The Trader’s Journey

  • Sep 19 2022
  • by
  • Analyst AZA
The Trader’s Journey

The Trader’s Journey: Pitfalls on the Path to Trading Success


Many a trader can recall their first foray into the foreign exchange markets. Having been drawn in by the promise of making enormous wealth that is attainable within a short period as advertised by the media, and led on to think they can live the glamorous life, they invest a sizable amount and begin their trading journey. Buoyed with enthusiasm and eagerness to begin this new lucrative business, they place their first trade in the forex market and encounter their first loss. Undeterred by this, they keep placing multiple trades and expecting better trading results, seemingly taking advantage of the high leverage most brokers offer and some quick strategy they are fed on the internet.

Well, we all know how that story ends: with a blown account and a bruised ego. Traders at this point would either quit (claiming trading is a scam) or become more resolute in their desire to make it in trading. The ones that decide to try again may either choose to seek out proper in-depth training and mentorship (which is the wise choice) or perhaps the source for more funds and google up some new strategy to use in the markets. The latter category begins trading with renewed vigour, placing even more risky trades with increased leverage, the result of which is more blown accounts and a plunge into further debts which most would not recover from. Those that stay on despite being battered by the markets finally go on to properly educate themselves and learn some of the skills that would enhance their prospects in the market. This in essence is the story of most who forage into the world of trading.

However, I do wonder if these setbacks could have been avoided entirely or at least reduced the number of blown accounts if one had decided to obtain some in-depth knowledge of the markets before trading live accounts. Considering the length of time that is typically invested in gaining a formal education, with the expectation of getting a well-paying job that demands a lot of hourly input per day and whose return is meagre compared to what successful traders earn, a neutral observer would wonder why most traders are often in a hurry to put money in the market without investing near enough time in training, even placing trades within a few days of being introduced to forex. This behaviour is the norm and is a testament to the nature of the markets which boast massive pulling power that feeds on traders’ emotions and greed to keep trading despite being ill-equipped. Essentially pitted against the big players and institutions in the market, they find themselves in a match they are designed to lose.

For those of us who’s decided to learn by reading an article such as this, I say congratulations. This writing, even though not adequate or robust enough to qualify as a complete guide to your mastery of forex, would provide the building blocks on which your trading career can be built. Encapsulated within these pages is the summary of my trading journey, the mistakes that were made and the lessons learnt along the way which saved my trading career. With rapt attention, I implore you to read on because the nuggets contained here would help shine the light, guiding you to avoid most of the pitfalls that plague new traders while advancing you on your way to trading success.

Trading rule: Never ignore the stops

“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks” .......Warren Buffett

A wise investor once said that the foundation of any winning team or strategy is a great defence and that before you learn to win, you must first learn how not to lose. He stressed that while a great offence would bring goals at some point in the game, a poor defence would result in huge losses. Applying this truth to trading would mean that a great defence (excellent risk management) is of more importance than a great offence (capital appreciation). It is said that a bird in hand is worth more than two in the bush, this couldn’t be truer in the world of forex trading where you need money to make more money.

Trading primarily is a probability game, where a combination of good strategy and a suitable risk management system is essential. While having good wins is vital, what is perhaps more important is risk management: the art of minimizing the magnitude of inevitable losses to preserve one's capital for the winning runs. So, in short, excellent risk management would help you to ride out the losing streaks, leaving you with sizable capital until your strategy begins to deliver winning trades. This also prevents a few losses from wiping out a greater number of previous winning trades.

So how do we protect our capital in trading and minimize our losses? This is facilitated via the use of stop losses. A stop loss is a market order that is placed below your trades at a point where your trading position is invalidated. It should be done in a way that allows for market movements (otherwise termed allowing your trades to breathe) and at the same time protects you from significant losses if the market goes opposite to your trade. An excellent way of doing this is to place your stops using the underlying market structure such as stop placement at 1ATR (average true range) below the lows of a pullback in a long setup. Some traders would claim that stops are unnecessary because they closely monitor their trades and can always get out of a losing trade. That is fine, but the issue is that a trader’s emotion can keep one hanging on to a losing trade while hoping that the market would reverse in one's favour. Such a trader might be lucky and the market reverses or the market may go on to the trend in the opposite direction, the result of which is a massive loss or a blown account. Even traders that are disciplined enough to close losing trades are still vulnerable to instances in which the market makes massive vertical movement in the opposite direction (such as news events). In a nutshell, you should always set your stops that would automatically close any losing trade, preventing you from throwing more money and mental effort into a losing trade and allowing you to look out for potential winning trades.

Trading advice: Trend trading versus Countertrend trading

Successful traders always follow the line of least resistance. Follow the trend. The trend is your friend.” .........Jesse Livermore

Trading systems can be broadly categorized into trend trading and countertrend trading. Trend trading involves positioning where there is a series of impulse-retracement-impulse moves driven by the momentum of an asset in a particular direction. An example of this is buying into the pullback (the higher low after a pivot high) of a trend. On the other hand, countertrend trading involves fading an established trend which appears to be overextended. Countertrend trading is appealing to new traders because they can buy low and sell high.

The system of countertrend trading is based on anticipating critical inflexion points (support/resistance zones) so that traders can place positions close to where they occur. So, this strategy involves:

  1. Marking out zones of support as price falls or resistance as price rises.
  2. Waiting for a rejection pattern and candlestick.
  3. Placing positions.

Technically, you could spot a divergence on a pair that you feel is overextended and get in on a countertrend move after a rejection, riding it to the next profit-taking zone and banking in the pips. In reality, though, the concern is that most countertrend setups fail. This is because established trends could go on making new highs and lows with a bit of consolidation occurring at the critical zones, eventually breaking past potential inflexion points while showing increased divergence. In such cases, traders who tried to go counter to the trend without waiting for confirmation via a change in market structure (such as a higher high and a low in a downtrend) would be trapped.

This can be avoided if new traders stick to trading with the trend (which is arguably the higher-probability practice) using techniques such as pullback entries to position into one. The reality is that newbie traders do not have the requisite skill and patience it takes to spot and trade an actual countertrend setup. Such skill takes time to develop, and until you can confidently consider yourself a thoroughly experienced trader, stick with the trend which is more likely to deliver profitable results over the long term.

Trading advice: Jack of all trades or the master of one

The financial markets boast an array of trading instruments spread over a range of classes such as forex pairs, indices, commodities, stocks and cryptocurrencies. As a result, the options for trading are vast. This situation leads to two different approaches to trading the markets, namely:

  • The way of generalist seeks to handle as many pairs and assets as possible to technically diversify one's portfolio.
  • The way of specialist instead pays attention to only a few pairs to get an in-depth knowledge of how the particular pair or asset moves in various market conditions.

Which approach would be more rewarding to the new trader? I would suggest that the more profitable path for the new trader is by being a specialist. The issue with monitoring a lot of trading assets for newbie traders is that by having your eyes on everything, you’d fail to notice the important moves in the market when they happen. Such traders would be more vulnerable to fake-outs because they haven’t devoted time to studying particular trading assets. While it is possible to add more assets to your trading list eventually, new traders should start with a few initial pairs.

Realizing this proved to be a turning point in my trading journey. Choosing only a few assets allowed for greater concentration and in-depth knowledge of those assets with increased consistency in my trading results. For new traders, I’d suggest trading the following forex pairs: GBPUSD, EURUSD and AUDUSD. These pairs are great for trading because they have the highest volatility and the spreads are minimal. They also present some of the cleanest setups for trend traders.

Final note and Conclusion

In addition, some trading tips for the new trader are:

  • Avoid complications. Some technical traders, in a bid to add confluence to their trade setup, tend to incorporate a lot of indicators and settings into their chart. This results in a clutter of information which may lead to indecision when it’s time to place a trade because there’s just too much information. The best strategy involves using a few tools which when combined allow for simplicity.
  • Multi-frame analysis involving the use of 3 close timeframes, namely: lower timeframe, trading timeframe and higher timeframe. This allows the trader to get a broader view of the trading asset via the higher timeframe and to position tight entries using the lower timeframe.

On a final note, I say thank you and congrats for making it to the end of this write-up. The ideas contained would greatly improve one’s trading if they are applied, but of course, the learning process never ends and as such, it is important to continue to seek out more trading knowledge preferably via a mentor. This would help reduce your learning curve and get you faster on your way to being consistently profitable.

This in essence is the story of most who forage into the world of trading.


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