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Forex speculation is the name of the trading game. Every trader has to click “buy” or “sell” at some point and commit to a position based on their analysis, although success is not guaranteed. Unfortunately for traders, the market can see the market very differently, which can lead to a serious moment of introspection.
This article attempts to address some of these thorny issues, examining the following:
What is speculation in the foreign exchange market?
What if everything goes wrong?
4 Best Tips for Speculating Like a Successful Trader
What is speculation in the forex market?
Speculation in the foreign exchange market involves buying and selling currencies for profit. Due to the uncertainty involved, this is called speculation, as no one can be sure whether the market will rise or fall. Traders evaluate the possibility of both scenarios before making a trade.
What happens when it all goes wrong?
After you develop a trading strategy focused on forex speculation and understand the fundamentals of the market, you will have many of the tools you need to succeed. If this doesn’t happen, a lot of questions may be running through your mind.
“Am I trading right?”, “Do I really know what I’m doing?”
These questions/questions are not unique. Most traders have these thoughts at some point and learn to overcome them. Let’s answer these questions directly:
1) Is my trading strategy correct?
Many traders don’t realize this early on – market conditions can change over time. As a currency speculator, you can spend weeks analyzing a particular market that fits your current strategy, but this is likely to change, and when it does, nothing seems to work in your favor.
A perfect example would be comparing EUR/USD in 2017 with the same pair in the first half of 2019.
In 2017, EUR/USD was in a strong uptrend for most of the year. Of course, backtesting a trend trading strategy can yield attractive results, and any sane trader would try to implement such a strategy.
Below is a very different picture, as EUR/USD has been trading sideways for the first 6 months of 2019, making it difficult for new trend traders. The 200-day red moving average helps illustrate this, as it breaks the price multiple times and does not provide a clear signal.
Traders should take some time to analyze whether market conditions have changed. The trading strategy is likely to be good, but the market no longer exhibits the qualities that attracted you in the first place.
2) Do I really know what I’m doing?
“Failure: The First Attempt to Learn” – Anonymous
This question is difficult to answer because it depends on the knowledge and willingness of each trader. Since this question cannot be answered, the next best thing to do is to see what others have done wrong, learn from it, and avoid the same trading mistakes.
At DailyFX, we researched over 30 million live IG trades to discover the first mistakes traders make in our Successful Trader Characteristics report. Knowing what went wrong and making the necessary adjustments is the first step to trading like a pro.
4 Tips to speculate like a successful trader and get back on track
1) Don’t Let Risk Change Your Behaviour
The biggest psychological barrier for traders is the perception of loss (and the concept of loss). For traders, the pain of closing a trade and taking a loss outweighs the excitement of getting a profitable trade of the same size.
First, top traders employ sound risk management. Traders can win two-thirds of all trades and still lose money if they don’t use stops. A natural consequence of this is that once the position becomes positive, the trader will let the losing position run while taking profits. The losses outweighed the winners, which should never have happened.
One way to control your emotions is to implement a trailing stop or manually move an existing stop when the market moves in your favor. This allows traders to relax knowing they are breaking even and any further moves in your favour are pure profits.
Before you trade, you should know the level of risk you are willing to take and make sure the risk/reward ratio is at least 1:1.
2) Bring a positive attitude to the leaderboard every day
Since you will inevitably lose money in this forex speculative game, it is important that these losses do not change your mood.
Traders are often disappointed by being stopped out, which can be very frustrating. As a result, they shorten their analysis or question their own methods. This never ends.
The key to having a positive mindset when trading is to look at losses the way business owners look at expenses; just as a cost of doing business. Because once you learn how to lose properly, once you learn to keep those losses in context, you’ve addressed the most important aspect of trading psychology.
3) Find a delicate balance between fear and greed
Both of these drivers can have a major impact on how we live our lives. Not only in trade. When it comes to trading, both fear and greed can have huge downsides as they can cloud your judgment and lead to bad decisions.
Most people get greedy when in the red; be prepared to hold if only the price can get back to its entry level. Most people get scared when they’re in a winning position.
Traders should try to reverse these impulses and become greedy when proven right. If you’re feeling anxious, you can use a breakeven stop to ease your worries that your original risk is still there.
4) Don’t let confidence get the upper hand
After a string of successes, it’s human nature to build confidence in your business, and that can be a good thing.
But once traders get into “overconfidence” territory, risk-taking habits creep into them.
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