WHEN people think about trading, many things come to mind. Some will think of huge amounts of cash and massive gains. This may be accurate in some cases, but today I would like to break things down and tell you about the harsh reality.
Trading is all about probabilities and psychology. When a person trades, they are ultimately speculating – attempting to predict a future price movement. Like all future events, price movements are unknown, and all you can do is align the probabilities in order to increase the success rate of a trade.
Technical and fundamental analysis can give an idea of where prices may go. Technicals can be used as a tool to time entries and exits, and the fundamentals provide a wider picture of how the markets may move. But remember: the technicals and fundamentals might present a good case to trade, but you can still get it wrong due to the randomness of markets.
To avoid becoming a victim of randomness, you need to think about money management. Simply keeping a positive risk-reward and using around 1 per cent of your account per trade should be enough to generate a reasonable return, while limiting the impact of a losing streak.
The final ingredient is psychology. Technical and fundamental tools are one part, but without the right mindset, you could fail. The right mindset is crucial to trading because, as stated earlier, markets are all about probabilities – there is always a possibility of being wrong. The key is learning how to psychologically handle your losses.
Lukman Otunuga is a junior currency analyst at FXCM. For more information about trading psychology and money management, visit http://bit.ly/DFX26