The Below was sent to me from Jack Crooks of MoneyandMarkets.com I thought it was a good read for forex traders.<\/p>\n
Traits we all exhibit at times are what swiftly separates us from our money \u2014 traits of an \u201cacute successful randomness fool,\u201d as defined by Nassim Taleb, author of the excellent book, Fooled by Randomness. <\/p>\n
Today, I\u2019d like to examine these common traits. Because if you can identify and recognize the traits of fool, and apply some simple principles, you\u2019ll have your own built-in risk management system in place.<\/p>\n
Keep in mind, though, that even some of the best traders in the world are prone to these mistakes, as we see so often in the blow up of funds and firms. So if it can happen to the pros, it can happen to you.<\/p>\n
After each of the traits of market fools I provide an example that perhaps you can all relate to, and a reality bite to show the proper perspective and simple ways to avoid these mistakes.<\/p>\n
Example: The U.S. dollar MUST fall because the current U.S. account deficit is rising. Reality: No it doesn\u2019t have to fall. If money pours into the United States from international investors for whatever reason (stocks, high yield deposits, real property, etc.) the dollar will rise regardless of what the current account deficit does. Develop reasons, but don\u2019t be dogmatic.<\/p>\n
Example: The dollar sold off even though the jobs report said employment is strong. I\u2019m right, the market is wrong. Reality: It\u2019s always about price action. There is much going on in the market, and a lot we will never know about. Price action tells us that our reasons may be wrong, no matter how much evidence we gather. Listen to the market. It\u2019s your only master.<\/p>\n
Example: You are a short-term trader and the market just moved against you on a key daily report. You rationalize that it\u2019s okay, because \u201cI\u2019m in this trade for the long haul, and sooner or later I will be right.\u201d Reality: If you develop reasons and time frames, stick with them. If the market gives you information that says your view is wrong, get out! You can always re-enter. Getting out will at least give you an opportunity to more objectively evaluate new information.<\/p>\n
Example: You enter the trade thinking you\u2019re going to make big money \u2014 all you think about is your reward. Reality: You should always think of your risk before you enter a position \u2014 that\u2019s what professional traders and speculators do. You must consider your risk beforehand because if you wait until you have already taken a position, you tend to lose your objectivity.<\/p>\n
Example: You liked owning the euro when it was at $1.40 against the dollar, you will love it at $1.35 \u2014 the average down mentality. Reality: This goes to point number 4 above; set your risk parameters ahead of time by establishing a stop-loss level to exit a trade and stick with it \u2014 don\u2019t rationalize. The euro at $1.35 may indeed prove to be a bargain. But it may also be the start of a major decline that can significantly damage your capital or wipe you out if you are trading with high leverage.<\/p>\n
Trait #6 \u2014 Denial
\nExample: Well, I really got hosed on that trade \u2014 it was bad luck. Reality: There is usually a very good reason why you lose money. Take the time to try to understand it. You learn more by objectively analyzing your investment mistakes than you do by studying your winners.<\/p>\n
The bottom line of all this is that you can never keep from being fooled by the market. But you can control your risk. And if you can control your risk and stay in the game to fight another day, your chances of winning will increase dramatically. <\/p>\n
Click here to read more…..<\/a><\/p>\n Click here to find out more about Jack Crooks from Money and Markets<\/a><\/p>\n