trader.
Popular Day Trading Strategies used by day traders
Out of the many trading strategies, one very popular used by day traders is that of Momentum Trading. This is based on the momentum in the price of the stocks to be traded. It could make use of news reports. So you can buy a stock based on positive reports. Here the main target of day traders is to buy a desired amount of stocks at lower rates and sell the same at high rates. Here trades are generated on the basis of based on daily trading pivots.
This is a very popular day trading mentor used by many in this regard is known as scalping. Here the moment the trader usually closes trading positions as soon as it is profitable. The target prices set keeping in view immediate profit once it is reached and the trade is closed.
Fading the Market- Trading Strategy
This is another popular day trading strategy used by some day traders. This is based on the contrarian view of the market. Here the traders buy when the price starts to fall and after that sells when the market and the stock bought begins to rally. These are usually high-risk trades, but at the same time, they also offer a high reward when it clicks.
Day Trading and Money Management
You would note that the successful traders are the ones who have all mastered the art of money management. This is all the more true in case of a strategy based approach to trading on which the day trades are set up. Money management is very important in case of day trading. It also involves personal preferences, as well. As a successful day trader, you need to consider the risk-reward ratio for each trade you enter into. What is important is how much more your wins are against the potential losses against the trade involved.
In terms of better money management, you need to have an unemotional approach to investing. To be successful with your money management, you need to be much disciplined with your trading decisions. This pertains to all trades which includes when and what is to be traded.
When it comes to trading discipline, the extreme importance of stop losses can hardly be overstated. This is what provides security to the trade you enter into. They offer excellent downside protection. As a part of the discipline, it is essential that you do not easily get influenced by traders. Once you have decided on a trade, you must follow the strategy and not get swayed away from it. You need to be independent of them at all times and have your trading strategy in place.
Flexibility is also another key and necessary element. This is more so when the conditions are changing. Other skills would include is not to get overstressed with what is happening. It is seen that often some traders get over concerned about decreased profits after they enter their trades. However, at the same time, you need to note that giving decreased profits is always preferable to losses. So even with minimum profits, one should be happy. Here in such cases, a possibility of reentry into the trade must always be considered.
Last but not least it is important that you must always have a detailed record of all the trades you enter into and in case you decide to reopen them a reason regarding reopening them.
You need to note that Orders are essential tools needed for all types of traders. It is what should be under consideration at the time of the execution of trading strategies. These are what have to be used to enter into a trade. It is also what helps in the maximization of profits and also helps to minimize the risks on the downside.
Once you understand how the order types differ from one another, you would be able to determine the orders that would suit your needs for reading trading goals you seek to achieve.
In terms of trade, a market order is the most basic order type. It is executed at the best available price on the receipt the time of the order.
This is meant for buying or selling at a specified price or the one more suitable. A sell limit order is executed a specific price or at the one which is higher. On the other hand, whereas buy limit orders are to be executed at the pre-decided price or one which is lower.
These orders benefit traders since they can be more flexible and at the same time, it helps to define the particular entry point or that of exit any trade. You must note that that limit orders do not guarantee that you will enter into or exit a position.
A stop order gets executed in case the market order reaches a rate which has been decided in advance. You need to note that both buy as well as Sell Stop orders are executed at the most suitable best available price. However, liquidity also is another factor. These are used to minimize the losses.
To maximize profits, the concept of a trailing stop has emerged. This happens mainly when the trade moves in the trader’s favor. On the other hand, if following a favorable trade in case the market moves against, then a market order is triggered, and the stop order after that gets executed. Here again, their liquidity is another factor determining the execution.
Good ‘Till Cancelled (GTC)
A GTC order is an order which remains active in the market until you decide to cancel it. In this case, your broker would not cancel the order at any time. Thus it is your prime responsibility for remembering that you have the order scheduled.
Good for the Day (GFD)
This is the same as the GTC, but this remains active in the market until the end of the trading day.
Since the foreign exchange is a 24-hour market, this usually means 5:00 pm EST. Since that’s the time, U.S. markets close. But make sure that you double check with your broker.
Contingent orders usually involve the combination of different types of orders. They are used to execute against a specific trading strategy. There are two main types of Contingent Orders. These are as follows:
In case of the if/then OCO order, it implies that provides that in case the first order gets carried out then after that the second order too gets activated.
Whereas if the first one is not triggered the second order would remain unexecuted. You must also understand that unassociated orders are not attached to a trade. They act independently of any position updates. Much like the regular OCO order, the execution of either one of the two “then” orders automatically cancels the other.
This is basically done to manage a situation wherein if a predefined condition arises then the second order would get executed.
In cases where the “if” single order does not execute, the “then” OCO order too would get dormant. Thus in both the cases, if the first condition for trade is not carried out the second part of the trade as specified also is unexecuted and stands canceled. These things are being eventually will be offering the expected result.
However, because of the volatility and speed required to day-trade, it is considered a risky practice. Day trading requires a lot of market knowledge and constant attention, which is why it’s better suited to experts rather than beginners.
In this post, we’re going to review some tips for day trading. The importance of market observation and research cannot be overemphasised here.
1. Know your stuff
In order to succeed at day trading, robust market knowledge is a requirement. Whether you’re interested in stocks or forex, it’s always beneficial to pay close attention to global market news and events. Anything happening around the world can contribute to pip movement, which is one reason why day trading is so fascinating.
In world news, for example, Canada’s road to marijuana legalisation recently saw a major legislative shift and its cannabis stocks made significant gains. How many day traders do you think made or lost money following that announcement?
News relating to central banks, interest rates, trade agreements, governments and even threats to civilian safety can sway a market. Following the news cycle around the market of your interest will only inform your knowledge base and facilitate smarter trades.
2. Budget accordingly
Successful day traders also live and die by their budget. How much money are you willing to risk on each trade? How much leverage do you want or have access to?
Most successful day traders risk less than 1% or 2% of their account per trade. If you have a $40,000 trading account and are willing to risk 0.5% of your capital on each trade, your maximum loss per trade is $200.
Your budget will indicate how much money you’re willing to risk without personal or financial consequences.
3. Make sure you have enough time in the day
Day trading requires that traders pay attention to small, fleeting details for most of the work day. If you have limited time to spare, you may want to skip day trading until you have more free time to absorb market machinations.
Tracking the markets and spotting opportunities demands fast action. If you’re in the middle of other commitments, these opportunities may be missed.
4. As a novice, less is more
Especially if you’re just beginning, investing in too many stocks or forex pairs at a time can spell disaster.
When you have fewer investments to track, making smart trades is much easier. Plus, sticking to one area of expertise will strengthen your market knowledge, leading you to trade with more confidence.
5. Avoid the rush hours at first
There is a rush at the beginning of the market day, and also before it closes. An influx of orders placed when the market opens and nears closing contributes to noticeable price volatility.
Seasoned traders will be able to recognise patterns during these morning and afternoon rush hours and understand where to trade.
As a novice, it’s best to simply watch these rush hours happen – another reason to give yourself dedicated time to day-trade. It’s recommended you don’t make any moves for the first 15 to 20 minutes of the market’s opening, and don’t jump on anything 20 minutes prior to the closing bell.
The middle of the day is usually the most stable period. This stability means safety for beginners, while the rushes mean opportunity for the practiced sharks.
6. Watch out for penny stocks
You may be interested in the seemingly cheap price tag of penny stocks, but remember that penny stocks are one of the riskiest options on the stock market.
Penny stocks suffer from a lack of liquidity, making it easy for artful traders to manipulate or hype up stock prices in ‘pump and dump’ manoeuvres.
Not every seasoned pro wins 100% of their trades. In fact, many traders only win 60% of their trades at maximum, even while maintain their preferred strategy. The goal is to strike a balance that favours the winning side over the losing one. When you make more money on your wins than your losses, the losses can be absorbed with less consequence.
To be successful you have to be comfortable in a fast-paced environment. Sticking to your trading strategy will allow you to navigate this rapid market movement with ease. Discipline will encourage you to follow your strategy instead of chasing fantasy profits.
What do 98% of the traders do? Give up? Yeah, some of them do that with the first taste at failure, other just keep on spending money on the hope of hitting their big jackpot. Not even 2% of them make the cut.
Depending on others choices and decisions is what other traders do, they create a social trading account and sit there waiting for returns. We live in a world of smartphone, where everything is at our feet, just a click away, but that’s not the case with trading, of any kind. You can’t expect that suddenly you will wake up as a billionaire one day.
Like any other field of life, in trade also there are only two mantras to success in trading are hard work and preservation. Being good at trading is a continuous process of wanting to learn more and more of how market functions. That is what the best in the business do. Success here also depends on how well are you able to find a system that works for you and how consistently do you stick to it. It is like an extended limb of yours.
Are you struggling to find a way through? Before you do anything, you should prime your mind.
Trading is like a game, a psychological one. Where you have to choose a side, either you are with the mass sentiment or against it. It is like a mirror image of other traders.
One thing trading is good at is that it can pull you down very quickly, once you start losing (which is very common) you get discouraged very easily and quickly, it gets hard to keep up with trading. It gets effortless to give up on trading with losing money at it.
To help you keep a winning mindset here are three things that will help you.
1. Know what you are trading
You want to trade a specific trade, well! You should learn what factors guide the price in this currency pair. Just relying on technical indicators will get you on the long road. If your goal is consistency, you need to take out time and learn deeply about currency pair and the security you want to trade in.
Mostly, traders, these days focus only on the security they want to trade or the currency pair because they think they can multiply there money quickly this way. It takes time for them to realize that all this does is empty their pockets.
To understand this point, take the example of the EURCHF peg that was broken in 2015. While it left many traders in a state of surprise, history reflects that it was now the first time that SNB was able to pull that off. Thus, only trades who had done an in-depth study about the history of currency pair were able to take its advantage, and all other only has the technical indicators to rely on to, with their deep greed to earn quickly.
2. Make a commitment and stick to it
Consistency is what gets a trader to it. You have to find a strategy and commit to it. The ones who jump from plan to plan end up getting nowhere. They’ll just be spending money.
If you want to succeed in this game, you have to start by building your very own trading system. There are loads of options to choose from. There is only one distinction between a good and a bad trading system, and that is your knowledge about the trading system.
With the first sniff on losing, most traders are quick at changing their strategies. Doing this doesn’t take them anywhere all it does that it restricts them from have a better understanding of the trading system.
The way you lose can only guide you to the road to victory.
3. Don’t give up
If you believe that you can own a yacht within one year of trading, well that is just unrealistic. The way to success goes through a lane of not giving up. Not giving up is the only way the markets work in your favor.
The time periods vary with each trade, some make the cut in a year, while for some it might take three. But the only thing that is common between all the winning traders is the spirit of not giving up. Not giving up is the only thing that helps the trade to make that 2% cut.
Forex trading is often glamorized, and it plays on the mind of the trader. It is a mirage of making money; most traders fall prey to the trap.
If you want to make the 2% cut and be consistently profitable, all you got to do is take a serious step towards learning; you will eventually get good at trading. You’ll have to keep on learning of how the currency market works and what are they, and it will guide you to a road of success.
Even though they use the most detailed charts, mechanical tools for trading, various indicators, and devices for elemental analysis, foreign traders also known as forex traders do lose their investments time-to-time. Even the most well-known and expert investors have in their days suffered loss and heavy blows. Experts are of the opinion that like winning, losing is a systemic- requirement of the process of trading.
An array of variables come into play and affect the task, such as decision- making skills, pressure from peers, mental aspirations and aspects, unsuitable trade terminals, and for some even superstitions. Following are the most- recognized reasons for trade loss.
Inadequate Risk Management
A very high skilled trader could be a victim of poor management actions. Traders who get caught up in the investment- profit and re-investment chain and do not prioritize the safety of their profit are more likely to incur losses. With less capital to invest, the chances of making a profit also go down. Setting up stop- loss and take- profit if used at specific points in the process of making trades can result in the achievement of sufficient gains. Lot sizes are also to be focused upon, and if they are in reasonable comparison to the account capital, then it is good news.
Management of risks is vital in a market, be it volatile or not.
Emotions if kept at bay while trading is the way to go, but human is rarely away from them. Greed for more profits, jealousy from a colleague, desperation, and at times over-confidence. Traders hold on to their positions, with specific tactics and techniques applied that reap in similar patterns, but if they don’t get on before the currency pair turns, they stand to lose all that they might have earned. Currencies are fluid and move frequently. To wait for the last second can be a grave risk.
Apart from greed, the most prominent emotion is a fear that needs to be tackled. When suffering from a series of losses, many traders make the mistake of stepping out from potential profit-earning investment and in turn lose good opportunities.
On the other hand are the ‘know-it-all’ traders. A string of wins makes the person overconfident. Mistakes, like life, are a part of trading, and owning up to them is the best option. Not learning from the mistakes result in failures, and thus losses.
Trading Tops or Bottoms
Beginners tend to spread their investments and add on to bad trades. Too much focus on turning points, place trades, currencies, in a hope to establish a pattern is common. But this, in turn, poses the risk of exposure to negative account balances. Aggressive decision-making makes a recipe for disaster, for instance choosing a bottom while a downtrend is not always fruitful, as, experts traders would do so once the market starts correcting in an upward direction. To think that beating the market to prove a point is a common habit among traders.
Like any acquired skill, trading as a profession is mastered with practices, work, and learning that expands over the years. Keeping a log or journal of the moves, investments and otherwise might come in handy. This would act as a record of decision that has been made and hence will help to repeat the good tactics and eliminate the bad ones.
If you are in trading business, the solitary nature of your profession needs no further mention. Therefore, it is clear that you need to set up goals and stick to those to keep going with a determined and positive mindset. We are almost at the end of the first month of 2019, and you should not dilly-dally in creating realistic goals. When doing so, it is essential to do some research and evaluate your needs. Once you are done with creating your New Year resolutions for trading business, it will be easier to develop some meaningful and result-oriented habits to accomplish the goals.
Assessment of Goals & Achievement
Your actionable goals should be based on your experience of the last year. Even before you set up goals for the next year, it is essential to identify the mistakes and evaluate the strategies that led to success and failure. It will help you avoid the mistakes and stick to as well as develop effective strategies. Do you think it necessary to devote more quality time to your business? Which aspects of your business made you stressed-out last year? Identifying the stress facts of the previous year will help you make adequate plans to deal with those negativities.
Outline the Basic Plan
Once you are done with revisiting your past year’s achievements and reviewing your plans, get down to outlining the goals of the ongoing year. Take decisions about the trading hour as well as profit goals. With the trading market remaining open round the clock, decide on the slot as per your convenience. For example, the time slot between 7 AM CT to 11 AM CT is considered the most liquid time in the US equity futures market. Do you have a plan to trade for just a particular time period or 24 hours?
Assess your personality and choose the right instruments for investment accordingly. What kind of trader are you – a scalper, swing trader or position trader? It is also essential to decide if you wish to invest in a volatile asset or something that takes time to grind. Create realistic, time-bound and measurable profit goals.
Calculate Return-Risk Ratio
Now take your time to determine the percentage of your current trade capital that you are willing to sacrifice. Being an active trader, you surely look for the short-term opportunities to make a profit. However, it is also essential for you to develop strategies not to incur a loss.
Search continuously for different and workable strategies that will provide a competitiveedge to your business
Prepare plans earlier to avoid losses
Make sure to stick to the rule of “keeping accounts high” that requires you to reap profits early.
Stay disciplined not to be swayed by emotions like greed, revenge or fear.
Refresh Your Market Knowledge Everyday
You surely witnessed to highs and lows in the 2018 financial market. According to the financial pundits, the market will continue being volatile even throughout 2019. Make it a point to get an economic calendar this year. Keep yourself updated with the news releases. With Brexit being scheduled for March of the ongoing year and the US Federal government supposed to pump up the interest rate in the upcoming few months, you need to proceed with calculated moves that are easy to adapt to the changing scenario.
Review Monthly Results
As a professional into the trade business, you should learn from your mistakes and efforts with an intention to make every upcoming day better and brighter. Making process-related goals will help you not to deviate from the right track. It will also teach you to avoid excessive risks.
Tip: Start maintaining a trading diary if you don’t have one.
Market experts or analysts are good at making predictions about the market. In fact, most of them always accurately predict the direction in which the market would move in the future. However, when it comes to trading their own funds, they often end up putting a miserable performance. The reason behind this is pretty simple. It’s their trading psyche that gets in their way of earning profits. In this article, find out why analysts don’t make the best forex traders.
Why do Forex Analysts fail at Trading?
Successful trading is all about adopting the right emotional strategy or approach. Trading isn’t limited to analyzing of charts or keeping track of the latest news and updates. It is incredibly complex in nature and requires consistent strategizing, market research and above all, discipline. Traders must have control over their psychology and emotions for profitable trading. When you are attached to your trade position, then making an accurate and unbiased analysis can be extremely difficult. This is precisely why market analysts don’t consider trading themselves.
The moment they put their trading technique to test and find their theories materializing right in front of them, their objectivity is lost. Somewhere, they start experiencing emotional issues, and their psychology fluctuates as and when the forex market moves up or down. In rare cases, traders find their ego expanding. However, in most of the cases, it gets bruised or distracts them from their goal.
While it is difficult to measure how earning profits or incurring losses affects one’s psyche, it definitely impacts every trader in a different manner. However, any decision one makes will always be clouded after you achieve success or endure losses. This implies that any strategy/technique that you had once been positive about could suddenly go wrong when you have doubts, greed or fear in mind.
For instance, a portfolio manager is responsible for designing a strategy/technique that offers maximum returns to the investors. However, this is a highly complex procedure and requires a great deal of effort at every step of the process of trading. This is why firms that manage investment look at dividing the task as well delegate.
Typically, an analyst studies the forex market as well as evaluates the impact of multiple investment opportunities. Furthermore, a risk manager steps in to assist in matters related to diversification of trade as well as sizing. Lastly, a forex trader implements the strategy on their as well as the investor’s behalf. Hence, the portfolio and risk managers are detached from implementing or executing the trades. This retains the integrity of their investment methodology, and their probability of failure by emotional attachment is minimized.
Emotional Detachment is the Key to Success
Traders can improve their trades by becoming their own investment managers. In fact, they can use a number of strategies to minimize their losses in the market. For instance, they can keep their risk at the minimum level by opting for a trade size that would easily survive their worst predictions. In other words, traders can prepare themselves for a worst case scenario and include a stop-loss limit in their plan. It is equally important that traders set a precise target and utilize Take Profits orders for automating the trading process. Traders can always place their trades and move further. They can look for other things or opportunities to distract themselves. Besides, they must also set pricing alerts on their MT4 account. This way they can keep themselves informed and not get emotional about their trades.
Traders must be quick and flexible in their decisions as what seemed valid during the planning stage, may not necessarily be appropriate or valid after a major news announcement or development. Finally, the trader must never think that failure is permanent or personal. It is always a good idea to adjust according to the market feedback and detach yourself from your trades. This would ensure success in the long run.