The 7 Habits of Highly Effective Forex Traders

The Foreign Currency Exchange (Forex) market can be a tough one to master. It’s an exciting, enticing and exhilarating money-making mechanism but it takes practice, dedication, and some serious focus to become proficient. Once mastered, the benefits of knowing this market and how to make money from it, are incredible.

Without the right training and resources, the market can seem confusing and easy to get lost in. Luckily, forming habits when learning how to trade Forex—and especially when trading a live account—can save you from common mistakes made by traders who lost their money and have bad experiences from the market.

The following seven habits—with this post title borrowed from the wonderful book, The 7 Habits of Highly Effective People—are taken from some of the best Forex traders around. These habits are second nature to them. If you want to achieve the success of the best traders, work on developing these seven habits—and you’ll be well on your way to becoming a highly effective Forex trader.

 

1)     Don’t worry if the next trade is a winner—or a loser

forex traders know the probability

Forex traders know that probability is the name of the game. Each new trade is another roll of the dice in their favor

Sounds kind of backwards, right? How could you be successful yet not care if you win or lose? The reality is, successful Forex traders really don’t worry about how the next trade turns out at all. They know that over the next 100 trades, 60 or so of them are winners—sometimes even less.

The Forex trading game is all about probability. The best traders know this. That’s why it doesn’t matter one bit to them what the next trade does. They know their winning percentage—their “edge”—and what they’ll get over the long-term. Given that fact, it just doesn’t matter what the next trade does.

Frankly, it’s counterproductive to worry about what the next trade does because that is wasted energy spent on a short-term fluctuation. Stressing about the result of the next trade also opens up the possibility of becoming emotional. Getting emotional in Forex is a big no-no, which is where we lead into the next habit.

 

2)     Don’t Get Emotional—Shake off Losses, Don’t Get Carried Away with Winners

Getting emotional leads to making decisions from the heart instead of the brain. Becoming emotional can lead to flushing all of your hard work and education down the gutter in one passionate mistake. This is why highly effective Forex traders make it a constant habit not to get emotional.

When I say that one passionate mistake can ruin all of your previous training—and returns—it’s because I’ve seen it before. This is when traders become down and upset—and keep throwing good money into bad trades—just in an attempt to make up for their losses. They over-leverage, get into debt, or trade more than they can handle in a fit of rage.

This is also when otherwise great traders can become over-confident and feel as if they can’t lose—risk too much on any given trade—and wipe themselves out. It’s when traders get such euphoria they feel as if they control the market and whatever side they pick will be the right choice. Don’t let this happen to you.

Forex is a massive market comprised of governments, banks and billion-dollar corporations. You won’t control the market or any of the currency pairs. Never get so caught up in winning trades that you feel you’ve mastered the market and can do no wrong.

The best of the Forex traders are aware of this. They keep their money management rules intact at all times, they shake off losses, and they never get so much confidence that they feel they can’t lose. They know that any given trade could be their next winner or loser, and absolutely never let a previous trade affect their next one.

 

3)     Always Set Stop-Loss Orders

A stop-loss is an order with the broker to buy or sell a currency you have a position in, once it hits a certain price. In other words, it is the price you have predetermined to be the maximum amount a trade can go against your position. Think of it like an insurance policy. The hope is that you won’t have to use it, but if the price goes against your position far enough, you’ll have the protection in place.

This habit seems like it would be a given, but it’s amazing how many people don’t—or won’t—set stop-loss orders immediately when placing a trade. The best traders do—and you should too. The forex market can move very quickly and whenever you are highly leveraged, these moves, if unchecked, can lead to disastrous results. Always use a stop-loss.

Placing a stop-loss doesn’t mean you think a trade won’t work. It’s used so that you’ll have protection in case it doesn’t work. As mentioned earlier, it doesn’t really matter to effective Forex traders what happens with the next trade. The only way for this to be true is if you are limiting your losses to a predefined level. Which leads us into the next habit…

 

4)     Know Exactly How Much Your Risk of Loss Is Before Placing a Trade

When you know the dollar amount you will lose if everything goes wrong, the fear starts to disappear. Trading with the absence of fear is a requirement for effective trading.

As long as you have a good Forex system in place, setting a predefined amount you know you could lose in a worst case scenario means that you don’t have to worry about that trade. As soon as you put the trade on, you’ve accepted the risk, and you can go about your business. After that, you manage your trades and let the winning trades make up for the losses.

Let’s look at an example. Say you are trading a $100,000 account. If you’re following the 2% rule (don’t risk more than 2% of your account on any given trade), you’d be willing to risk $2,000 at the absolute most on the next trade you take. So as the next trade comes along, you enter, immediately set your stop-loss at a level that would result in a $2,000 loss, and move on. You would know that’s the most you’re going to lose in a worst case scenario.

The only thing to fear is…a $2,000 loss, which is 2% of your account. The best Forex traders know this on every single trade, and are confident enough to know that even if they do lose 2% on this one, the next one, and the next one—eventually the winners for that month, or that year will more than make up for it.

Always trade knowing how much you could possibly lose at any given time. Eliminate the fear and trade with confidence by developing this habit.

 

5)     Know What Will Make You Exit Before You Ever Enter

The best way to ensure a smooth exit in a trade is not to make an emotional decision in the heat of the moment. This is true if you’re up $10,000 or down $10,000. Having a predetermined exit plan eliminates bad emotional decisions due to excitement or anger. The great traders realize this, and have a trading style that allows them to know under which conditions they’ll exit. They don’t alter this rule depending on how they’re feeling at the time or for any other reason.

One trader might keep a stop-loss order active at all times which is 5% away from the current market price. This keeps their downside protected while locking in gains as the currency moves up/down. Another trader might have a predetermined timeframe for exiting that they won’t change, such as closing the trade on Friday before the market closes for the weekend.

Either one is perfectly acceptable depending on your style. The only thing that matters here is that you allow yourself to exit unemotionally, with a pre-calculated exit based on certain conditions you’ve set. This drastically cuts down mistakes and allows your style to play out the way it’s designed.

Sometimes this will cause to get you out of a trade too early or too late; while other times it will get you out at just the right time. This is a part of a Forex trader’s career. Just because a predefined exit caused you to lose money you otherwise might not have, or made you less money than you otherwise could have, doesn’t mean it was the wrong thing to do. Predetermining your exit is always the right thing to do. Don’t forget this fact.

Get into the habit of planning how you’ll exit before you enter. In the long-run, it will save you time, headaches and stress, and will help to maximize the returns you’ll realize in your accounts.

forex traders stop loss

Planning your exit and setting a stop-loss is one of the most important, yet underrated, habits a Forex trader can develop

6)     Know The Market is Completely Neutral

Successful Forex traders know that the market is completely neutral. They know that the market doesn’t care one way or another if they win or lose a trade. They know that the market isn’t even aware of where they entered, so their “break-even point” or stop-loss level is completely arbitrary—as far as the entire market is concerned.

This may seem obvious, but in the heat of battle, it can often feel like the market is out to get you. Sometimes it can seem like everybody in the world knows exactly where to take you out of a trade, just to reverse and go back the way you originally hoped it would.

The fact is, the market is completely neutral in regard to your position. Forex is a $5.3 trillion a day market. In comparison, the New York Stock Exchange is a $28 billion a day market. Your position, no matter how big or small, is irrelevant to the entire market. No single person or entity—besides large banks and governments—can manipulate the price in the currency market. For this reason, the market is never out to get you, and is always, 100% completely neutral to the position you’re in.

Every moment in the Forex market is random. Since new and different players are always in the market at any given time, no one day or instance in Forex is 100% predictable, or ever the exact same again. All of the other players in the market—be it banks, overseas companies, or individual investors—are the market. They don’t even know that you have a position, let alone do they care which side it is. For this reason, the market is neutral to your side of a trade at all times.

The best traders realize this. This is why they’re able to remain unemotional and transact their trades the same way every time. If it feels like the market is out to get them, and everybody knows where the price is going except for them—they shake it off, realize it isn’t true—and move on. This habit is crucial to your success as a Forex trader.

 

7)     Don’t Let the Market Run Your Life

This last habit is an important one. It’s easy to get caught up in the money, the profits, and the excitement that Forex can offer. It can be tempting to constantly check your trades, looking for new ones, and measuring your results as your trade develops. The fact is, constantly checking on your trades, and living your life by sitting in front of the computer all day or night is not good—it’s not productive and it’s not conducive to a happy and healthy lifestyle.

The most effective traders are not always the ones who make the most money, but the ones who have the best life balance. They are the ones who can be successful in Forex, yet still have a life outside the market—away from their computer.

Don’t let Forex run your life. Treat it like a business and manage your risk, profits and losses, but don’t be a slave to your broker and the charts. We coach on systems that allow for time away from the computer. This is the way to do it. You are in charge of how much you want to be involved with the market, but we are big advocates of not trading when you’re distracted (illness, family issues, outside work issues), and making Forex a positive part of your life.

When there are no trades, take a break from the computer and don’t force the issue. Spend time with your family, friends and loved ones. Pursue your hobbies and other phases of life. The market will always be there when you’re ready to return.

 

Forex Traders Trust Their System and Believe In Their Abilities

A pattern has emerged among these habits along the lines of unemotional, probability based, and trust in your system. The most effective Forex traders in the world have a system they trust, believe in their system, and put that self-belief in themselves to execute their system in an efficient manner.

All of these habits are related to each other. Trusting in your system converts to habit #1—not caring what happens on the next trade. If you can truly trust your system, habit #2—don’t get emotional—happens naturally. When you believe in, and are confident of, your abilities, habit #3—setting a stop-loss order—is just second nature. When you set stop-loss orders, habit #4 follows—knowing your risk. When you know your risk and are able to be unemotional, habit #5—have a predetermined exit—just makes sense. When you have a predetermined exit, and aren’t worried about what happens on the next trade, you realize habit #6—know the market is neutral. It all begins with trust in your system, your style, and your abilities.

If you can learn to develop these habits, you’ll be well on your way to becoming a highly effective Forex trader.

Be Happy. Make Money. Retire Well.

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Kevin Tudor is the VP of Investment Training for Margin of Safety Investing, LLC. After a significant amount of time in the financial services industry, Kevin moved on to investment research and analysis to bring his expertise to the individual investor. He now resides in Scottsdale, Arizona where he conducts online webinars, writes financial newsletters, and provides various methods of investment training to show others the key strategies to successful investing.

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