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Importance of Forex trading discipline and patience

Importance of Forex trading discipline and patience

Countless traders enter the Forex market every day, but many of them fail.

Want to succeed in this challenging environment?

There are three virtues you must cultivate.

Before we reveal the virtues, try to guess them based on the scenarios below.

Some traders focus too much time on creating the perfect strategy, which leaves them with little energy to develop proper discipline.

This approach is a recipe for failure...

...as it is far more important to have a plan you can execute than one that is perfect.

If you don't have an executable strategy, we recommend you to learn from our live trading webinars.

Live Forex webinars free

Some traders fail because they fail to give proper risk management the due diligence it requires.

Finally, certain traders quit too early, giving up when their strategies don't produce the desired results right away.

No approach will generate returns every time and traders must keep this in mind.

As for the three virtues...

...Forex trading requires discipline, patience and a proper attitude toward risk management.

Rules of Forex trading discipline

Rules of Forex trading discipline

Proper Forex trading discipline involves:

  1. developing a successful trading strategy; while
  2. modifying it as needed; and
  3. executing that plan effectively.

Following through with one's plan is an essential component of trading discipline.

A great example of this importance is Jesse Livermore, a man TIME described as the "most fabulous living U. S. stock trader."

Livermore made a fortune following rules he created, amassing at least $100 million at the height of his career in 1929.

However, Livermore decided to break his own rules, causing him to lose everything on more than one occasion.

To avoid meeting a similar fate, traders can follow some simple rules.

There are three main rules in particular that are crucial to obtaining a basic understanding of Forex trading discipline.

Once you are comfortable with following these rules you may feel comfortable with trading on a live account.

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Trading plan elements

A trading plan is the foundation for a trader's success.

There are many ways to create a trading strategy, but the crucial elements are:

  1. a list of trading instruments
  2. which signals will cause you to enter positions
  3. which signals will prompt your exit
  4. minimum duration of your trade
  5. maximum duration of your trade
  6. maximum number of trades per day, week and month
  7. hours during which you will trade.

By listing the rules you will follow, you can not only develop your plan, but also cultivate Forex discipline.

Be sure to mark any market analysis done in your plan to examine whether this analysis corresponds to the plan.

Determine some key variables before trading. These variables include:

  1. trading instruments you will use
  2. entry and exit signals you will harness
  3. how frequently you will make transactions.

Trading plan elements

After some time, you might feel tempted to relax a bit and take your foot off the gas pedal.

Remember that there are many stories about traders who didn't follow their systems and suffered dire results.

One such tale involves Nick Leeson, who has been called the original rogue trader.

Leeson single handedly pushed Barings Bank (a U.K.-based financial institution established in the 18th century) into insolvency.

The bank uniquely employed him as chief trader and also allowed him to clear his own trades.

The latter responsibilities are typically split between different people, but Leeson was armed with both.

When his speculative bets didn't pan out, Leeson hid his losses in an error account.

These losses exceeded £800 million in 1995.

Make stop-loss a must, not a maybe

stop loss is a must

Most disciplined Forex traders use stop-loss.

Before opening any positions, you should know exactly where you will place your stop-loss.

Once you set this up, you should never lower it to keep a position open.

Keep in mind that the more transactions you make:

...the more you will encounter situations where you believe your losing position will become profitable.

Some traders have a hard time accepting failure, which can:

  1. cause them to place bigger bets; and
  2. potentially incur bigger losses.

In 2012, JPMorgan Chase & Co.'s chief investment office announced a loss of at least $6.2 billion tied to derivatives trading.

Bruno Iksil led the office's charge to set up complicated positions involving credit derivatives - placing bigger trades in response to losses.

These positions grew so large that certain investors claimed they were distorting credit indexes.

Amid this disruption, Iksil got the nickname London Whale.

While you probably won't risk being in any situations like this - it illustrates the value of having a stop-loss to automatically close a position.

Setting a stop-loss, takes the emotion out of the situation.

However:

...while establishing a specific price and then sticking to it is integral to using stop-losses...

you should take a different approach for setting take-profit points.

If you are just starting out, it's wise to establish a take-profit point for every trade and then refrain from modifying it.

With more experience, you can start modifying your take-profit points - especially if you have also begun setting your stop-loss to generate profit.

But regardless of whether you are a rookie or veteran trader - you should always know your profit target before you commit to a trade.

Your trading schedule counts

timezone and trading schedule counts

Another important part of developing Forex trading patience and discipline, is creating and sticking to a trading schedule.

If your strategy involves trading when the London markets open, don't make transactions when they are about to close.

Why?

You may not know about moves in other economies, that could cause your unplanned trade to suffer a loss.

In addition to setting trading hours, you should determine how many trades you can make in a day, week or month.

This frequency is usually based on the type of trading you use.

The latter is due to intraday traders generally limiting themselves to a particular day, while medium-term traders create limits for a weekly or monthly period.

Forex patience grows your potential

patience grows your Forex potential

We've covered discipline, so let's take a deeper dive into patience.

While the two are similar, there are a few key differences.

Most online Forex traders will occasionally feel tempted to close profitable trades prematurely, either to:

  1. take-profits; or
  2. ensure they do not becoming losing trades.

To overcome this inclination, you must exercise patience.

Let's look at some specific steps to help achieve this objective.

First of all, don't be controlled by your fear.

Once you commit to a trade, very little should cause you to second guess your decision.

Each time you enter a trade, you should know:

  1. the maximum loss you will allow; and
  2. the minimum profit you want to generate.

Market fluctuations are perfectly normal and should not prompt you to change course.

Adhering to this best practice, can bring your Forex patience to the next level.

Next, be patient and learn the tools of the trade.

MetaTrader 4 is the most widely used trading platform in the world, despite its steep learning curve.

Successful traders take the time and patience to get to know the tools that make winning trades.

Download MT4 Supreme Edition

Another crucial aspect of patience is evaluating your winning trades.

As your position approaches the take-profit level, you will likely want to close the position and take the profits right away.

While following this approach yields profits quickly - it could also prevent your trade from generating a potentially larger profit.

For example, instead of closing such a position you could:

  1. set your stop-loss to the minimum accepted profit; and
  2. change your take-profit to where you expect the trendline to hit.

And don't forget - you can do this more than once for each trade.

Take action

Now that you have learned how to cultivate Forex trading discipline and patience, it's time to put that knowledge into action.

Start by analysing the market and developing a trading plan for your first week.

Determine upfront:

  1. which trading instruments you will use
  2. the signals that will prompt your entries and exits
  3. your stop-loss and take-profit levels
  4. the maximum number of trades you want to make during a set time.

Then you can apply your knowledge via a trading account.

If you don't have one already, open a live account with Admiral Markets or start practising by signing up for a demo account.