Updated from its original posting on 2013-08-02
So you’ve graduated from being a breakeven trader and find that you’re one of the elite few who can call themselves consistently profitable. Congratulations!
Now, you want to take your trading to the next level, but you just can’t seem to improve on your profitability. You’re making money, alright, but you know you can do better.
On today’s edition of Pipsychology, I’ll discuss three things that may be limiting your profitability.
1. Improper position sizing
Position sizing is a key element of risk management that can spell the difference between catching a big fish and snagging a small fry. It goes beyond knowing how much you stand to lose – you also have to know when to trade big and when to minimize your risk exposure.
When the market is trading in your direction and you are dealing with a high probability setup with large potential rewards, it may be a good idea to increase your risk. In Blackjack, it’s like betting big when the cards are stacked in your favor.
On the other hand, if you feel like there’s a lot of uncertainty involved (as in the case with news trades) and the potential return on risk isn’t top-notch, it may be best to reduce your risk and go with a smaller position.
2. Inability to adapt to the market environment
To maximize the moves in the markets, you have to be flexible and know how to adjust to changing market conditions.
You can’t expect to catch a big swing move when volatility is low and the market is trading within a tight range. It doesn’t work that way. You have to be reasonable with your expectations and always plan your trades with the market environment in mind.
Remember, YOU must adapt to the market and not the other way around.
Sure, going long only after a pair has already risen and shorting only when it has already fallen may help you ride its momentum. But it has its drawbacks too.
For one, you won’t get the best price. You could miss out on pips that could tip the reward-to-risk ratio more heavily in your favor. Secondly, you usually end up entering at levels that make you vulnerable to pullbacks.
Don’t get me wrong. Just like Huck, I too, am a firm believer that the trend is your friend. But you should be aware that your fear of pulling the trigger may keep you from entering at optimal levels. Fear can lead you to jump in at inopportune times — when the market has already moved so much. This my friends, is what we call “chasing the market.”
Always try to be on the lookout for these things. Just because your account is in the green doesn’t mean you should stop working to be better. That is the beauty of forex trading – there’s ALWAYS room for improvement.
Hopefully, by becoming more aware of your position sizing, capacity to adapt to market environments, and fear, you can become even more profitable!