Forex Trading Words of Wisdom
Updated: April 18, 2013 at 7:49 AM
Over the years, many forex traders have found themselves in trading situations which have a tendency to repeat over time. A number of these situations have had the honor of meriting a trading maxim or adage from which a novice trader can learn from the wisdom of seasoned traders.
A profitable forex trading system will incorporate many of the trading maxims or words of wisdom that are commonly passed on from seasoned traders to novices. Most professional traders have had a mentor, senior trader or trading buddy clue them in on these sayings at one time or another.
These generally brief phrases often include such pearls of wisdom as:
"Let your profits run, but cut your losses short. "
Allowing a winning position to continue making profits while taking losses quickly can make up a solid forex strategy in itself, and it is a key element of just about any good money management plan.
Many successful traders apply this as a trading rule in their trading plans in one form or another, perhaps by having a minimum risk reward ratio where the anticipated reward on a trade is always greater than the risk taken. Read a longer article on cutting your losses short and letting your profits run.
"Don't double up a losing position".
Adding to a losing position or "doubling up" may work for a lucky trader once or twice. Nevertheless, in most cases, adding to a losing position will only multiply the losses.
Often, it's better for a trader to just get out of the market by closing the position with a manageable loss. They can then have a clearer head with which to reassess the situation which caused their loss before beginning to trade again.
"Don't let a winning position turn into a losing one."
This market warning refers to riding an initially profitable position into a loss. This common trading mistake is often the product of hope in that the trader hopes the position will return to profitability while the market continues going against their position.
Also, the trader that had a profit in the position and watched it go into the red often feels they are still right despite evidence to the contrary. This often results in holding on to the losing position as they watch the money evaporate from their trading account.
"Sit on your hands when you don't have a clue."
Knowing when you do not know where the market is going and discerning when to stay out of the market because of difficult trading conditions or because of your individual portfolio situation can save a trader considerable money and frustration.
Remember, good trading opportunities eventually arise for those who wait for them patiently.
"No one ever went broke taking a profit."
This seems a wise and yet somewhat limiting expression perhaps. Famous trader Jesse Livermore used to say this and then finish with "but no one ever got rich taking three or four points out of bull market". Taking profits will always add to your account, but by "letting profits run", a substantially higher profit can often be had.
"Don't marry a position."
Marriage is for couples that want to be emotionally and materially bonded and is simply not appropriate for a trader's relationship to a trading position. Remember, the market is open every day with an endless amount of opportunity for those with heads clear and objective enough to discern it.
Marrying positions generally occurs to traders with losing trades because winners generally cash out, while losers can take a longer time to divorce emotionally.
Also, giving into your emotions while trading is a common sign that you may be trading without a plan or perhaps disregarding the plan you do have. Emotional trading is the first step in losing discipline.
Remember, trading forex is a highly competitive business that does not take prisoners. Much like a casino, the forex market will not let you have your money back once lost!
"It's never too low to sell or too high to buy."
Typically, markets will continue moving in the direction of the general trend. When a high or low is made, often a sufficient amount of momentum will propel the price to an ever higher high or lower low.
"Don't Stand in Front of a Train."
Rather than trying to pick a top or a bottom, which often ends in tears, a wise trader according to this adage should instead wait for the market to run out of steam and reverse before taking a position in a contrary direction to a prevailing trend. When a market has obviously picked a direction and has the conviction of a large number of traders and money propelling the move, either get on the train or step aside and let it pass.
This philosophy is especially relevant to swing traders who often seek to trade and profit from counter-trend corrections, as well as the prevailing trend.
"Price discounts all."
The mantra of technical analysts, the saying refers to the belief that news about any event related to the trading instrument - whether it is related to current events or supply and demand - will already be included in the price of a currency.
"All news is old news."
A variation on "Price discounts all", this saying refers to the idea that the market has already moved to factor information into the currency pair's exchange rate regardless of what the news that came out was.
"Buy the rumor, sell the fact."
Buying the rumor means going long before a bullish news item ever makes it to the news wires for fundamental analysts to mull over. Trading activity then ensues based on this rumor indicating that an item of importance will soon be released. The trader wise to the rumor can take advantage of the release of this news by selling out their position once it becomes public.
"Trader that pick bottom, get handful of do-do".
These sometimes rather colorful market sayings all warn traders to avoid relying solely on their valuation attempts when trading. Often, traders may be tempted to buy what appears to be a ridiculously low level, or short an "obviously" overbought situation.
Nevertheless, lows often lead to lower lows and highs often lead to higher highs, especially in trending markets.
"Plan your trade and trade your plan."
Trading does not favor the scatterbrained over the long term, so having a comprehensive and objective trading plan which can be easily followed and implemented makes up a key component of any successful trader's methods. Here you can learn how to design your trading plan.
"The trend is your friend."
This maxim recommends trading along with the market trend which consists of the predominant direction of the market in the currency pair of interest. Basically, the phrase is a statement to avoid going against the predominant directional trend, which could be compared to swimming against the current or going against the flow.
This phrase is the basis for the trend traders' overall strategy of identifying the major trend and then seeking to position their trading accounts in the same direction. This tends to give a trader an edge.
"Markets go up the stairs and down the elevator."
This saying refers to the slow and plodding nature with which markets often go up, whereas when prices decline, they tend to do it in a much faster and abrupt way. While less of a factor in the forex market, this is especially true of stock markets.
"Don't bet your house."
This saying refers to trading only with money you can afford to lose. Trading in the forex market can be extremely risky and the entire sum of money committed to the market could either explode and multiply or disappear in one sharp currency move.
Refrain from believing anyone that tells you that forex trading is not risky or that profits are guaranteed.
"Bulls Make Money, Bears Make Money, but Pigs Get Slaughtered."
This saying is pretty much self-explanatory once you know the significance of the market animals it refers to. In general, it offers a warning to avoid allowing greed to predominate in your trading decisions.
Many traders get greedy in taking profits, and instead of taking and locking in a reasonable profit, they will hold out for more money. This can have disastrous results for their account, sometimes even turning winning trades into losers.
"Buy low, sell high."
This maxim describes profitable trading in a nutshell and represents what every successful trader aspires to do. Of course, the hidden joke behind this saying is that buying low and selling high is so much easier said than done. Nevertheless, some technical indicators like the Relative Strength Index can help traders determine when the market is high and when it is low, as can support and resistance levels.
Basically, all of the above sayings contain valuable advice and trading wisdom that can be useful for just about anyone involved or thinking about getting involved in trading forex or any other market.
Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.