Logical Foreign Exchange Trading

Logical Foreign Exchange Trading

It is known that forex traders lose money when they trade impulsively and with emotion.  There are several beginners in the foreign exchange trading market who have gone long on their pair because it declines far enough and they felt it would definitely move up again.  This is not a solid basis for your decision because it is illogical to base your trades on your feelings.

Impulsive Trading

Trader A always trades on impulse and maintains that he has a gut feel for the market and trades on that feeling.  For this example you should imagine that the EURUSD has started moving upward.  Trader A may feel that he has reached a level where he should go short.  The pair continues to climb and he is now absolutely convinced that the pair has been overbought and decides to get rid of more of the pair thereby adding more to his short positions.  At that point, the prices stop and do not retrace.  Trader A is convinced that the prices have reached their limit and decides to triple on his position.  Eventually he watches how the currency pair goes up, eventually forcing a margin call on his account.  Only a couple of hours later the pair tops out and collapses.  This makes Trader A sit there in distress while he watches the pair selling off without him.  He was right when made the choice regarding the direction, but he topped off in an impulsive manner.

Logical Trading

Trader B has taken the time to do technical and fundamental analysis to ensure that he knows his entry points and risk level.  He also thinks that the pair has been overvalued, but instead of choosing a turn at any point, he looks for a technical indicator that alerts him to initiate the trade.  He has stuck to his 2% possible loss target by sizing an appropriate position.  Even if he was incorrect about the trade as was Trader A, the logical and methodical methods used gave him the opportunity to keep to his capital level whilst Trader A was forced out by a margin call.

Gambler Foreign Exchange Trading

When you trade and make big profits, you can start to lose perspective.  All it takes is a single loss to eliminate those profits or to wipe out your account balance.  There is a maxim in the trading market that traders would do well to remember – ‘logic wins and impulse kills’.  This does not imply that logical trading is more precise than impulse trading.  It often happens that logical trading is not.  There are impulsive traders who often experience spectacular winning streaks, while the logical traders are experiencing long periods of losses.  The reason for choosing logic over impulse is that eventually the logical traders are able to limit their losses, whilst the impulsive traders are always only a trade away from bankruptcy.

Trends may last for long time periods in this trading market and a premature act could push you into a loss position.  You should consider your options carefully and wait if that is what your indicators are telling you to do.  Do not act on impulse – stick to your plan!

 

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