Warning: this article is NOT about trading plans, golden systems, reasonable money management, psychology of trading and most of all quitting. Only constructive, cold analysis for better understanding of matter.
Forex market attracts many young, ambitious minds filled with dreams. They all are lured by illusion of quick gains. They read somewhere that majority of people lose on forex market and they think “Not me, I ‘am not majority, I’ am going to show them!”.
But after couple of months of excitement learning, after testing hundreds of strategies and blowing deposit couple of times the illusion is starting to blur out. They are starting realize that this is not that easy as it was looking at the beginning.
Now, how people are achieving proficiency and success in any category of life? They are practicing, practicing, practicing. They make mistakes, learn from them and then practice some more. Ok, but why forex trading is so distinguish from others disciplines? The cost of mistake.
The success is useless, because it teaches us nothing. Mistakes in other hand brings us value experience from which we can learn, that way we can develop our skills and make progress. But different occupations has different cost of mistake. To better illustrate this I will compare forex trading to sport for example tennis.
If you are practicing tennis, for example serve. You hit and ball didn’t went into the field, you made a mistake, but you lose nothing. You pick up another ball and do it again until you succed. You can gain experience and learn almost for free. You are bound only by your physical condition, how long you can repeat that. But in forex trading you are bound by amount of money you have (we are considering only real live trading, not demo).And when your trade is happen to be a mistake, you are loosing money. When money ends, you can no longer pay for your mistakes and process of learning is stopped. Obviousness or not?
It is clear that in tennis you can’t practice all day and at some point you will be too tired, but you only go to sleep, regenerate the strength and tomorrow you can do this again because your physical energy is renewable, money is not.
Second thing is frequency of making mistakes. If we assume that we learn something from every mistake we made, we can say that our development speed depends on how many mistakes we made. So in our interest to learn fast is to make as many mistakes as we can to learn from them as much we can. But in order to make mistake we have to have opportunity.
We are considering that we are stick to one strategy only. Lets assume that we are daytrading simple 0 cross MACD strategy on M15 chart. MACD cross from minus to plus is buy signal and vice versa. How many crosses can be made in one day? Two, three? So those are your opportunities from which you can learn. Not many and you also have to wait some time to see what was the result of your action. It can be any strategy because even scalping doesn’t give opportunities every second.
But in tennis you have basket of balls and you hit as long as its not empty. Then make 5 mins brake for pick them up, and do this again, and again and you can see results immediately. The frequency of making mistakes is higher so is the speed of learning. Another obviousness or not?The last thing I want to discuss is heuristic of thinking. This is the process of developing actions/behavior/solutions for particular problem and then application it to similar situations. People like to simplify things, and this is thinking shortcut so to speak. They see similar situation , they don’t want to waste energy to think again and try to applicate solution from similar problem. But if you are enough time on forex market you know that market is in constant change. One time it is calm and predictable and technical analysis is very helpful, other is highly trending and fundamentals are more important or there is so changeability and chaos that nothing make sense.
But we seems to forgot about it or try hard not to accept changing nature of market. We think that market will always behave the same way. But even in most standardized strategies which gives good opportunities, every one of them is slightly different from each other. And every opportunity, doesn’t matter how similar to others have to be analyzed separately from beginning.
Because this is main difference between physical job and mind job. And forex trading is a mind job! If you are digging holes in ground with shovel you can turn off mind and just do your job because hole is hole. But in forex trading EVERY situation is different and requires different approach!
Summering why is hard to succed in forex trading I would say:
- Cost of mistake -it can be different topic of discuss above MM;
- Frequency of mistakes - depending on strategy;
- Lazy nature of human - another topic above human psychology;
Realizing first two things maybe will not help you much in your trading but I think it is good to be aware of it.