New Forex traders typically bring their deposit to the table and little else. To be successful in Forex trading, you must hone your craft with months of practice, hundreds of hours of study and a solid foundation in both technical and fundamental analysis. Otherwise, your new endeavor will do little more than pad your broker’s pockets.
To avoid becoming a statistic, you must become aware of, and then counter, the two major hurdles to successful Forex trading: greed and compulsion. If you are still trading a demo account, it’s fair to assume that you likely haven’t come head to head with either yet. Greed manifests in Forex trading as a driving need to go further, to ride the trade and squeeze every possible pip out of your broker. Compulsion begins with more subtlety, but is no less damaging. It is the ever present need to tweak and re-examine your trading strategy. Both of these traits of the novice trader stem from fear.
You may not encounter either greed or compulsion while trading a demo account because a demo account is not an accurate facsimile of Forex trading. All of the core elements are there: you will find the same list of currency pairs, the same charting tools and the same trade execution time. You will find that the price reacts to news and other factors in the same way.
The truth is, the difference between a demo account and a real account only becomes evident when you enter the equation.
It is very difficult for anyone, even experienced traders, to trade a demo account and make the same choices that they would with a live account. One thing to realize before you make your first real trade is that a demo account will never get your adrenaline pumping in the same way that a real trade will.
Imagine for a moment that you are under the gun, twenty pips in the hole and three pips away from your stop loss. This is your first trade, and it looks like it will be your first loss. You grind your teeth, thinking of how your broker wins either way. You glance at your chart morosely as the MACD signal that you took disappears.
Then, all at once, the price reverses. Negative ten, break even, and then it happens: ten pips profit. Before entering the trade, you set your take profit to forty pips. You blink, realizing that your trade is now only four pips away from it. Still tasting that near loss, and wondering how much further the price will go now that it has turned in your favor, you remove the take profit.
After all, you tell yourself, you were right about price direction, weren’t you?
Predictably, the price reverses, and you are stopped out for a twenty pip loss within a few seconds. This is greed, and if you are not prepared for it, it can destroy your account. As a new trader, you are likely to encounter greed any time you nearly take a loss only to see the trade reverse unexpectedly or when your trade takes off like a rocket from the start, almost touching your take profit but halting, giving you time to think.
Don’t think, but plan.
Compulsion in Forex trading is typically the result of a string of losses while trading any one strategy or system. All traders, whether novice or expert, are susceptible to compulsion at some level. A trader gripped by compulsion is akin to a buyer at a car lot, forever flitting from one car to another, checking out paint jobs, curves and sticker prices. As soon the shopper finds the slightest negative aspect of any one car, they move on to another. When they have examined each and every car, they might even find themselves going back to inspect cars that they’ve already looked at.
This cycle can go on for some time, and it isn’t surprising. After all, a car is a significant investment. So, too, is any one trading strategy. It makes sense that you would want to commit to the best possible modus operandi. You must be aware of the trader’s tendency toward compulsion so that you can recognize it when it comes knocking.
You can overcome both greed and compulsion by committing to treat your Forex endeavor like a business. To be successful in any business, you need to write and stick to a business plan. One key component of your Forex business plan is your take profit. You should consider your take profit written in stone. In fact, a take profit that never changes is one of the single most important components of a successful system because it is an integral part of money management.
Another component of your Forex business plan while you are learning should be to commit to any one system for at least three months. This trait, perhaps more than any other, separates the successful traders from the rest. There is simply no way to gauge whether a system will be profitable in day, a week or even a month.
It may be tempting to tell yourself that because a system looks great on the charts, it will be profitable in the future as well. This is just another form of greed, and you should avoid it at all costs. Unless you have the good fortune of being mentored by a successful trader, the only real way to gain traction in this business is to give each trading methodology, system or idea the testing period it deserves.
Remember, there is a reason that over 90% of traders fail. By keeping the ever-present dangers of greed and compulsion in mind, you stand a greater chance of meeting that basic criterion of the successful trader: ending your first two years of trading in a profit.