I continue the educational articles’ series by adding some more tips.
In case you have missed the first part, here it is: useful tips for traders,1′st part
6. Never use: “I am sure” the market will reverse / retrace / rally / fall / [insert whatever action here]. Same for “it has to”
Trading is speculative no matter what technique you use to predict the market direction and take trading decisions: technical analysis, fundamental analysis, math, a dice, a crystal ball, stars or anything else – it is all about probability.
Since there is no single known technique to predict the markets by an accuracy of 100%, never use “sure”. Be prepared to face the opposite direction. While being “sure” of something, the impact of the contrary action will be a surprise and people usually fail to take the most rational decisions when facing surprises. Always assume risk and think about the different possibility so you won’t be surprised when a trade turns bad, you will be ready to take the appropriate decision as you already knew about the risk.
7. Don’t trust too much all those technical key levels
Each time I look at a support / resistance level, I try to imagine how violently it may break. The more important a Support /Resistance level is, the more violent and fast a breach could be!
Always keep in mind that Support & Resistance levels are MEANT TO BE BROKEN! That’s why they exist! Else, the market would always move into the same range it moved a day ago, a week ago, a month ago and so on.
Sure that support are good buying levels, sure that resistance are good selling levels … but the opposite is true as well. While the crowd will buy on support, the smart money will go against it and the support level will fail to hold, hence the crowd will lose. Try to balance your view on key levels, i.e.: some day expect it to hold, other day expect it to breach.
8. Don’t over-trade!
Concentrate on the best trading setups and don’t over-trade. Rather increase position size and go for the smarter trades than getting into the same random trades again and again. Also, when things go bad, don’t expect the odds to turn on your favor too soon. After taking a bad trade, you better stay away for a while, analyzing what was wrong with that trade in order to avoid the same mistake if possible. Recharge batteries! Go out or take a nap, enjoy something else and allow your morale to get back up. Remember that tomorrow is a new day and you should leave the bad things behind.
9. A market is never overbought or oversold!
Don’t put all your money on betting against strong trends. Be ready to always adapt to new market conditions and new trends and forget about your previous bias. Simply because a currency pair is at oversold (or overbought) readings it does not mean that it cannot fall further, or rise, respectively.
Don’t try to “catch falling knifes” – buying in a strong downtrend just because your technical oscillators tell you that the market is oversold. So what if it is oversold? Follow the market!
My opinion on these two terms is that they are “overused” and I rather not rely on something that’s on everyone’s lips. Last time I relied on an “overused” term I bought an IPhone and that was my worst decision in the last 3 months :-)
Here is an example of what happens when going against trends just because the market is oversold:
Phase 1: the trade setup looks quite decent. We are sure that the market will reverse (related to point 6 discussed earlier on the article)
- 1 – Market oversold
Phase 2: The market continues its fall, stop is hit. But how about buying again since it is so oversold?!
- 2 – Market oversold
Phase 3: The market continued its fall for months while it remained oversold.
- 3 – Market oversold
- speculative failure
©Picture by Blueju38 / Julien Ratel
While oversold/overbought trading strategies could work on ranging markets, they will fail on trending markets. What to do, then? Simply keep a balanced state. Accept the fact that a market may rise or fall for an unknown/unlimited time or distance. Be aware that it is also possible that a market level seen today could never be traded again in the future and that’s why stops are needed but that’s a different topic to be discussed.
10. Don’t use money that you can’t afford to lose
Sure it does not feel comfortable losing money but one thing is certain: it feels even more uncomfortable to lose money that is not yours!
So please do not borrow money from anyone else just because you feel that a new trading strategy will earn you a fortune. Trade only your own money and trade only the money you afford to lose.
- speculative risk
©Picture by Over the Top of NY’s
A friend once asked me to trade his 50k he got from some real estate investments. I asked him why he decided to invest in currencies? guess what: he HEARD that currency trading is very profitable.
No thanks, mate! I won’t trade your money just because you’ve HEARD it could be very profitable. Trade it yourself! I’m having a hard time being careful with my own money, I’m also having a hard time knowing that some people follow my own trades (and mistakes), so why would it be any easier to be careful with yours, too?
This is all for now. I will continue some other time. Meanwhile, you may ask your questions regarding the tips above by commenting on the article. I’ll be glad to answer.
I wish you a great Sunday evening!
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Hi,
thanks for the trading tips,i would say it was most enlightening,but i would like to ask,if like you said that do not trade with fund you can't afford to loss,then how would someone become a fund manager
Hi there and thank you for commenting.
Things are different regarding fund managers as they (or most of them) are professional traders. Different rules apply on such case. Fund managers trade with less emotions and they feel comfortable trading other people's money since that's their job.
It is like someone tells you "hey stay away from fire, it is dangerous!" but the same advice won't be valid in case of a fireman, as that's his job: to fight fire and rescue people. Of course it doesn't mean he has to jump into the fire, as a fund manager shouldn't take above average or extreme risk while trading for his clients. :-)
Trading other people's money is fine as long as it represents money you afford to lose. If the person lending/investing money understands what's the risk in currency trading, then you will probably trade comfortably. The problem is that most people are not aware what's the risk in currency trading, especially resulting by mixing high volatility and high leverage (200:1 or 400:1 leverage is not really a big advantage as some would claim).
A fund manager affords to lose money since investors understand what's the risk and agreed to let someone else trade their money.
But "money you can't afford to lose" could as well be your own money, not someone's else, that you need for different purposes like: mortgage, food, bills and other things that have to be paid on regular basis or life turns bad.
Thanks,
that was really nice,but i really need your help here on choosing a broker,please could you recommend a broker for me cos i am really confuse here,i would be most grateful
Unfortunately I can't help you much with that as I am neutral on recommending brokers so I won't name any.
Choosing one depends on how much you plan to deposit/trade, what trading platform do you prefer, what leverage etc
Their reputation is also an important fact and there are a few places where you should check what people say about broker X, Y and Z.
Pip spread is not such a distinctive feature anymore as most of them offer the same spreads lately. A few years ago spreads made quite a difference (most brokers offering 3-4 pips on majors while a few others were offering 0.5-2 pips).
Usually trading with the largest ones is safer and safer could be better.
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Good advise continued. Start writing about candlestics. I prefer to read the charater of each candle and then only check the indicators. It would help a lot of small timers.
Items no, 7,8,9 are very very true.
Subramanian
i want to add one more from my experience, i found it in bible( proverbs 23:4,5(esv))
4. Do not toil to acquire wealth;
be discerning enough to desist.
5 When your eyes light on it, it is gone,
for suddenly it sprouts wings,
flying like an eagle toward heaven.
a suggestion to my fellow traders who want to make money in a hurry