The biggest mistake that most beginning forex traders make is made before they even place their first trade. In fact, they usually make this mistake before they even open their trading account!
Most traders begin by learning the mechanics and terminology of trading.
They study charts and look for trends. They try to find predictable patterns and how to profit from them.
They learn the meanings of the words “pip”, “cable”, “swissie”, “shoulder”, “flag”, etc.
They study how the “Aussie” behaves when the Royal Bank of Australia lowers rates or what the impact on the EUR/USD will be after Jean Claude Trechet says the word “vigilant” three times during the ECB rate announcement or what the rising price of oil will do for the Canadian dollar.
But the one thing most traders don't do before they begin their careers in this “sport” is to properly assess their own temperament and how that will effect their trading.
The cute E*Trade commercial which shows a talking baby placing a trade is accurate. It's easy to place a trade. The mechanics are easy enough to learn. And many traders, even adults, feel like barfing right after they pull the trigger!
Are you going to barf every time you place a trade? Will you be afraid of losing? Will you become angry when you do lose on a trade – even if it's a small amount? When you close out a trade, will you feel elated (on a win) or humiliated (with a loss)?
These are all questions that you need answered before you place that first trade.
When you have answered the tough questions about yourself, you will be well on your way to determining what kind of trader you will be.
Many of those who hold educational seminars and write books on forex traders talk about 3 types of traders: the day-trader, the swing-trader, and the investor. However, I believe there is a viable fourth category: the non-trader.
The day-trader goes for the quick gain. Successful day-traders have nerves of steel and don't mind sitting in front of their computers watching the up-ticks and down-ticks of their favorite pair(s). They can easily stomach many small losses knowing that they only need a successful trade or two to put them ahead. The day-trader depends heavily on the charts and technical analysis. But they really only care about what's going on with the 5-minute, 10-minute, or 15 minute charts. A daily chart represents an eternity for a day-trader.
The next type of trader is the swing-trader. This type of trader is a bit more patient then the day trader. The swing-trader will read the weekend papers and websites and study the fundamentals of their favorite pair. They'll then take a look at the yearly and daily charts, looking for good entries and then decide on their target. Then they'll set up their trade on Monday morning, which may or may not be triggered. When the entry for the trade is triggered, the swing-trader is patient to then wait until either their stop or target takes them out. The swing-trader's trades will run for days, weeks, or months, typically – and that's plenty fast for them.
The third type of trader is the investor. And the investor is the most patient of them all. The investor trades off of very long term trends. He places his trade and forgets about it. It may be months or years before he exits his trade. The investor relies mostly on fundamentals and long-term economic trends.
The last type of trader is the non-trader. Although, the dealers wouldn't agree, it's actually OK to not trade. For some people, trading is just going to be too stressful for them. Even though education can relieve a lot of this stress it won't eliminate for everyone.
What category am I in? Right now, I'm in category four. But, soon, look for me in category 3.
What is the best category to be in? Again, it all depends on who you are.