Developing a Solid Trading Mindset
Throughout this book, we have emphasized the importance of solid technical analysis and objective data. However, a good mindset is just as important. This implies that having a good mindset can be just as important as maintaining a close watch on the technical data that you need to place successful trades.
Often, novice investors get sucked into a silly game. This game consists of the Hollywood version of what an investor should be. Many times, Hollywood films depict investors and brokers as overly aggressive individuals who are arrogant and egocentric. Moreover, these films make it seem like you have to be pushy and go to extremes to make money.
What these films don’t generally depict is that becoming a successful investor or broker isn’t about being the toughest or meanest kid on the block. Being a successful investor is about learning to take your lumps in stride while using your head to make sound investment decisions. When you are able to make decisions based on reliable data, you can filter out the negative emotions that come with investing.
What negative emotions are we talking about?
Here are some to consider:
- Fear. This is by far your biggest enemy. Fear can compel you to act irrationally while also cause you to freeze. For example, when the market is a sudden downturn, investors panic and begin dumping their positions. This leads to bargains that can be scooped up later. So, a good rule of thumb to consider is that when others are liquidating their positions, look for bargains you can scoop up. Who knows what goodies you can find on the cheap?
- Greed. It’s easy to fall for greed when you have a string of successful trades. You might go on a roll and make a killing. This can lead to a false sense of security. You might even think that you have it all figured out. And while that may be true, the problem lies in the fact that you take on unnecessary risk. Herein lies the problem. If you think you have everything down cold and decide to take on more and more risk, you are simply opening up the door to trouble. So do make sure that you keep in mind the fundamentals that have made you successful in the first place.
- Anger. This is another emotion that is hard to keep in check. When you get upset over anything, you might be tempted to act out irrationally. Simply put, if you are angry or upset over any unsatisfactory issues, then you might be better off simply sitting out a few rounds until you calm down. Believe it or not, hasty decisions can end up killing any progress you have made.
- Desperation. Unfortunately, some investors get into the FOREX market out of sheer desperation. They are in a dire financial situation. This leads them to pin their hopes on investment opportunities like FOREX to save the day. This can then lead to unrealistic expectations. When these folks see that money doesn’t just fly out of the computer screen, they become increasingly desperate to make returns happen. This is where such folks are willing to take on unnecessary risk. They may be perfectly willing to go all-in hoping to hit a home run. In the end, they may very well hit that home run. But along the way, who knows what can happen.
The best way to offset this type of mentality is to maintain reasonable expectations. Sure, we all dream of scoring a huge hit that can suddenly make us wealthy, the fact of the matter is that the likelihood of such deals happening is once in a lifetime. So, setting up realistic expectations will help you keep your mind in check.
To set realistic expectations, think about the average return in the FOREX market. This is generally around 6% to 8%. When you look at the grander scheme of things, that’s a pretty solid return. For the sake of simplicity, let’s say that you earn 5% on average on every successful trade. That’s money that can quickly add up.
Naturally, this type of return won’t make you a millionaire overnight. But if you are prepared to be patient, you can earn a decent income out of trading. This is the best means of supplementing your income. Again, you might not become an overnight millionaire, but you’ll at least put yourself in an incredible position down the road.
Another important aspect to keep in mind when managing your mindset is to have a clear goal in mind. If you are thinking, “I want to quit my job by the end of the year,” you might be aiming a bit too high. However, if your plans are to put an extra couple of hundred bucks at the end of the month, then you have set yourself an attainable goal.
Let’s consider how you can set a realistic goal in this regard: you start off with $500. Now, let’s assume that you place 10 trades in a day. Let’s go with the law of averages, so let’s say that you’ll win 5 trades and lose 5. This puts you at a 50% effectiveness rate. If you invest 2% of your investment capital in these 10 trades, you are investing a total of $100. At a 5% profit rate, you are making $5. If you keep your losses to a 5% average, you would break even.
The previous example may not seem particularly overwhelming. But if we upped the winning percentage to say 7 out of 10, then you are making the same 5%. However, you would only be losing about $2. All of a sudden, you have made a profit of $3.
For the sake of simplicity, this example highlights how you can make modest but solid returns. If we were to multiply these returns over a larger number of trades, you could potentially multiply $3 a hundred times over. This is where you begin to see solid returns.
Please note that making money on FOREX is a numbers game. As a result, the more successful trades you make, the more money you stand to earn. This differs greatly from trading stocks. In stock, you can hold on to a stock for months and clean up when the stock shoots through the roof. In FOREX, the longer you hold on to a position, the greater the likelihood you’ll lose money. Hence, it’s always best to liquidate your position as soon as you hit your take-profit point.