In forex trading, the initial goal is simple: to trade for another day.
Opening an account and putting real money on it is the easy part. The challenge is to stay afloat long enough for you to acquire the skills needed to become consistently profitable.
So how do you know when you’re on the right track?
Does a negative balance automatically mean that you suck as a trader? How many trades do you think are needed before you HAVE to show profits? Should you panic when you’re on a losing streak?
If you freaked out over the questions above, don’t. Remember that losing is as much part of forex trading as winning. However, a stream of losses or a consistent lack of profits could be a sign that your trading process needs tweaking.
Here are five questions you need to answer to help identify your problem area/s. Of course, trading on demo before opening a live account would’ve already answered most of these:
1. Are you committing classic trading mistakes?
Humans have the tendency to think that they’ll be the exception to the rule. People buy lottery tickets believing that they’ll win the huge jackpot prize. Others buy houses near fault lines thinking “Eh. There won’t be any earthquakes while I live here anyway.”
Forex traders are no different. Though they’ve been warned that more than 95% don’t survive their first months, some are still overconfident enough to think that they’ll be immune to the classic trading mistakes.
Don’t be afraid to check if you’ve committed one of them. Whether it’s the basic ones like not setting stops or psychology-related ones like lack of emotional control, it’s better to confront your trading problems as early as you can.
2. Do you have a trading system?
How do you pick your trades for the day? Do you trade the first currency pair that catches your eye? Do you pick the most colorful indicator and buy/sell according to its signals? Which time frames do you usually look at?
Trading without a system is like pushing random buttons in a game controller, hoping that you’ll hit a winning combo. You may win, but you won’t know how you can do it again.
A trading system will go a long way in helping you become consistently profitable. If you don’t know how to build one, then you can start by simply identifying your entry and exit parameters.
3. Are you managing your risk exposure?
Does your average position size match your risk tolerance? Are you taking setups with a good reward-to-risk ratio? How much daily loss can you sustain given your leverage and margin levels? For those who are winning trades but are still not making money, are you keeping track of your trading expectancy?
Don’t forget that trading without risk management is gambling. In the end, forex trading is a numbers game and those who know how to take advantage of favorable odds are the ones that survive the longest.
4. What does your trading journal tell you?
You can’t improve what you do not measure. Trading journals not only tell you where your weaknesses are, but it also prevents you from reverting to your old habits and repeating your earlier mistakes. It keeps you measure, track, and stay focused on improving your performance.
What you put in your journal depends on your personality, but you can start with basic ones such as your motivations, market views, trading mistakes, and general statistics. Consider asking other traders if you’re not sure which performance metrics matter.
5. Is forex trading for you?
Perhaps the reason why you’re not making money trading forex is that currency trading is just not for you.
It may be that you find currency trading too much for your risk tolerance. Or maybe macroeconomic events don’t really interest you. It may also be that you’re so used to trading other assets that you don’t care much for currencies.
In any case, there’s nothing wrong with turning your back on forex trading if you feel that it’s not for you. In fact, we’d rather see an informed investor quit forex trading than an eager one who’s just in it for the money.
That’s it for my list today! I’m sure there are plenty of other reasons why you’re not making profits despite your efforts, but I think this list is a good start at identifying your weaknesses. Hope it helped!