"Trust your instincts."
Sure, sure. That's bad advice for the game of currency exchange.
When it comes to forex trading, that is a strategy that is sure to lose you money, unless you have a very well-trained gut that is not affected by feelings. To make money on the currency exchange market, you need to avoid making decisions based on your feelings and instead use a well-thought-out plan that takes into account both the current market and the past.
The market for forex trading is very volatile. Emotions can run high or low, and either extreme can affect your trading decisions if you don't have a plan and stick to it no matter what you THINK you're seeing at the time. System, analysis, and sticking with it are the keys to making money in Forex. Notice that emotion is not one of them. In forex trading, it's a bad idea to go with your gut.
Letting your emotions control your trading can hurt you in more than one way. It's why most traders with a lot of experience tell new traders to come up with a system and stick to it no matter what. The system tells you when to buy, what to buy, when to trade, and for what to trade. You'll make the most money if you stick to your system even when you want to go against what you know.
If you're just starting out in forex trading, a system based on technical analysis of past market trends is one of the most useful tools you can use. Even traders with years of experience still use their system to keep making money. In fact, many people will tell you that their "gut instinct" is almost never right when it goes against their system.
The third key is to stick with it. When you look at market trends, you can see that the market goes up and down in dips and spurts that follow predictable patterns. No trend goes up or down in a straight line. There are always times when prices go up or down quickly because of something outside the trend. When you feel this way, your portfolio can suffer. When a currency you own suddenly goes down, it can be tempting to panic trade, cut your losses, and run, even if your system tells you to stay put. On the other hand, it's easy to get excited as the value of a trade starts to rise and rush to buy more of the same thing. This is when you need to rely on your trading system the most. It will tell you when to trade to make the most money.
Using a mechanical system takes away the emotional side of trading, which is one of the main reasons why people fail. Your system doesn't refuse to show that a theory is true. It doesn't care whether the news is good or bad. It doesn't hold on to a losing trade in the vain hope that if it waits long enough, the trend will change and turn into a moneymaker.
For your system to work, you need to know the entry point, the exit point, mitigating factors, and an exit strategy. This is true whether you make your own system or use someone else's. In plain English, this means:
- What are the best ways to get a currency?
For example, you might have a buy order for when a certain currency falls more than 5 pips because your research tells you that's probably as low as it will go.
How do I know when to trade that currency for another, and which one?
There are two reasons to get out of a trade: to make the most money or to lose the least. That means you have a set stop-loss order and a set take-profit order that tell you when to get out of the trade.
- What things can make me change my mind about this?
If you aren't careful, this is where your emotions could ruin a deal. Even though the money market moves in patterns that can be predicted, there are always small changes within those patterns. Taking these differences into account will make it much easier to tell when a factor really makes a difference and when it's just wishful thinking.
- What can I do to get rid of a currency?
Your exit strategy could be as simple as "a stop-loss order when my loss hits 5 percent or a take-profit order when I'll make a 40 percent profit."
By using a system to tell you when to get in, get out, or stay put, you can keep your emotions from affecting your trading and make the most money possible.
