What could be so hard about a game with a 50% proposition; it either goes up or goes down, right? Of course, such a statement is an over-simplification of trading forex since the outcomes are anything but binary. As a retail trader, the skill of consistently ‘beating the markets’ year in, year out is reserved for the elite few.
While forex presents several benefits, it’s still inherently complex, with various technical, financial, and psychological contributing factors at play. The most successful traders accept the complex realities of forex and align their expectations accordingly.
In this article, we’ll break down the technical, financial, and psychological aspects making forex trading difficult, along with simple mindset shifts of dealing with them.
The technical factors
‘Past performance is no guarantee of future results’ sums up one of the fundamental challenges of trading any financial instrument. In many ways, speculating in forex is about predicting the future using historical data obtained from technical analysis.
The challenge comes down to the inherent randomness for whether a trade will lose or not. Technically, there is no foolproof leading indicator of what millions of traders will do at a given time to move prices up or down.
To some extent, a retail trader is competing against the very best in the world. Forex is a ‘slugfest’ where everyone essentially looks to take money away from one another; hence, we have bulls and bears. Fundamentally, forecasting the behavior of people, which can change in a heartbeat, isn’t something that can be done consistently.
Regardless of a trader’s skill and experience, there will always be an element of error in their judgment. This is one of the primary reasons no ‘holy grail’ or 100% winning system exists.
Every position a trader makes can still lose even with the largest amount of evidence suggesting their desired outcome. Here are some simple affirmations to deal with these challenges:
- No single trader has any level of control for moving prices, only their personal monetary risk.
- Every moment in the market is unique. While a trader might repeatedly trade the same pattern, how it plays out after execution will structurally never be the same as other previous times.
- A high winning percentage is not necessary for long-term profitability. The more critical aspect is a favorable risk-to-reward ratio.
- True success is never about an individual position making money; it’s about consistent actions over an extended series of trades.
The financial factors
One of the appealing features of trading forex is the freedom to generate an income not directly correlated to how many hours one works. On the surface, this is an attractive prospect for new traders, but many make a few detrimental mistakes.
Technically, there is always some opportunity to profit in forex at any given time because of its around-the-clock structure. However, there are risks to frequent trading, and no one can determine when they will have a profitable position.
One of the big errors of new and struggling traders is treating forex like a nine-to-five job. In reality, the frequency of profit or income is unpredictable compared to a traditional career.
These expectations are indeed one of the contributing elements to why trading forex seems difficult. Also, most people starting trading are under-capitalized and will over-leverage in the hopes of turning a relatively small amount into a large one quickly.
Here’s what one must do to deal with the financial challenges:
- Money made from currencies is unpredictable. This is one reason having daily or weekly targets is dangerous, as it leads to over-trading and emotional trading habits.
- Due to the inconsistency of not knowing when one will have a profitable position and to what extent, it’s less pressure to treat forex as an additional income while working a job or on another income-generating opportunity. Many traders want to go full-time without the right experience and capital available, often without properly studying the fundamentals.
- There is no scheduled number of positions a trader must take each day or each week as it depends on the market conditions. Thus, having strict rules for making decisions is part of what makes a prosperous trader.
The psychological factors
It’s often said trading forex is more psychological than technical. Unfortunately, the psychology of being a trader is hard to master as it involves many things. For starters, the markets may sometimes seem to reward bad habits and punish good ones.
When someone executes a position, there is never a feedback loop over whether they made the right decision or not until after some time has passed. Once a trade goes live, anything is possible, with a host of permutations filling a trader’s mind.
If a trade is in some profit, when does someone move their stop loss? If the position has gone substantially in gains but not at the desired level, does the trader take the profits or leave the order running? What if the market were to move back to the entry point?
These are some of the questions someone will ask themselves during a live position. Fear, greed, nervousness, anxiety, and doubt are among the many emotions an investor will experience. To deal with the various what-if scenarios, here are a few things that help:
- Traders should maintain a neutral mindset where the outcome of any position does not emotionally drive them. It’s also crucial to realize the results of any trade aren’t necessarily binary.
Not every position will go to the profit target. There needs to be a rule-based system guiding someone over the logical choice they should take after certain things have occurred. Traders should expect either a normal loss, a smaller loss, partial profit, or their desired profit.
- Traders must treat every trade as a new opportunity without having any recency bias. Whatever transpired previously is no indication of what will happen currently.
Final word
Trading forex isn’t inherently difficult, though the outcomes of each position are never technically 50-50. Successful traders appreciate the grey area of speculating in the markets.
Through experience, they know what to do when X or Y happens and maintain an impartial mindset not affected by impulses but rather driven by logic and appreciating they have no control over moving the price.
