Real Forex Trading pt.5

How Will I know When I am Ready to Trade?

Anybody who has read significant quantities of this website will know that the last thing that I want to happen is that people lose money while forex trading.  It is very easy to rush in without being ready. Consequently, I would like to suggest criteria so that a person will know when they are ready to enter. When I started researching currency pairs, I thought that if one could explain small parts of a graph, then that would be enough. All you would have to do is wait for the indicators to take place and then you could trade according to the prepared model. I no longer believe this and the reasons are below.

1. Indicators, Indicators, Indicators

All it takes is for one indicator to be missed out and your trading model becomes useless. The reason is that your trading model can be interrupted at any time by something that you do not know about. Nassim Taleb is a scholar who focusses on risk management. In his book, Fooled by Randomness he notes a certain kind of effect where a person earns a reasonable amount of money many times, but then loses a huge amount of money a few times. This is predominant in currency trading, the person feels that they are earning, because they do, many times, but then one large loss wipes out all former earnings. The only way that this vicious cycle can be cured is if absolute control of the trading environment is taken. It is vital that the trader takes into account all the features of the graph, the aim should be to explain every feature. For example, why did the price go up at that point? Why did it go up by so much? When will the rise end? What will it do afterwards? It is not good enough to be able to explain parts of the graph. If the graph does something that you cannot explain, then you are not ready to do trades.

2. Human Responses

Another reason it is important to grasp all the indicators to explain all the features of the graph is because of human nature. People are not only responding to the financial data, they are also responding to the indicators. These responses will evolve over time and a person cannot monitor its evolution if they do not know what they are looking at.

As a result of these facts, I have come to the conclusion that you will know when you are ready to trade when you can explain every feature of a specific pair. If you start trading before that moment, you will earn money, and it will feel good, and you will also lose money, a lot of money and as a consequence you will have a method that doesn’t work.

Nassim Taleb, ‘Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life’, Random House Trade Paperbacks, 2005.