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How I Became a Better Forex Trader?
By Davorin Sadar of Markssin
I considered myself to be an expert on equity markets when I started trading forex in 1997. I made money in stocks since early 1990’s. Yet I lost my entire first investment on forex. I traded longer term. I was hitting it big from the start. All the available leverage put me ahead 70% in just a few months. Without any info out, the market one day started to go against my bets. I added to a position, to lower entry point in an anticipation of market turn. Yeah right, market turned my way, as soon as a margin call wiped-out my entire balance. I was stunned. My trading pride was badly hurt. I could afford to lose that money it just wasn’t good for my self-consciousness. So I stopped trading for a while and started reading. This way I actually analysed what went wrong. Basically I implemented Murphy’s Law (When all else fails read the Users Manual.). I found an article describing the need of protecting your gains in leveraged investments. There was an anecdotal description there. You can gain 500% or even 1,000% trading in forex. You can lose no more than 100%. So gaining 500% on $10.000 investment makes it $60.000. Losing 100% on $60.000 brings account to zero. The moral of the story was to protect your gains and never risk too much. I made a rule to risk no more than 2% of my portfolio in one trade.
I am an economist by education and I know a lot about John Maynard Keynes. But it was years after my forex wipe-out when I found his famous saying: “Markets can behave irrational far longer than you can stay solvent.” That was a trigger to my next rule – don’t try to outsmart the market. Trade with the trend, not against it. If I think that market exaggerates I stay on the sidelines. I actually use this rule ever since in all markets. Even in Real Estate. I pay more in rising market. I sell in falling markets. Wherever I can use stop-loss, I use stop-loss (or some other strategy or combination of instruments to the same effect). Even my Home Insurance is a kind of stop-loss.
I tried that strategy and it works. I switched many trading strategies and styles of trading before I devised cross-majors strategies I use now with a success. Also, when I first started trading forex I entered with an intention to make big profits. I tried to catch every upswing and every downswing. I overtraded, even if it paid-off at first. Than I picked a story telling that good swing traders catch 1 swing in 10. No one can catch every move. You have a choice to enter a trade or not. When you enter the trade you lose control. After you are in, the market will dictate moves and you can exit only as circumstances allow. My next rule is connected to the mind set. First I need to protect my portfolio; second goal is to make profit. That is completely different mindset. I do not rush into every opportunity to make money with all the risks of loss associated with every open position. I wait until an opportunity that satisfies preset criteria arises. I limit my loss. I know what I will do whichever way the market turns. There are more rules I try not to break in my trading, but these three are fundamental: Limit your risk, follow the trend and wait for the right opportunities. If used in every situation they will save you a lot of headaches.
Using stop-loss to limit my potential loss to 2% of my portfolio I can be wrong 5 times in a row and still not lose more than 10% of my portfolio. If I didn’t have stop-loss one big move against me could wipe-out my entire portfolio. I am rarely wrong five times in a row but I have never been 100% right for more than a week.
This intel first appeared on: http://rurzag.wordpress.com/
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This intel was contributed by Rurzag
Rurzag
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May, 2012
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