Forex Trading - The Subtle Trap That Causes Most Traders To Fail

As the popularity of forex trading increases, so increases the number of new traders who get burned too early, loosing their funds and never trade forex again. In reality, only a small group of elite traders (some say between 5 to 10 percent) eventually survive the learning carve and trade forex for a living.

 

The are many reasons for the above statistics. But the primary reason for the high percentage of failure goes down to the root of human nature. While a successful trader must be rational rather than emotional, most humans find it very difficult to control their impulsive, irrational behavior when they trade. And the reason for this difficulty is no other than EVOLUTION.

 

Evolution prefers impulsive/emotional reaction over rational thinking in terms of order of appearance. By default, emotionally driven behavior comes first. Why? Because the ability to survive thousands of years ago relied on a quick, instinctive reaction to danger. Evolution prefers the one who first run without thinking over the one who first stops to think and then run. The reason is simple: Statistically, it is better to run away at the slightest possibility of danger, even though 99 out of 100 times there is no real danger justifies running. Through the eyes of evolution, an individual who wastes time on rational analysis every time he feels in danger, might not succeed to save himself in the one single occasion out of 100 where the danger is real.

 

So basically we are programed to first act emotionally (impulsively) while rationality comes second. The thing is, that forex trading should be based on rational decision making. A prerequisite for winning the forex game is to rationally weight risk vs. odds prior to every single move. However, being products of evolution, humans tend to first act emotionally when they trade. This is the reason why traders enter a position impulsively (for example, in order to "catch" a quick market move), even though the risk/profit ratio is not in their favor; that is also the reason why traders move or cancel their stop loss order and significantly increase risk just because they want to avoid the emotional pain involved with losing real money. After all, you do not mind that your stop loss is hit while you DEMO trade don't you?

 

Indeed, EVERY successful trader has managed to separate emotions from trading. However, this is in contrast to our evolutionary psychology and, hence, a very hard thing to do. So hard, that it is almost impossible for the vast majority of traders, the losing 95%, to accomplish.

 

So how can you join the winning 5%? Here is a suggested action plan:

 

1. Get a good trading strategy with a precise, easy to follow set of entry and exit rules. A decent strategy with a good money management already includes the "rationality" aspect of trading.

 

2. Stick to your trading strategy. Sticking with the rigid rules of your strategy will help you to trade without emotions.

 

3. Learn to accept losing trades, although losing is painful. No matter which strategy you use, you cannot win them all. But if you trade your strategy and stick to it, you will be profitable in the long run.

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by: Guest Total views: 10 Word Count: 576 Date: Sat, 22 Nov 2008 Time: 12:00 AM 0 comments