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Chapter 2- What Is The Proper Mindset To Have Before You Begin Forex Trading?

Before you begin your journey, it is of utmost importance to do a complete and accurate self-appraisal aimed to provide you, the trader, with a chance to create the proper mindset for long-term success in the Forex market. Doing so provides a strong foundation for future trading success. The proper mindset is often as unique as each individual trader, but don’t worry, you will develop your own mindset, and set of quality traits, as your trading career progresses. But, there are common themes and requirements that each successful trader shares. A desire for knowledge, risk management, patience, and courage are four examples of these themes.

Embrace Knowledge and Learning

Before you begin Forex trading, you must embrace the idea of learning from your mistakes. Every trader makes mistakes and you will, too. One of the differences between successful traders and unsuccessful traders is the ability to learn from their mistakes (and successes!) and to use those lessons in future trades.

Did you take an early exit from your trade when the technicals were clearly telling you to let your profits ride? Did you get greedy and try to take a few extra pips of profit before your exit? Write these situations down. Learn from them. The lessons you teach yourself, especially as you’re just beginning your Forex journey, will last you throughout your career. And don’t just stop with what you teach yourself! Learn from others as well. Read books. Read Forex blogs and follow the markets. Taken together, a strong base of knowledge resources is the key to becoming a knowledgeable, and successful, trader.

Managing Risk

Risk management is priority #1 when it comes to Forex trading. A trader must know what he or she stands to lose on each trade in terms of invested capital per trade and in terms of percentage of total portfolio value at risk. Without a true understanding of how a trade fits into an overall portfolio, the trader is unable to make an informed decision when the time comes to either lock in a gain or to take a loss. An understanding of how a position fits into a particular portfolio is often a key factor in these important decisions.

Asset allocation is essential to successfully managing risk. Oftentimes, as beginners in the Forex market, we are tempted to focus on one or two trades and place a significant portion of our portfolio at risk on each of these trades. At first, you may get lucky and take a few profitable trades using this method. However, over the long-run, there is virtually no chance of sustained success using this strategy. When you hear news coming out of Europe or the United States, instead of asking yourself “How much can I make trading the EUR/USD pair,” ask yourself “How much of my portfolio can I put at risk trading this EUR/USD opportunity?” Forex trading is more than placing buy and sell orders on currency pairs. It is an act of portfolio management. The cash sitting on the sidelines is just as important to your strategy and portfolio as the capital at risk on any given trade.

Patience

As a beginner, it is easy to become overwhelmed by the breadth and depth of the Forex market. Often, we become so overwhelmed with the idea that we must be continually trading if we want to grow our portfolio. However, the opposite is generally true for a majority of successful Forex traders. As a new trader, it is important to learn which trading styles will work for you, and which will not. This takes significant effort, and often, many hours of waiting on the sidelines watching and learning. You must remind yourself to avoid the temptation to trade for the sake of trading and to slowly build your trading skills while discovering the best methods that suit you. Do you follow the charts or the news? Do you trade based on momentum and price action or do you wait for reversals to occur around support/resistance levels? If you are patient, willing to learn, and investing wisely to manage risk on each trade, you will soon find out which system is right for you.

Courage

Courage is the trait that allows each of us to place our trades, knowing that when we do, we are taking an educated risk with an uncertain outcome. It takes courage to follow a determined trading strategy when that strategy hits a bump in the road. And it takes just as much courage to change course when your strategy proves flawed.

As a beginner in the Forex market, you can expect some of your trades to lose money. Every trader has losing trades and these are often factored into an overall portfolio strategy by estimating the percentage of losing trades during a given time period. Have the courage to learn, to manage your risk appropriately, to be patient in the face of uncertainty, and to admit your failures and move quickly.