Bill Baruch, president and founder of Blue Line Futures, reviews and previews the euro, Japanese yen...
Are You Asking These Questions Before Each Currency Trade?
07/30/2010 12:01 am EST
It feels like we have all been on a very wild ride in the global markets these last few weeks, and if volatility is any kind of gauge, then I have all the confirmation I need. With earnings season in full swing, combined with statements of "unusual uncertainty" from Fed chairman Ben Bernanke, what objective trader can really be surprised? I understand that the market is always capable of surprises, and if one is not fully prepared for the consequences at all times, then they are simply inviting themselves into an ongoing world of financial pain. We have seen both the equity and forex markets powering up and down in violent swings, mainly due to the reaction of good economic news one day, then closely followed by bad press the next.
I work in an ongoing virtual environment at Online Trading Academy, and I do my very best to help my students keep their emotions in check during these turbulent times, encouraging them to remain disciplined and objective at all times when their valuable trading capital is at risk. No trader should ever be tempted to jump into the market on a whim or gut feeling, no matter how much they may think it is a good idea. The market is a world full of variables and will only do what it wants to do. The professional trader respects this truth and understands that no matter how good things are going, or even how bad, the only control they ever really have is self-control.
In my experience, the best form of self-control can be consistently achieved by working from a solid and well-structured plan for trading. This document should become the trader's anchor during calm or stormy waters, and is really the only constant any professional trader can hope to rely upon throughout their speculative activities. Unfortunately, due to a lack of decent education available in today's environment, many traders struggle to understand fully what they should include in their trading plan and end up writing down a few things on a scrap of paper, which is quickly discarded and forgotten with the rest. And without proper guidance, this is fully understandable. I feel so strongly about the necessity of a trading plan that I dedicate a whole class and lesson day to the subject during my teaching practices. For the purpose of this article, I would like to share a few key questions that you should ask yourself before embarking on your mission to draft your first constructive plan. These are the very same questions I pose to all of my students in the Online Trading Academy family:
Do I Have a Reason for Taking Action in the Market?
A trade plan should be based upon rules that govern a trader's decision to enter a trade or take a position in the marketplace. One of the most common mistakes I encounter with struggling traders is their inability to control their trigger finger. Reacting to a sudden move in the market may seem like the right thing to do, but in the long run, the account will surely tell you otherwise. Emotions, gut feelings, and instincts have no place in a consistent trading career, and any profitable market speculator will tell you the very same thing. You see, the aim is to know why you are entering a trade. "Because it looked like it was going up" is by no means a valid reason. By adopting this approach, the novice is at great risk of overtrading and making bad judgment calls over and over again. Instead, the key is to stick to a set of rules that define your actions, and while this does require patience and discipline, it will also protect the account and allow the trader to fully understand what made them enter a trade. If something works the majority of the time, then stick to it. Nobody knows what is coming next in the market, but we are all capable of knowing why we took a trade in the first place.
Do I Have All Possible Questions Answered Before Pulling the Trigger?
As ambiguous as this question may seem, it is by far more intrinsic in the trader's actions than we may first think. As I stated before, we have to accept that none of us can tell price what we want it to do. The market is made up of people taking buying or selling positions constantly, and once a trade is taken, anything is possible from that moment on. If you don't anticipate all possible outcomes of the trade, then you are headed for an emotional rollercoaster to self-destruction. When money is on the line, human emotions change and our brain can play funny tricks on us when things are not working out as we hoped. Fear and greed are two of the biggest account killers around, and if you don't fancy becoming yet another statistic, then it is about time you get prepared for what's to come. Before I even place a trade, I know exactly what I will do every step of the way, should it go against me, partially work for me, or turn into a runner. I see myself as a planner, not a reactor, and I must know exactly what actions I will take throughout each segment of the position to not only be consistent, but to maintain my own personal sanity. A clear mind is far more useful than an emotionally clouded one.
Do I Have a Measurable System and Approach?
This is really the embodiment of the trading plan, and by asking yourself this question, you can fully digest what you are trying to accomplish in your career: Consistency. Chopping and changing your trading strategy from one day to the next will be of absolutely no help whatsoever to those longer-term goals and aspirations. While there are a variety of systems and technical tools out there, I would encourage the novice trader to dedicate the time to discovering the right ones for their needs and stick to them. It is only after a period of consistent results that we can then look back and discover what worked and what didn't. It may not be the case that a particular plan needs a complete overhaul, but instead, just a little tinkering here and there to streamline its efficiency overall. The plan should detail each and every step of the analytical approach so we can look back at past performance and ascertain the success rate. Only when this level of consistency is applied can we really hope to evolve further in our careers, and without a solid plan in the first place, we are always faced with the prospect of uncertainty.
I hope you all found this useful.
By Sam Evans, instructor, Online Trading Academy
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