Traders often focus on the obvious and most talked about trading parameters such as entries, indicators, technical tools and other ways to time entries and exits. However, focusing only on these tools may not help traders in the long run. Traders must also have realistic expectations about their potential returns, and understand that every unit of profit is accompanied with a unit of risk.
A trader’s unrealistic profit expectations may potentially harm him/her, even if he has a method that is based on a good set of tools. Unrealistic expectations may lead a trader to commit certain mistakes that those with greater experience and realistic expectations may not commit.
In order to achieve a reality-based outlook, a new trader should conduct research on what successful traders are earning, the capital required for those returns, what strategies are used and what risk management system is in place. They may also find their own strategies, testing and practicing them to see how they perform (simulated results are often much better than live trading results). They should also consider how many traders who try, fail. No one wants to focus on the negatives, but a significant number of want-to-be traders fail. Those who are uncommitted need not apply.
Unsuccessful traders tend to commit certain errors, while their successful counterparts are able to manage or overcome these pitfalls. Commit these errors, and likely any sustained success is unrealistic. Overcome these issues, and success is more likely within grasp.
The Reality of Trading
Although trading offers opportunities, the majority of new traders have to realize that reaching their goals will probably take much longer and require more effort than initially planned. We have found that those who come to the marketplace “ill-equipped,” and who do not realize how difficult trading can be, are more prone to committing certain errors.
The following list will hopefully help you become more conscious of potential pitfalls if you are a beginner in the Forex arena:
1) Overtrading. This is the most common problem almost all traders struggle with at one point. Overtrading is when you take too many trades, or reenter the market right after a losing trade out of anger or frustration (not based on a valid trade setup). This is where lack of risk management manifests itself because the focus is on the short term, and not thinking of trading as a long-term (career) venture. Mathematically, consider that a loss of 50% requires a 100% gain in order to recover. Gains don’t come from taking lots of crappy trades, they come from taking solid trades that align with a profitable method.
2) Taking too much risk. Traders with relatively small accounts often have a problem with over-leveraging. Once a trader realizes how ‘slow’ his trading account may grow, some traders will just increase their position size to “speed things up”. Rarely will this lead to greater or more consistent account growth. Typically, taking on too much risk just leads a rapidly depleted trading account.
3) Taking random trades. This is similar to over-trading, but whereas overtrading typically refers to impulsively reentering losing trades and chasing losses, this point describes those trades that have nothing to do with your overall trading method. These are gut feel trades based on things such as “it must correct”, “it’s too low”, “It’s too high”, etc. Any trade that is not based on a sound and tested strategy is a random trade.
When people chase unrealistic expectations and try to achieve high returns, they tend to reason themselves into trades they should not be in. Or, they will listen to opinions from other people just to get into more trades. Only take trades based on a reliable method that you have tested and found success with by first trading it in a demo account. If the strategy hasn’t been tested and practiced by you, then it shouldn’t be used with real capital.
4) Changing the approach. When traders realize that their current trading approach won’t allow them to grow their account exponentially, it’s very common to become unmotivated and frustrated. Many traders will go so far as to completely change their whole approach and look for a new trading method.
Those types of traders often can’t stop looking for the “Holy Grail” system that will help them realize their overly ambitious goals. Obviously, this is not how trading works, and many traders will get sucked into a cycle of constant system-hopping, never being able to settle on one. If you find yourself here, it’s important to acknowledge it, and then actively make a decision to stop system-hopping. Pick one method and make it work, rather than hoping to stumble upon something that will miraculously work.
5) The cycle of live trading/demo. Once a trader realizes that a certain method does not yield the required results, he/she may resort to the old cycle of demo/live. It is recommended to demo your method and test it out; however, it is also important to remember that any method may experience losses, drawdowns, and lackluster periods. Moving from one trading system or method to another–constantly going from demo to live trading–typically won’t yield positive results. As the point above discussed, pick a method and make it work, first in demo and then in live trade trading.
Final Word on Setting Realistic Expectations
Many traders spend years, and thousands of hours, chasing unrealistic goals and returns, only to end up completely abandoning their trading journey. For those reasons, it’s vital that you make sure you align your expectations with your general trading approach. Being aware of why you make your trading decisions, and how you approach trading in general, is essential to your journey as a trader. If you realize that your actions are driven by your unrealistic ideas, correct them, and put yourself back on the right track.
This article was contributed by Optimus Forex, LLC
Disclaimer: Trading Forex involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. The risk of loss in forex can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The use of leverage can lead to large losses as well as gains. Optimus Forex, LLC is not affiliated with nor does it endorse any trading system, methodologies, newsletter or other similar services that appear on this site. We urge you to conduct your own due diligence and determine whether trading is appropriate for you.