By: Terry Allen
You will need to trade your Forex system consistently over long periods of time if you want to achieve significant profits. To do this, you first need a well-constructed set of rules that you can follow with confidence and that can be applied using a good Money Management Strategy together with an expert psychology.
Trading psychology is highly important to ensure that all trading decisions are made with discipline and consistency. Sticking to your system for any length of time is nearly impossible without having sufficient faith in your trading ability. For instance, after experiencing their first bouts of consecutive losses, many traders suffer serious drops in their confidence causing them to deviate from trading with the necessary discipline required for success.
With each subsequent negative result, their natural impulse to avoid any further pain increases causing their faith in their trading ability to constantly wane. Fears, doubts and anxiety run rampant under these circumstances making consistent trading nearly impossible. Trading psychology is affected by many human emotions such as the following. Traders experience frustrations when reality does not match their expectations. Anxiety surfaces when they can no longer trust their trading systems after suffering severe drops in confidence. How can traders regain positive attitudes when their most immediate reference point is a string of very painful losses? New traders must realise very quickly that Forex Trading is an activity during which losses will always occur.
One of the most recommended methods, used to defend against the very debilitating experience of failure, is to develop a system that can be trade consistently as well as being able to cope with severe problems such as the following. If you were to lose 50% of your account on a single trade, dropping from $10,000 to just $5,000, as a result of an unexpected market move, you would then need to gain 100% just to recoup your initial position. This is known as a drawdown and it can have an insidious effect on your account balance. For example, assume your initial balance was $10,000 and your results over 10 trades were alternatively 20% loss and 20% win:-
$10,000; $8,000; $9,600, $7,680, $9,216; $7372; $8847; $7,077; $8,493; $6,794
As a result of the draw-down effect, recovering from consistent loses gets increasingly harder. You need to avoid these situations developing by using a trading strategy that has both a positive risk to reward ratio and expectancy value.
This article is part of a course intended to show you how to do this.
By: Terry Allen