Updated from its original posting on 05-11-2010
When talking about risks in forex trading, most of the time you will limit your definition to money terms. But the truth is that it is not only your wallet that you put on the line whenever you trade.
I understand very well that keeping a p-p-p-poker face amid emotional highs and lows is hard to do. (Heck, not all of us can be Lady Gaga! Or K-Stew.) But perhaps taking note of these “truths” will help you cope with the uncertainties that you encounter in the market.
Think about it. If you acknowledge the fact that just about anything can happen, how can you be wrong about the market? Here are two important truths you should remember in forex trading:
1. Expect the Unexpected
Face it. No matter how much effort you put in your analysis, you still won’t have a hundred percent accurate idea of where the market is headed. There’s always the chance that a surprise is waiting just around the corner, maybe in the form of an unannounced currency intervention or shockingly dovish comments from a central bank official.
In fact, these unforeseen events can go beyond the economic arena and also come in the form of natural catastrophes or a sudden declaration of war. Even if you watched the charts constantly, stayed on top of the forex calendar, and listened to the news every day, you still probably wouldn’t see those events coming.
Unless you’re Nostradamus…
2. Trading is all about probabilities
Remember that trading is a game of probabilities. This implies two important things: (1) you must always make sure that the odds are in your favor before putting on a trade, and (2) the cost to find out if that trade is right must be compensated by probability.
Let’s say EUR/USD is trading at 1.1000, just testing a major support level. You know that you cannot predict where price will go, but you do know that price has a higher probability of going up than going down since this support has strongly held in the past.
Whether you win or lose at this point matters very little now, since you have already acknowledged before you even took the trade that you are trading based on probabilities. You may lose, which is okay, because you have already expected it and know the costs associated with it. In the same manner, you may also win, which you already are expecting too. Nothing can be more heartbreaking than unfulfilled expectations.
By keeping these truths in mind, you ease the pressure on yourself to always be right about what the market will do next or having to take a loss. In doing so, you overcome the fear of losing money, which is inevitable to every trader as losing a tooth is to every person.
Once you are at peace with the possibility of losing money, you will be able to recognize all kinds of information that both support and argue against your market views and beliefs. So, not only will you come to a point where you trade using probabilities, and not your ego, but you’ll do a better job of seeing what’s really moving the markets.