Losing money can be a rude awakening that forex trading is far from the excitement of making money from the liquid currency markets.
Some traders realize it soon while, for most, it dawns after blowing an account.
That’s because trading leveraged products is not as easy as advertised.
It is hard; that’s why you should never understate the importance of the two trading skills you will learn in this article.
Whether you are a new trader or a veteran trader, if you don’t learn to manage risk and track your trading, you tread the path of Nick Leeson, the rogue trader.
Yes, it is essential to have a tested trading strategy, yes you must trade with a good forex broker, yes, and yes, capital plays a vital role.
But, if we are honest with ourselves, none of these crucial factors helps an indisciplined trader who never knows how they got where they are in the first place.
To gut the perpetual losses in your trades, take a step back to look at your past performance and then create a strategy around your discoveries.
This article will hopefully help you with that.
Important Trading Skill 1: Keep a Trading Journal.
A trading journal is a tool traders use to track their trading performance.
It could be a book, a spreadsheet, or an advanced journaling software – whatever it is, it is simply a tool.
But it is not just a simple tool; it is a powerful tool that successful traders use to learn about their trading behavior.
A trading journal is like a mirror; objectively and honestly filled, it will reveal areas in your trading practice that need work or amplification.
That said, for a trading journal to be a useful tool, you need to fill it with every detail of your trades.
Now, the skill part is knowing what to fill and actually filling in the journal.
Most traders know the importance of keeping a trading journal but never keep it.
Others keep one but fill it with data that is not entirely helpful.
While other traders keep the journal only to shelve it.
None of these will help you.
A trading journal is only helpful if it captures the right data, the right amount of data, and if you consult it regularly for trading perspective.
Your trading journal must capture.
- Trade entries and exits
- Trading instruments
- Trade sessions (US time or London or Asia)
- Trading strategies used on the trade
- Reasons for the trading decisions
- Lessons after the trading sessions or even individual trades
- The emotional state when you entered the trade – were you greedy or hoping that the trade will reverse?
- Trade management decisions – did you move the stop loss, or you removed it.
- A rating of whether it was a fair trade or a lousy trade
You can go beyond that and track everything else. The purpose is to find patterns that affect your trading.
For instance, you can track in your journal the number of hours you slept the previous night or how the relationship with your partner affects your trades.
It may not make sense, but some terrible trading decisions happen the days after a fight with a partner.
Such events seem parallel to the candlesticks and the market, but they sure do impact your trading.
So in the journal, keep track of everything about your life that has the potential to impact your trades.
Important Trading Skill 2: Risk Management.
I may shoot my foot by saying this, but you may skip keeping a trading journal, but you are ruined if you forget managing trading risk.
Trading leveraged products is risky, very risky that regulatory bodies force brokers to stamp risk disclaimers on their websites and promotional material.
That means that as a trader, your number one job title is – Risk Manager.
So how do you exactly manage risk?
Trade With a Strategy and a Plan
Most traders lose a bulk of their money because they approach trading casually.
A strategy and plan bring order to the chaos of the markets.
A good strategy should focus a trader on the currency instruments to trade, the timeframes to take trades, the entry and exit rules, and how to manage trading emotions.
Ideally, the trading strategy helps a trader to find the edge they need to extract money from the markets.
Beware of Leverage
The attraction of forex trading is leverage; with $1,000.00 on the leverage of 1:100, you can open a trade worth $100,000.00
Now imagine leverage of 1:1000
Implying you can easily double an account.
But leverage is a double-edged sword; on its right side, it will slice you a big piece of the markets; on its wrong side, you will lose an account in minutes.
To succeed, you need to trade with leverage that your trading strategy and personality accommodates.
Use Stop Loss Limits
A cardinal rule to hold dear to your heart is to always trade with a stop loss.
Every trade you place has a likelihood of going against you.
So, manage your risk by limiting how much you lose on every trade that defies your original predictions with a stop-loss limit.
Keeping a trading journal and managing risk is easier said than done; that is why they are trading skills that you have to master.
Mastering skills comes down to habits. Start small, do it every trading day, and your trading account will increase with no time.