The Importance of Patience in Forex Trading
The lion is an extremely successful predator not because of its size or power but because of its endurance and analytical skills. Patient and very calculative, it presents us with the most important qualities of a good forex trader. In this article, I will be sharing with you the importance of this element of success and how we can emulate the king of the jungle in patience and strategy.
Patience is something I learnt only after losing my money. In my early days of trading forex, I was misled into believing that it was possible for me to earn while I was learning. With no knowledge of how the markets work, I wired $2000 into my trading account and was already calculating how much I was going to make from my “investment”. After loosing 75% of my money in two trades, I googled “how not to loose money in forex” and the results showed me what I should have done before going live. I learnt never to play with the markets but sadly my hard earned money was gone before I was even able to understand forex.
It took eighteen months of demo trading and strategy testing before being able to convince myself to try again but this time starting small. I had learnt all about money management, and was more than willing to apply it but the memory of my first account was still fresh. This forced me to make mistakes again. I was overtrading and didn’t wait patiently for my trade setup to play out instead I was entering and exiting the market compulsively. I looked again at my methods and was able to see that the cause of the problem was actually me and not my trading method. The lesson of having the patience to wait for the right high probability & low risk opportunity to enter my trades has been the single biggest factor in me moving from a mediocre trader to a consistent, profitable trader.
I have listed seven points to help you step up your trading from good to great.
The first and most important is to get good forex education. Do not rush to trade before getting educated. Learning the hard way is unnecessary and avoidable. The lessons the market will teach you would cost you. You need to have clearly established your trading edge before you can exercise the patience that is required to consistently execute your trades. Patience is totally useless unless you know what you need to be patient for.
Have a trading plan and trade according to that plan – All of the best traders plan ahead and are prepared. They have a detailed trading plan, plan their trades out, and trade according to their plan. However, that doesn't mean that they are always trading. Novice traders often rake up losses because they think they must constantly be entering, exiting, adjusting, etc. It is important to be prepared, but sometimes it is best to patiently sit tight and do nothing in the market. Just because the markets are open 24/7 doesn’t mean you should always be doing business.
Wait until your trade setup plays out - do not anticipate a play out. Many traders loose money this way. Use your patience pills at the right time; do not take the medicine after death. The lion stalks his prey with unrivalled patience and waits for the perfect opportunity to pounce and when he does he rarely misses.
"The big money is made by the sittin' and the waitin' -- not the thinking. Wait until all the factors are in your favor before making the trade." - Jesse Livermore
Use your sixth sense - The advantages of accurate guts are indisputable. George Soros, arguably the greatest trader of modern times, depends heavily on his guts. He once wrote in one of his books “I rely a great deal on animal instincts, when I was actively running the fund, I suffered from backache. I used the onset of acute pain as a signal that there was something wrong in my portfolio. The backache didn’t tell me what was wrong – you know, lower back for short positions, left shoulder for currencies – but it did prompt me to look for something amiss when I might not have done so otherwise.”
While you may not pray to have backache like the legendary investor, you have animal instincts – that inner feeling that you get telling you that you are in the wrong place. It could also be a good tool for trading.
Be a currency stalker - The lion targets the smallest or the weakest in a whole herd of animals and stalks it. Be a currency stalker. It is easier to trade with pairs that you are very familiar with. I have been looking at GBP/USD, EUR/USD & GBP/JPY 5min charts for at least 5hrs everyday for 5years now. I literally breathe those three. I know what forces move them, their relationships and all. This puts me in position to make a very good call and apply my trading methods. Trying to master every currency pair could be confusing. Pick a currency pair and stalk it.
Know when to cut your losses – If you are already in a trade and you see that things are going badly it pays to retrench. Do not wait to get lucky. To remain in the game, you have to be willing to endure the pain. George Soros was one of the best loss takers in the business. He didn't care whether he won or lost on a trade. If a trade didn't work, he was confident enough about his ability to win on other trades that he could easily walk away from the position.
“There are a lot of shoes on the shelf; wear only the ones that fit. If you're extremely confident, taking a loss doesn't bother you." – George Soros
Lastly, it pays to be aware of central bank activities especially in closely monitored currencies as I stressed in my last article “CENTRAL BANK CURRENCY INTERVENTIONS AND 2012 EXPECTATIONS” - In today’s markets central banks have become more active than ever before. In 2011 alone there were almost half a dozen interventions and from the little I have seen 2012 will be no different.
Happy New Year!