WHEN it comes to your daily trading, how often should you be dipping into the markets? The temptation is often there, especially in volatile markets, to jump on any and every move that comes along. The common pitfall is to think that more trades mean more opportunities to profit, and that you don’t want to let those chances slip through your hands. But this is probably the easiest way to lose as much money as you can in a short period of time.
Before you go into a trade, you should ask yourself why you are doing so – do the technicals point to a change in the price action? Do the fundamentals suggest that this is going to be moving in your direction? Or is it a case of getting carried away by a big move on your screen and wanting to take advantage of it? If it’s the latter, you’re probably heading for a bad day of trading.
PLAN YOUR MOVE
If you’re sat watching the market moves and trying to get a piece of everything that’s not going sideways, it’s probably because you don’t have any sort of plan or aims for your trading. It may not sound as exciting as juggling ten trades at once, but for retail traders, it’s low, not high-frequency trading that is the route to consistent profits.
When it comes to spread betting and contract for difference (CFD) trading (or any other trading) you can be right every time and still lose money. And this is particularly so when you are trading at a high frequency.
If you go into the right trade but too late, go into a trade that sees a sharp reversal, or trade a small percentage of your capital on a well researched and thought out trade that goes right only to recklessly go all in on an impulse trade that wipes you out, then you’re on the wrong track. Fall into any of these common trading traps and you can be right about the direction of the trade, but still finish in the red at the end of the day.
RISK AND REWARD
When you’re trading, you should be constantly assessing your risk/reward ratio. And in particular, only enter a trade where you have a higher potential gain than you could lose on the trade. If you risk losing the same number of pips that you hope to gain, then your risk/reward ratio is 1:1. If you target a profit of 80 pips with a downside risk of 40 pips, then you have a 1:2 risk/reward ratio. You should always use a ratio of greater than 1:1.
By trading less frequently, it is much easier to keep a tab on your risk/reward ratios, and avoid being swamped by one big market movement that you are unhedged for.
If you find that you’ve been losing money, trading dozens of times a day, keep it simple. Pick the trades you want to enter carefully, assess why you are entering, at what point you will exit and how much you stand to gain compared to how much you could lose. You will rack up more consistent gains. When trading, slow and steady wins the race.