Have you ever gone through a rough patch in your trading and couldn’t seem to figure out what was going wrong? You have probably encountered a few losing streaks here and there but you eventually made it back on your feet by making the necessary adjustments. Unless you are able to pinpoint the root of the problem though, you’d probably have an even tougher time bouncing back.
If you are going through this situation, chances are that the pressure to get back in the black is making it difficult for you to assess what the problem is. Instead of letting yourself get crippled by anxiety, start by asking yourself these questions:
- Am I trading badly because I’m not following my trading plan?
- Are my emotions clouding my judgment?
- Have the market conditions changed and what must I do to adjust?
Aside from not sticking to your trading plan, your trading slump could also be explained by other problems, some more common to newbie traders. Below are 3 of the most common kinds of trading problems that newbies often encounter:
1. Lack of training
Blame it on the excitement to make tons of moolah in trading, but some newbie traders jump the gun and trade real money on a live account right away without even practicing their skills on demo. An inexperienced trader can wipe out an account faster than you can say “margin call,” which is why we advise newbie traders to open a demo account first.
You see, demo trading allows beginner traders to get their feet wet without putting their hard-earned money on the line at first. This allows them to have a feel of the market environment, to tweak their trade plans as they see fit, and to practice proper risk management. Without proper education and training, you might be missing obvious cues from the market such as chart patterns, Japanese candlestick formations, or shifts in market sentiment.
2. Emotional trading
Even experienced traders fall victim to emotional trading from time to time. Emotional noise may present itself in the form of unchecked fear, hope, or greed.
These emotions, in turn, manifest themselves through harmful trading behaviors such as overtrading, trading too large, cutting winning trades, and letting losing trades run.
3. Changing market conditions
Sometimes, the problem isn’t with your trading psychology but with shifting market conditions. You may be highly disciplined and doing everything according to plan, but if your trading approach doesn’t suit the market environment, you could still end up deep in the red.
Last month (May 2012), we saw extended moves and big downtrends across almost all currency pairs. Trend traders probably made a killing on these moves, but they also probably ended up giving back a good chunk of their gains if they had failed to adapt to the choppier markets this June. The key to finding consistency through changing market conditions is to remain flexible!
So you see, kids, there are many possible reasons as to why your trading may be suffering. You may be trading badly because of a lack of training, emotional trading, or even changing market conditions.
Remember, diagnosing your problem is the first step to curing it! The better we can determine the root of the problem, the better we can address it.