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Harnessing the Power of
Predictable
Irrationality
A
tale of
fear, greed and how to tame the demon within.
Every
year many very knowledgeable and technically skilled Forex traders try
their hand at currency trading. They learn all they can about
the
market, technical analysis, fundamental analysis, trading strategies,
indicators, etc. They try every rational system they can get
their hands on. They implement every strategy known to
science. They leave no stone unturned in the quest for the
holy
grail of trading systems. Yet, every year, the huge majority burn and
falter.
I must admit to having been one of these who repeatedly failed time and
time again.
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After trying desperately for nearly three years, I came to the
conclusion that successful Forex trading was possible only for those with
superior information or
advanced skills.
After all, I didn't know many people who
were successfully making money trading currencies. I had
heard
stories, but didn't really know anyone personally who was consistently
doing well. Only the big money managers, with superior tools and
information were
making money, right?
Are
You Losing Your Pants Trading Forex?
Have you been working the Forex market unsuccessfully
too? Been reading every book you can get your hands on about
Forex? Tried every strategy? Bought every course?
Still can't make it happen, can you?
Want to know why? It is most likely NOT because you lack
information or skill.
Let me be clear. If you have taken courses on Forex trading,
read
books on technical analysis and implemented sound trading strategies,
the reason you are failing is NOT because of any lack of
knowledge. There is something else you are doing very
wrong.
What are you doing
wrong?
The answer is simple. You are doing one or both of the
following:
1. Failing to use sound Forex Trading Psychology
2. Failing to implement sound Money Management techniques.
A New Discovery About
Forex Trader Behaviour
In the last twenty years, social scientists are discovering information
about how we approach market behaviour that is very
illuminating. It probably comes as no surprise to
you that
human behaviour in a trading environment can be nothing short of irrational.
People make the strangest decisions
when trading. They buy when they should be selling and sell
when
they should be buying. They add to losing positions and
double up
when they are down. They avoid the market during the most
profitable opportunities and refuse to get out when things are at their
most risky. In retrospect, they make
decisions that any reasonable person would clearly see as being against
their best interests.
Of course, these "reasonable
persons" are not "in the trade" with money at stake. The
reasonable person is not impaired by the two twin evils of a trader -
fear and greed.
Fear
and greed are the twin evils
that can cause even the most knowledgeable and astute trader to
fail. They lead to the phenomena of bias, emotional trading
and overconfidence.
These are the silent killers of all things good in currency trading.
To illustrate, I would painfully like to recount some of my own
experiences. I can remember a time when my ratio of winning trades
to losing trades
was 4:1 and yet I still lost money.
For those of you who
are new to Forex trading, this means that out of every ten trades I
took, I was successful 8 times. Pretty impressive statistic,
isn't it? Why am I telling you this? Well, not to
impress
you, thats for sure. Instead, I want to impress UPON YOU that
notwithstanding such a phenomenal win ratio, I LOST MONEY!!!
Why? Poor trading psychology
and poor
money management
techniques. I had honed my actual strategies to such a
polished
extent that I could generate an 80%
winning record over a
substantial number of trades, say, 40 or
50 trades, and yet I still managed to lose money. Sound
incredible? Well, let me tell you, it was real and in
retrospect,
it is pretty hard to do. You have to make some pretty stupid trading
decisions to
fail with those kinds of numbers. But I was a master of
irrationality. In fact, the more successful I became at
times,
the harder I fell afterwards.
Does this, by any chance, seem familiar to you? Are you
experiencing some of the same frustrations? If so, I would
bet
anything that the same twin evils are robbing you of your success in
Forex trading.
There is Hope!
Social Scientists to the
Rescue
Fortunately, what social scientists have also discovered during the
past two decades is that while irrational decision making is built into our very
genetic makeup
and hard
wired into our behaviour
from when we are a child, this irrationality is often times predictable.
YES, with
practice and awareness, we can actually gauge when this irrationality
is likely to creep into our trading
decisions. With
this predictability comes the cure.
The Cure
If we know when to expect irrational behaviour, we can pre-empt
its manifestation and avoid
poor decision making.
The
question is, how do we know
when to expect irrationality and how do we cure this.
The answer to this million dollar
question comes from studying
the market and understanding how we
interact with it and how we deal with market information. By
recognizing our susceptibility to
emotional trading, we can
adopt rules and guidelines to curb our
behaviour and limit irrationality. Even more basic, we can implement trading plans
which
prevent us from acting emotionally.
Combined with proper money management
techniques, we can ensure that our psychology is working for us rather than against
us to
ensure success in our trading.
How do We Implement this
Knowledge
The importance of trader psychology and money management seems to be
poorly understood by most traders. Only after a period of desperation
and extreme
failure do most traders
accept the reality that perhaps the reason they are failing is because
of themselves.
Fortunately,
like the alcoholic
who finally admits he has a problem, once the trader recognizes that
his failure is self-imposed, he can begin to address the
problem.
Just like the trader himself has neglected this most important aspect
of his trading methodology, the industry itself has largely neglected
the importance of trader psychology until recently.
Fortunately, some seminal works during
the past ten years have shed some light on the topic and we now have
some good sources to go to for help.
Don’t forget to
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for all of our free Articles, Videos and Tutorials available in our
members area as
well.
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