FAILING TO DO YOUR HOMEWORK

Of all the mistakes that FOREX traders make this one is one of the most common.

If you want to lose money quickly, make sure you ignore doing your homework.  When I say homework I mean get market knowledge.  People often make the mistake of thinking that all they have to do is buy a trading system or a piece of software and start trading.  If it was really that easy then everyone would be rich and there would be no horror stories of people losing all their money.  It is true that a trading system or software can be a very valuable asset.  Those tools make finding winning trades somewhat easier.  They do not take the place of true market knowledge.

True market knowledge can only be acquired by regular study and education.  Market knowledge is highly needed because a trading system or a computer cannot take into consideration general conditions.  Computer software and trading systems don’t take into account people’s behaviour.  As a serious trader looking to make real money trading you can’t just plug in a black box, hit “go”, and sit back and watch the money roll in.  That might work for a period of time but once conditions change or people’s behaviour changes the quality of the market changes; once that happens your computerized approach will start losing money faster than you made it in all likelihood.

For example, most electronic systems or trading approaches use the laws of probabilities and averages to create trade signals.  Many systems you might buy are Trend Followers.  That means they use various algorithms, pivots, formulas, and ratios to determine that a market has traded to a price that is favourable as a place to go WITH the trend. In other words, the market has rallied to a sell point in a down trending market or fallen to a buy point in an up trending market. See example “A” and “B” below:

Example A: USD/JPY Daily Price Chart, courtesy of Genesis Financial Technologies. The market is in a very obvious down trend and the red arrows are where my proprietary computerized SELL signals would have told you when to short this market for a potential profit in a down trend.

Example B: EURO/USD Daily Price Chart, courtesy of Genesis Financial Technologies The market is in an obvious uptrend and the green arrows are where my proprietary computerized BUY signals would have told you to BUY this market for a potential profit in an uptrend.  The problem comes in when the market itself is no longer trending.  At a time like this, a trend following software will get chopped to pieces as the market rallies and falls chaotically; whipsawing you as you try taking each trading signal. See example “C”

Example C: USD/CAD Hourly Price Chart, courtesy of Genesis Financial Technologies The market is trading sideways with enough distance to fool the computer into thinking it is developing a trend. Notice how the red and green arrows suggest getting in to the market just at the time the market would reverse. By understanding how to tell when a market is truly trending and when it is not you can save yourself the headache of continuing to trade every signal a computerized approach might give you.  This type of market knowledge is never going to be “inside” the software or “inside” the black box.  You as a trader must not make the mistake of thinking that you don’t have to do any homework about the markets you are going to trade.  Trading systems and software only will go so far; you need to be vigilant on making up the difference through quality on-going market education.  It is important to understand the basic fundamentals of the FOREX markets as well as how to apply a trading system properly.

HOW TO MAKE THIS MISTAKE WORSE: ignore new developments in the news, don’t take refresher courses, don’t take advanced courses, don’t read any trading books, don’t attend seminars, ignore changes in your system, and don’t take feedback when offered.

SOLUTION: Make regular time daily to read books on solid trading principles, attend seminars or online webinars offered by seasoned professional traders, update your software and hardware regularly, and invest some of your trading profits into continuing education regularly.

Tags: Forex, forex strategies, forex trading

This entry was posted on November 2, 2011 at 5:04 am and is filed under Trades. You can follow any responses to this entry through the RSS 2.0 feed.