By: Terry Allen
You must not just focus on profits and ignore your downside risks. Instead, you should do the opposite in order to first survive and then to prosper.
In addition, you should not expect that each of your trades will make you rich. You need to realize that you will have more chances earning Forex profits by setting yourself realistic objectives. If, instead, you aim too high, the resultant failure could quickly crush your confidence and morale. In addition, you should try to review your Forex objectives on a regular basis in order to detect any serious changes in your circumstances.
Just because you think that Forex is currently hot is not a good reason for leaping into a trade especially if you do not fully understand what is happening. Under these circumstances, you are well-advised to bide your time until you have obtained a full comprehension of the current trading situation.
If you have been trading for sometime, then you no doubt know that Forex trading carries with it a tremendous amount of risk. Your best defense is to develop a sound, disciplined Forex trading plan based on an astute knowledge of the Forex Market coupled with good money management skills.
As stated, one of the major differences between novices and experts is that the former think about how much money they can make while the latter think about how much money they can lose.
You can obtain a better appreciation of this by considering the following Forex situation. Assume that on the one hourly chart that the RSI has fallen below 30 and is just beginning to rise back above it. Many traders would interpret this as a BUY signal.
Novices may well enter such a trade at this point, but backed by no money management or trading strategy. Assume that price first moves against the trade by 20 pips, but then rises back to record a profit of 10 pips at which time the trade is closed.
After three similar wins in a row, a fourth trade is entered and again price moves against the trade by 20 pips. However, this time price falls by another 30 pips before the novice exits the position.
After four trades, the novice would have recorded a loss of 20 pips despite having achieved three clear wins. In fact, many beginners win a good proportion of their trades only to lose money doing so. Something is definitely going wrong.
Experts, on the other hand, will analyze the same position but with the use of their trading systems which have both a positive win:loss ratio and expectancy value.
They also know that in order to be profitable in the long run they have to make more when they are right than they lose when they are wrong, typically twice as much. So after four positions, they would have traded in such a way that could have produced two losing trades for a total of 100 pips, but two wins with a total of 200 pips producing a profit of 100 pips.