Today I realised one important thing about trading. It’s very important how you start the day and how you gauge market sentiment at the begining of the trading day. Many times the same trend goes on the entire session. If you are wrong in the morning, you may not be able to adapt/accept that your analysis was wrong and you will lose over and over again.

Ability to adapt and get in tune with the market is a crucial element for traders. You have to become a market chameleon.

So, what I did today was that I made a fast analysis, without thinking too much about what’s happening. I was long on all three pairs (EURUSD, GBPUSD and EURJPY). The trend was actually bullish, but I didn’t pay close attention to a few other important facts:

- Friday – Fridays tend to usually move prices against the weekly trend, due to profit taking (last day of the week, some big guys close big positions in the market);

- Candlestick patterns at resistance – I did watch these, but I missinterpreted them. I wasn’t paying attention to what the market was telling me.

Let’s take this GBPUSD H1 chart for example:

Lesson learned!

The past few days have been another revelation for me. I strongly think that trading the Forex market is a piece of cake, IF YOU CAN CONTROL YOUR EMOTIONS. That is the only obstacle in front of us.

Fear and greed are the cause of losing money in this market. We fear the trade won’t reach the profit level, so we close it early. We can’t accept that a trade is going bad, because we’re greedy, and we widen our stop loss. So we cut our profits and let the loss run. When we should do the opposite: CUT YOUR LOSSES AND LET THE PROFITS RUN!

I don’t know about you, but that’s why I lost money. I won over 65% of my trades in the 2 months and a half I’ve been trading live. But I lost money because fear and greed were stronger than my brain was. And there was also anger after I lost a trade. I jumped in with another poor trade just to get my money back or get revenge on the market. And lost again. We need to get this through our head, that the market is not our enemy. If you lose a trade, that’s your fault, not the market. Accept it and go on. Stay focused, only get the good trades. Don’t fear the market, stay “in the zone” (as Mark Douglas would say), watch what price is doing now, don’t think about your previous trade (no matter if it’s a winner or a loser; euphoria can also be devastating if you can’t control it).

When you get past these obstacles, trading is like riding a bycicle. It just becomes a reflex. I haven’t yet reached this goal, but I feel I am almost there. I know what my problems are, I know where I am wrong when I am wrong and I know I have to avoid the same mistakes over and over again. And I know some guys have made it. They are successful. They’re not smarter, they didn’t study at better schools, they just have a different attitude: the attitude of a winner.

If you act like a loser, you’ll always be a loser. Take the winner attitude. A winner does not fear anything. A winner is patient, planing his moves carefuly. He does not underestimate his opponents (the human emotions). He knows his opponents very well and knows what to expect. Know your emotions, observe yourself while you are trading. Take note of what you feel. If you know you are afraid when that happens, then you can control that fear and use it in your favour.

Let the battle begin!

After I discussed the importance of psychology in the previous article, let’s say a few words about self-fulfilling prophecies in Forex.

Many newcomers fall into the mistake of using lots of indicators and forgeting about the fundamentals (economic news). As I said, the key to success is doing what the big guys are doing and watching what everyone else is watching. So, do all banks and hedge funds watch moving averages, MACD, Stochastics, RSI or other indicators? If yes, then do all institutions use the same settings for these indicators? Do all institutions draw identical Fibonacci retracements? The answer is no, they don’t.

So what do all the big guys do?

1. Well, they certainly watch out for big economic news and reports. So, if you want to be a better trader, make sure you do that too. You will find links to a good economic calendar and a news site in My favourite sites section on the right side of this page. Make sure you read them every morning, before you start trading. Read the news to find out what the long-term market sentiment is and read the economic calendar so you know when to stay out of the market and what to expect. I would advise you to stop trading during major economic releases (events marked in red in the economic calendar). Those are times when big spikes can occur and it’s too dangerous for a newbie to trade.

2. What else do professionals watch out for? On the short-term, technical analysis is a must. And I, for one, am a short-term trader. I’m a day trader, which means I close my trades in the same day I open them. I do not leave my positions open over night or over the weekends.

Technical analysis is a must-use for short-term traders. As I said at the beginning of this article, banks do not look at indicators. The most important rule in any business is to KISS (keep it simple, stupid). That’s what the smart guys do. They keep things simple and only use basic tricks. And the most widely used technical analysis trick is: support and resistance lines. We will talk about them in depth in another article, but now I just want to tell you why they work.

You see, when Forex was just born, it was run by mass psychology (much like today). So people watched the price movements and, for instance, they saw that price stopped two times before at 1.4000 and then went back up. So they thought it’s likely that the next time it gets there, it will go back up again, because 1.4000 acted as a support level, blocking the price to move further down. Many traders saw this and used this logic, so this became widely used. So they just work because everyone uses them. They are self-fulfilling prophecies. They work because we all think they will.

In my strategy, I only use horizontal support and resistance lines and Fibonacci ratios. I rarely use diagonal support and resistance lines (also called trend lines). However, I will talk about all these three major parts of technical analysis in the next articles and I will show you how to draw them and how to trade them.

Psychology is by far the most important thing a good trader must master. And the sooner you realise that, the better. In this article, I want to write a few words about the market psychology and some psychological pitfalls that many newcomers encounter on their way to success.

So, why is psychology important?

First, you have to ask yourself “Who moves the market“. And the answer is: people. Of course, small traders like you and me do not move the market too much, but big institutions, like hedge funds and banks, do. And they have real people trading for them, not automated systems.

So, if people trade the market, then the market is actually moved by mass psychology. And the only way to success is to do what the big guys do and go with the trend. If you read a few things about Forex, you probably read this famous statement: “The trend is your friend“. You have to do your best to “guess” what the next move will be, what would others do in these circumstances? What does the news say? What are the conclusions that people take when they read the news? Which economy is good, and which is not doing so good? What would an institution do? Where would it sell and where would it buy? Where is it safe to do that?

You and I will succeed in this market if we trade with our heads, not with our guts. Banks don’t trade on instinct, they analize the market, they know the news, they know where to place a safe investment and when to stand aside.

Psychological pitfalls that drive newbies to failure

In these months of trading, I found myself to be an unpatient, emotional and greedy human being. Trading can teach you a lot of things about yourself.

Professionals are patient, rational, good managers of their money and the risk they take and are not greedy. Let’s talk about lack of patience, emotions, greed and fear, so you can see how these can get you out of trading for good.

1. Lack of patience

Most newbies think they’re going to get rich in a matter of months. They search the internet for the perfect trading system, some even pay money for good marketed trading systems (that really only bring money to the self-proclaimed gurus that sell them),  thinking they would become rich after they bought them.

I thought I was going to get rich too. But, fortunately, I didn’t believe in any Holy Grail of trading systems and did not throw my money off the window. Instead, I played 2 or 3 weeks on a demo account and then couldn’t wait anymore, so I invested some money in a live account.

In 2 weeks, I lost 40% of what I invested. Why? I was not patient. Unpatient traders make two mistakes: they overtrade and they overleverage.

Overtrading means making too much trades. Say you made a trade and lost 50 pips, then made another one and lost an additional 30 pips. Now, you’re angry and want to get revenge. So you start making chaotic trades to get your pips back. That’s overtrading. A good rule against this bad habit is: “TAKE A DAY OR TWO OFF AFTER 3 CONSECUTIVE LOSSES!”

Overleveraging is the way to maximum drawdown. Especially when it’s mixed with overtrading. I overleveraged when I lost my patience. Yeah, I earned 200 pips, with 0.01 mini-lots, but that’s just 2 dollars. So I won’t get rich soon. Well, why not trade 5 mini-lots? 200 pips could be 1000 $. That’s pretty good. Well, stop thinking like that, or you will end up sucking your finger and eating bombons. I lost 30% of my account in a matter of minutes due to overleveraging.

Be patient or be out!

2. Emotions

A professional trader is not emotional. He is rational. After you have three consecutive winners, you should take a break. That’s because you can get emotional and think the market is in your hands. Emotions confuse the mind. And you need a clear mind when trading. Likewise, after a few consecutive losers, you get sad or angry. So you start breaking rules and losing more.

3. Greed

Greed can cause you a lot of pain in the Forex market. Overleveraging and overtrading are fruits of greed too. But we already talked about them, so I’ll write about another ugly habit: skewing your risk/reward ratio.

1st example: Let’s say you enter a trade and you set a 50 pip stop loss and a 150 pip take profit level. That’s a 50:150 = 1:3 risk/reward ratio, which is what most professionals recommend. Always have 1:1 or higher! So, you’re in the trade, price starts going against you, but you can’t accept a loser, so you move your stop loss to 100 pips. Now, your risk/reward ratio is 100:150 = 1:1.5. Price continues to go against you and takes your stop loss. Now you’re devastated. You can’t believe you lost 100 pips.

2nd example: Let’s say you take the same trade, but price goes your way. You see price stalling before your take profit and you get strong hints that it’s reversing. You don’t close it, because you want more. Price reverses and gets your stop loss.

As a rule of thumb, learn how to accept a loss. Even professionals have losing streaks.

Another rule of thumb is: if you see clear signals that the price is going the other way and it’s not just a small retracement, then close the trade manually.

4. Fear

Fear can cause you a lot of troubles as a trader. It makes you close the trade before getting to your take profit level, even if you don’t have strong signals it’s going against you. That’s what happens to me a lot of times. I see the trade at 20+ pips, then it stalls a bit, and although I have my take profit set at 100 pips (for good reasons), I close it, because I fear it will reverse.

Control your emotions, or be out!

So, these are a few reasons why psychology and discipline are the corner stone of Forex trading. I hope you and I will work to become more disciplined and build up some self-control.