How to Protect Your Account (and Avoid Gambling Forex)
We all know that the first and most basic rule to make it in the long run in the forex world is to protect your account. Most forex traders have lost one or more accounts after first starting the job. Rendering your account inoperable with low funds is a big scare, particularly for fresh traders. But, that´s the risk we are willing to take in order to reap the benefits of forex trading. It would be much easier if it was a risk-free game, but you can´t make a profit without risking the booty. We cannot eliminate risk from forex, or from life for that matter, the best thing we can do is minimize the risk. Here we have several strategies and articles about how to minimize risk and building your own forex trading strategy:
- Money management tactics in forex trading
- 3 Advanced risk management tactics
- Forex trader personality discovering guide
- Traders personality, Pt. 2: Find the best trading strategy for you
This article will address how you can fight the urge to trade obsessively in forex, and refocus your trading strategy. Once newbies start to understand the forex world and see the first positive results, they become obsessed and want to trade non-stop. They overtrade even during uncertain times and inevitably end up losing their entire forex account. I have been in this business for more than ten years now and sometimes I step back and just watch the market during uncertain times or watch the price action in the market when it becomes irrational.
The problem with new traders is that after they have been profitable for a few weeks they think they got it all figured out. They become overconfident, overtrading and opening multiple positions which they cannot manage. The forex market changes its nature continuously; it may be peaceful for a few weeks or months, only to suddenly turn into a monster in the blink of an eye.
We just had few of these occasions: during December last year and January this year the forex market was pretty quiet, with an average daily range of 30-40 pips in most pairs. Then, in the beginning of February, suddenly, someone pushed the panic button and everything went mad with daily movements worth several hundred of pips. That´s the reason that we, as forex traders, must keep our heads cool and not trade obsessively.
Ask Yourself: Are You Obsessed With Forex Trading?
If a forex trader becomes obsessive, it starts turning into gambling. We have to fight it and try to see forex as a job, that obviously stretches over a period of several decades. First of all, it is important to figure out whether we are obsessive forex traders and accept it. But, how can we know if we are obsessive? It´s not that difficult really, you just have to ask yourself a few questions:
- Do you feel the need to trade forex nonstop even when there´s no action in the market?
- Do you trade nonstop, even when the charts aren´t telling you anything?
- Do you keep increasing your trade position in relation to your forex account?
- Do you open too many (depends on the trader and his ability) positions that you are unable to manage?
- Have you ruined or jeopardized a job, a relationship, or any other important aspect of your life due to forex trading?
- Do you think about trading forex even when you are away from your platform or during the weekend, holiday etc.?
- Have you tried to hold back, control or cut down the number of trades and failed?
- Do you continuously cut the trades short?
How To Deal With Bad Trading Personality Types
If you think you suffer from one or more of these symptoms then you may be an obsessive trader. We all show one of these symptoms from time to time but the problem is when you do these mistakes over a long term period. But, there always a cure for a disease:
Stick To Your Forex Strategy
Of course, as you may have read elsewhere, sticking to your forex strategy is important. We might alter the strategy if the market outlook changes, but we can´t change our mind every time the market makes a retrace or the price moves a few pips against your trade. Unless something really major happens, like the European Central Bank (ECB) starting to tighten their monetary policy, stay in your long-term EUR/USD sell forex trade even though this pair might go up a couple hundred of pips. This prevents you from opening and closing many trades and the psychological effect will take its toll on you. Apart from that, the cost of the spread obviously accumulates, so you will end up paying more.
Try To Do Nothing
Following the logic of the previous argument, sometimes it is best to do nothing. You´re not trading just for the sake of it, your goal is to make money. So, if the reward is very small, it is best to do nothing. That goes both ways, either when you are in a trade or out of the market.
Let´s take a real long-term example. If you bought USD/CAD about two years ago, when the FED started to tighten their monetary policy and the price of oil started to collapse, and then you let the trade run the full course until the beginning of this year when the oil price bottomed out – you would have made 40 cents (4,000 pips). So, doing nothing and letting the trade do the entire job for you often pays off. The same logic applies when you are out of the market; if you don´t see a clear opportunity or the price action is numb don’t trade because you feel like it. Doing nothing is the best thing to do at these times, because often when the picture is not clear and you are still trading forex, that´s when you are more likely to lose. Do yourself a favor and do nothing or go get some fresh air!
Look at this graph: If you bought USD/CAD in 7/2014 and did nothing until 1/2016, you’d be a lucky trader!
Trade the same size for a month
If you have the urge to increase the size of your position with every trade then you really are an obsessive trader. You could increase the position size to the point that trading will just become a gamble. We know we can´t win ´em all, and increasing your trade size continuously only increases your risk.
One of the best forex strategies for this type of trader is to keep the same trade size for a month, despite the growth of your account. Picking a risk to account equity ratio, I would suggest 1-2% maximum, which may be one lot, and just trade one lot the entire month. Then, at the end of the month, if your account has grown by 20%, you increase the trade size by 10% next month. It doesn’t look like much at the first glance, but trust me, the geometric progression will take care of the profits. By the end of the year, your account will have grown nearly tenfold.
See the bigger picture
When you see an obsessive forex trader, the best advice you can give them is to show them some big timeframe charts. There´s a lot of noise on the smaller timeframe charts and both the support and resistance levels are not that strong. Obsessive forex traders usually use one and five minute charts and concentrate on each and every tick. We know that the price doesn´t go in one direction in a straight line, there are always ups and downs, but we can´t trade every little move. So, looking at the bigger picture clears the chart and makes trading easier. If you concentrate on small timeframes for a long time (like 1, 5 or 15 minute charts), then you change to a 1- hour or 4-hour chart and will feel pretty silly seeing how difficult you made it for yourself before. This way, the obsessive forex trader will trade less and hold trades for longer.
Forex Strategy Is Part Of The Solution
As you can see, there are ways to help an obsessive forex trader overcome their situation and there are forex strategies which can help them become better traders. The forex market is not a game full of action; you cannot trade forex just to gain some adrenaline. If you get too excited during trading then you are trading the wrong way. So, try looking at the bigger timeframe charts, stick to your forex strategy, take a step back and relax instead of trading forex like your life depends on the number of trades. And obviously – don´t keep increasing your trade size beyond reason. We hope that all this advice will help you become a better trader.