Forex Mentor: 7 Habits of Great Forex Traders
Editor’s Note: This post was originally published on December 30, 2016, and has been updated for comprehensiveness.
Do you know what separates great Forex traders from the not-so-profitable ones?
They establish and follow habits that help them stay on track and profit consistently. You should do the same if you want to succeed in the Forex market.
What is a habit and why does it matter?
By definition, a habit is an acquired pattern of behaviour.
There are many “kinds” of habits, both good and bad. Some of these include:
- Neglecting yourself
- Being a workaholic
- Chewing your nails
- Negative thinking
- Being late
- Blaming others
To set the record straight, I would classify the above as “bad habits.” The antithesis of the above list would thus fall in the category of “good habits.”
As an example, negative thinking vs. positive thinking, or being late vs. being punctual.
Here’s an interesting question – how do we get into the momentum of developing habits, good or bad?
Take a look at the graph below:
From the graph, it is safe to say that actions, repeated over a period of time, would develop into habits.
We can go further by saying that “positive actions” repeated over a period of time would develop into good habits, while “negative actions” repeated over a period of time would develop into bad habits.
Here’s a classic example.
In the book The French Paradox, the author explains how the French live longer because they drink a glass of red wine a day.
Drinking a bottle of red wine in a day could be passed off as a good after-dinner celebration. Drinking a bottle of red wine a day every day, for an extended period of time, would border on alcoholism – a bad habit. You get the picture.
Habits apply to all disciplines in life.
If you develop good habits and cut down, if not eliminate, bad habits, you can establish a foundation for success in your life.
Habits Every Forex Trader Must Adopt to Succeed in the Market
Let’s take a look at how habits apply to a discipline where my passion lies – Forex trading.
Over the years, I have found that the following seven habits, above all else, keep a trader grounded and, more importantly, consistently profitable.
Let’s have a look at them:
Habit #1: Know your reasons for taking every trade
All too often, many traders take a swing at the markets because they “feel” they’ve encountered a good price. The most common scenario where this occurs happens when a trader goes “long” after the price drops a considerable amount. The train of thought is “Woah! It has fallen quite a bit! It’s bound to reverse!”
In another scenario, the USD/JPY, for example, rocketed from a low of 101.1 to a high of 118.4 in just two and a half months. This is a significant jump of more than 1,700 pips.
What if a trader went “short” after the currency pair rose by a “considerable amount” of 500 pips? Or 700 pips? Or even 1,000 pips? Their account would have been ravaged.
Here’s the key: Have a reason for entering every trade, and never enter a trade based on gut feeling.
Every move you make must be backed by a good and valid reason. This is easier to do when you follow a trading plan, a set of rules and guidelines that you stick with every time you trade currencies.
Your trading plan can include:
- Clear strategies/trade setup that you should follow
- Your profit or loss targets
- How to identify trading opportunities on the charts
- How frequent you will trade
- Which currency pairs you want to focus on
Think of a trading plan as a checklist that will help you decide when to enter or exit a trade.
If you're a trend follower, for example, the trend needs to be present for you to consider opening a trade. If the price rises above its daily moving average and then breaks it, this signals your entry point.
If the price moves or hits your stop-loss, time to get out of that trade.
As you can see, there's no gut feeling involved in the entire process. Every move is based on your trading plan.
Habit #2: Don’t get frustrated over missed trades
In the course of my trading career, I have come across traders who always appear to be on tenterhooks. They get anxious and frustrated because they missed a trade, and rue the day they should have been at their laptop to execute the all-important trade. For these people, missed trades are harder to endure than a loss.
The Forex market trades about $6.6 trillion a day, making it the largest financial market in the world. There’s always the next trade. It’s no use beating yourself up for missing a trade. If it’s any consolation – who said the missed trade would surely register a win anyway?
Besides, missed trades tend to happen due to fear and emotion, confirmation bias, and recency bias, where the previous trade's outcome affects your next one.
Clearly, you were getting off track and against your trading plan. Get back to your proven trading strategy rather than kick yourself about the missed trade. The longer you dwell on it, the more likely you'll want to “take revenge” on the market that rarely results in a positive outcome.
Habit #3: Always put a stop-loss
This habit is well turning out to be my mantra when I coach my students. I sometimes joke with the class by saying that if I ever hear of any student not putting a stop-loss immediately after entering a trade, I would personally fly back from wherever I am and smack their heads!
Take my word – the biggest reason why traders blow up their account is the habit of taking on excessive risk. Don’t fall into that trap. Always put a stop-loss. Make it a habit today.
Doing so is the most effective way to manage and preserve your trading capital. Cut your losses while you still can and live another day to trade. Or, at least, have enough funds to trade the next day.
What should be your ideal stop-loss size?
It depends on how much risk you can tolerate. If you set your stop-loss at 2% of your total account balance and you lose five trades in a row, your account will be down by 10%.
What if your stop-loss is at 10%? Well, you do the math.
Habit #4: Don't take revenge over losses
You have just completed your “apprenticeship” in trading the demo account and you are now ready to trade LIVE. The first opportunity opens up. It’s time to make BIG BUCKS.
You take a trade and it hits your stop-loss. You take the second trade and it hits your stop-loss too.
Now, you’re angry!
At your third trade, you now triple your lot size because you want to “win back” the money that the Forex market has so cruelly taken away from you.
Sounds all too familiar, doesn’t it?
Don’t fall into the “revenge” trap. The Forex market will make you pay heavily for it. The key here is to not take things personally. No one wins every trade. What you should do is to step away from the computer and re-analyse your trading plan.
If everything is going according to plan, then great! Accept the fact that losses are part of the game.
A good way to avoid revenge trading is to develop a set of habits specifically for such an event.
- After a frustrating loss, take a break and distance yourself from it.
- Once you calm down and clear your head, analyse what caused the loss. Did you not trade according to plan? Does your system need adjustments?
- Don't overcompensate in an effort to recover your losses. Limit your risk by taking smaller positions. Also, accept the fact that it will take time to fully recover.
- Make risk management a habit. You have more chances of being profitable if you control your losses better.
The next time you have a major loss at hand, remember what professional trader Alexander Elder once said, "Markets offer unlimited opportunities for self-sabotage, as well as for self-fulfillment."
Which opportunities do you want to enjoy?
Discover How to Deal with a Losing Streak in Forex Trading and avoid revenge trading.
Habit #5: Maintain a trading journal
This is a tough one, and not many traders do it. Those who do, profess of its immeasurable effectiveness.
A trading journal, among other things, should document your decisions before you take a trade and note down your thoughts and emotions after the result is achieved.
How would you know if you’re heading in the right direction if you’re not documenting your progress?
How would you know if certain “bad habits” have unintentionally crept up on you if you don’t have a framework to measure against?
Here’s a short list of what a trading journal should encompass:
- Date and time of trade
- Currency pair (e.g. EUR/USD, USD/JPY or USD/CHF)
- Action/Strategy used (long or short)
- Risk (how many lots, stop-loss)
- Profit potential (Do you have one or multiple profit targets?)
- Result (profit/loss)
- State (What are your thoughts and emotions? Did you execute it correctly?)
A trading journal is like a road map. It helps you stay on track. Start maintaining a trading journal today!
Habit #6: Maintain a clear mind
Would it be wise to analyse or enter a trade just after a heated verbal exchange with a friend or family member? What about just after you’ve had a long 14-hour work day where your boss berated you for the things you failed to accomplish?
Certainly not. A clear mind must always be maintained when you step up to the computer to start trading. You don’t want any emotional distress to cause you to see patterns on the screen that aren’t actually there!
It's not always easy to keep a clear mind, however, especially in the middle of a trading session.
Losing a trade, for example, can cause your higher brain function to shut down. Even when you know you shouldn't revenge trade, you still buy or sell because your emotions have taken over.
When you profit, on the other hand, you can become excited or overexcited, which might then turn to greed. When that happens, you'd continue buying or selling because greed is in control.
So, before you trade or after a win or loss, take a break to clear your mind.
- Meditate to improve your mood and cognitive function. This is also one way to cultivate mindfulness, so you're fully aware of what you're about to do and the corresponding consequences.
- Deep breathe to bring more oxygen to your brain. This will help you stay alert and think more clearly.
- Talk to someone or a trading buddy to clear your head and get someone else's perspective. A family member, friend, or another trader could also help find solutions to challenges you might be facing.
- Write down your thoughts or worries to get rid of them. Once you're calm and thinking clearly, revisit your list and use it to develop a better, emotion-free trading system.
- Get organised so you're not distracted when you trade. While you're at it, come up with a plan for moving forward if you're in a less-positive state.
Habit #7: Pay yourself consistently
Is this habit important? But of course.
What is the ultimate purpose of trading? To generate consistent and profitable returns. However, what good is that if you’re not enjoying the fruits of the game?
There are many ways to pay yourself in this business. I’ll list a few:
1) Have a goal to earn 100% of your capital. Then, withdraw your initial capital and continue to trade on the profits generated. This is now essentially a “risk-free” business venture.
2) After your trading account has grown considerably, withdraw 20% as profit and leave the rest to be compounded. The compound interest will continuously grow the principal amount without the need for additional deposits. Remember to withdraw the amount that far exceeds the cost you might have to pay for wiring fees charged by brokers.
3) Make a habit of withdrawing profits after trading for seven business days, while ensuring the same account balance is retained. Doing so will help you realise that you're earning and reaping the benefits of trading currencies.
Of course, take into consideration your broker's withdrawal rules and fees. At Fullerton Markets, there's no minimum amount for withdrawal, and you can simply choose the Withdraw Profit option, so you won't need to calculate anything.
As for fees/charges, it varies on the platform used. For example, you'll be charged a 2% administrative fee when you withdraw via Neteller.
4) If you swing trade, make it a goal to pay yourself biweekly or monthly.
5) Set a specific amount of funds to keep in your account and withdraw the rest. This is similar to #3, except that you may need to defer withdrawals until your intended money reserve has been reached.
For example, over the next three to six months, you trade and then save or reinvest the profit earned. This will give you a healthy fund reserve. After the six-month period, any profit earned on top, you pay to yourself.
How do you develop these habits?
Simple. Maintain these actions for an extended period of time and these will automatically become conditioned habits. You won’t even have to think about doing them after a while, you just act on autopilot.
Once you’ve reached this point, this is when you bloom into a mature trader and become a force to be reckoned with in the trading world.
I’d like to leave you with a wonderful quote:
Winning is not a sometime thing;
It’s an all time thing.
You don’t win once in a while,
You don’t do things right once in a while,
You do them right all the time.
Winning is a Habit.
Unfortunately, so is losing.
~ Vince Lombardi (one of the greatest football coaches in history)
Ready to build and grow your wealth and test your trading habits in the world's largest financial market? No better place to start than right here with us! Begin trading with Fullerton Markets today by opening an account:
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