Forex Trading: Do You Have What it Takes to be a Professional Trader?
Alternative investment vehicles have received a great deal of attention over the past few years, as investors have grown weary of fluctuating stock markets and sideways trading patterns. Commodities and options have drawn a share of the action, but the largest beneficiary appears to have been forex trading. It is difficult to move around the Internet without being bombarded by broker ads for currency trading, and recently, advertising on national television has begun to fill the airways. Investing in currencies has gained credibility and popularity on a retail level due to flexibility and easy access to modern trading platforms. If you have a laptop and wireless access to the Net, then you can trade anywhere and at nearly anytime. Nevertheless, this is only a game for professionals. Amateur forex day traders are the lambs among the wolves and will last just about as long.
If forex trading is so easy and profitable, then most everyone will be doing it pretty soon … NOT! It may be easy to trade, but it is also more than easy to lose your money. The latest statistics are that only 25% of all trades on average are profitable (the actual number might even be lower), or in other words, for every one winning trade, you would on average have three, yes — 3, losing trades. Remember, as well that this is a zero sum game, so having only a minority of trades be successful means that there is still a balance overall of winners and losers. It is simply that losing trades tend to me more frequent due primarily to trading costs and poor strategy.
It turns out that to win in forex, you must minimize per trade losses to small amounts and then cover them with your few, larger winning trades. There is even a phrase to cover this strategy that states, “Cut your losers early, and let your winners run.” Sound advice, but how do you do it? And, can YOU do it?
Forex investing is classified as having a high-risk profile, necessitating the need for specialized training, technical and analytical capabilities, and hours of practice on a free demo system provided by an online forex broker. Most brokers offer these “free” training systems that allow you to use virtual cash and real time quotes to test and hone your skills, develop a reliable trading plan, and then gain the consistency and confidence that are demanded by real market conditions using real money.
After knowledge and experience issues have been dealt with, the real testing ground remains to be addressed. It centers on trading psychology and whether you possess the necessary emotional control that being a trader demands. Numerous books and articles have been written on this topic. Some websites are devoted entirely to this subject alone. The best traders take responsibility for their actions, understand their mental issues, and carefully plan their actions before entering a market position. Although there are several personality traits that are desired, these few tend to make everyone’s list for success:
- Big picture oriented
- Able to discern new possibilities
- Logical decision maker based on analytics
- Patient but decisive when committing
- Always disciplined in approach to markets
The pattern of these traits resembles those of a good leader: the ability to cope in a high-stress environment and think coolly and decisively. It is not about being cocky or overconfident or impatient, each of which will send you directly to the poor house.
How does one determine if they have what it takes? Your personality type will help guide you, and time spent practicing on a free demo account will confirm if the trader’s life is right for you. It should not feel like work, but it should not feel like gambling either. If you get this far in the process, the best advice would be to seek out a professional trader and ask him to be your mentor. There are few shortcuts in forex, but professional mentoring is one worth investigating.
The bottom line here is that forex trading is not for amateurs. If you do not have the risk capital, skill, perseverance, rational control, and knowledge, then simply stay away. The boring old, but tried-and-true extremely low cost, fully passive index mutual fund and ETF buy-and-hold investment strategy with an asset allocation in line with your personal risk tolerance is still the best approach for long-term, risk adjusted wealth building.