6 Rules Smart FX Traders Never Break
06/11/2015 7:00 am EST
The best traders focus on the method, not the money, writes Nial Fuller of LearnToTradeTheMarket.com and these six rules are designed to shift the trader's thinking squarely where it needs to be in order to be consistent and successful.
One of the primary differences between forex traders who consistently lose money and forex traders who consistently make money is that losing forex traders are much more fixated on the money they can make from trading, rather than actual trading itself.
In contrast, traders who pull consistent money from the markets are much more focused on being good traders, as opposed to focusing on how much money they can make. You see, if you want to make money in the markets on a regular basis, you have to understand that controlling your risk per trade is crucial.
Successful traders understand this point and so they contain their risk per trade to a level that does not allow them to become emotional, and in fact, they actually forget about the money for the most part, making them much more concentrated on being excellent traders.
So, if you want to focus more and relieve the emotional tension you feel in your forex trading, you simply need to dial down your risk per trade to a level that cuts the emotion from coming into play. Then you will have nothing left to focus on but becoming a master forex trader and the sky will then be your limit.
I know it's one thing for me to say "You have to forget about the money and focus on the trading," but it's another thing for you to actually do it. In the name of providing specific and practical information in my articles, rather than general information that does little to help you actually evolve as a trader, I'm going to give you some specific things you can do to put your focus on your trading and take it away from the money.
Don't Trade in Order to Buy Something Specific or Quit Your Job
Let's be honest here, you probably are interested in trading because you hate your job and you want to trade from the beach with pretty girls (or guys) serving you drinks all day. It's a nice dream, but it's not reality...at least not yet.
Most beginning or struggling traders skip learning the actual process of trading and instead go right to thinking about what could be the final outcome if they are successful. This is backwards thinking, and unless you forget about buying a Ferrari right now, you are never going to have that Ferrari.
Like anything else in life, you have to pay your dues when learning to trade, you have to put in time to actually learn how to trade, you have to be disciplined enough to manage your risk on every trade you take, and you have to not overtrade.
If you do these things, you have a good chance at achieving your desires from trading, but there's no sense in gambling your money in hopes that you get consistently lucky enough to just skip over all the hard-work aspects of trading. Luck always runs out, but developing life-long trading skills and positive trading habits does not.
Make Sure You Actually Have Genuine Passion for Trading
Now, I'm not going to act like trading is not a super sweet way to make money, because if you do what I mentioned in the above point, it is. But, you should not only be trading to make money; you should genuinely enjoy the challenge of becoming a successful trader and you should have a strong interest in markets and economies, otherwise, you won't be able to maintain enough focus on your trading to stick around very long.
Many people fool themselves into thinking they are interested in trading in the early going, but it's mainly because they are just focused on getting rich and not on the actual process of trading. So, make sure your intentions are in the right place and you aren't just trading to gamble your money in hopes of hitting it big. Go to Vegas if you want to do that.
Trade with a Forex Strategy You Really Enjoy
If you want to focus on your trading more than the money, you obviously need a trading strategy or system that you really enjoy using. However, many traders buy trading systems that sound good or that look good when backtested over a perfect set of data, but in reality, these systems or strategies end up being a heap of confusing junk.
In short, if it hurts your eyes and makes you frustrated or confused to look at some trading system that tells you to use five indicators, Elliott Wave theory, and the proper star alignment, it's probably going to cause you to spiral out of control and start gambling your money. Look for a simple trading strategy like forex price action trading that is built on simple and logical chart-reading skills.
NEXT: Never Flip-Flop Between Strategies
Don't Flip-Flop Between Strategies After Deciding on One
This point is related to the previous one, because many traders start out trading with a confusing trading method and then switch to another one, which is not necessarily a bad thing, but when you constantly flip-flop from trading one method to the next, it can cause you to give up focusing on your trading and start focusing on the money.
Another thing many traders do is give up on a trading strategy that is actually genuine and effective only because they hit a few losing trades in a row. Don't do this; every trading method will have losing trades and losing is part of winning the race in forex trading.
If you are happy with your forex trading strategy and it has proven effective in the past, don't throw it away just because you hit a few losers. If you are actually following a good trading method and not overtrading it, there's no reason to change strategies.
Focus More on Risk Than Reward
Perhaps the most important thing you can do to focus more on your trading than on the money you can make is to focus more on risk per trade than reward. I know this article is about not focusing on the money, but you do need to focus more on your risk than your reward, because if you are mainly fixated on the potential reward per trade, you will end up risking more than you should.
In short, if you manage and contain your risk effectively on every trade so that the money you have on the line does not make you emotional, you will naturally be more focused on the process of trading since you won't be worried about losing a lot of money. I firmly believe that if you focus on the risk, the rewards will take care of themselves.
Know Your Risk Tolerance and Never Exceed It
To wrap up this lesson, I want you to do one extremely important exercise for yourselves. Sit down with a pen and paper and write out all your life's current expenses...don't hold anything back. Then look at your monthly income.
Now, after your expenses are all paid for, and you've put aside some money for your retirement or for anything else you might need, do you have any money left over? In essence, do you have any fun money that you could use for entertainment?
If so, this is the money you should risk in the markets; not your child's college fund money. This exercise plays into the task of determining your risk tolerance per trade. You need to decide how much money you are 100% OK with losing on any one trade and never risk more than that.
This is the key to focusing on your trading and becoming a master forex trader as opposed to focusing on the money, which almost always ends up in you becoming an emotional wreck of a trader.
By Nial Fuller of Learn To Trade The Market