When speculating in the currency pairings—the most significant market by far on a daily traded basis—we have to be on our toes not to get trapped.
Buzz day trades Forex. The only time he holds a trade overnight is when he’s trapped. An event (being trapped) that every trader has to strive to eliminate. But how do you do that?
(Trapped is not merely being out of the money, which is something a trader experiences on nearly every entry. Trapped is holding an out of the money event beyond a pre-agreed level—either through emotion or by mistake).
Being on the wrong side of a directional trade is the risk of doing business. It is part and parcel of the job. However, there is a world of difference in taking an acceptable loss and trapped.
Trapped suggests that a trader has held beyond an acceptable loss position and has ventured into account adjusting territory—not a smart place to be. Not only is the situation emotionally exhausting as well as potentially account debilitating, but it also distracts the trader from other trade opportunities.
Swimming with sharks
It may be difficult for an observer (a non-trader) to appreciate the implication. To trade currency pairings is only achieved via a derivative account of some form or other; to deal with leverage and margin.
A while ago, legislation limited the amount of margin possible on a (derivative) position for retail traders. Buzz believes that this was mostly a good thing. It helps prevent over-trading. However, he says, it also draws inexperienced traders into the lower timeframes—day trading in other words.
Margins of up to five per cent do not provide lucrative possibilities with a small account on daily Forex charts. Drawing the unsuspecting novice further down the timescales in search of riches but blind to the significant increase in risk. They go from pool dipping to shark-infested waters.
The lower timeframes bring the plethora of news events into play. One of the reasons Buzz trades the highest of the day trading periods, the hourly bars. Day trading requires a more focused and, therefore, dedicated management style than is necessary if trading daily charts.
Trade management is a crucial skill to learn. But what is all the fuss? Have a method, backtest sufficiently to be sure of an edge and put it all into operation.
Unfortunately, live trading brings a whole new level of difficulty than is experienced in a systemised trial. The future market is not necessarily the same; live timeframes can seem both more expanded and contracted. Live markets bring emotion generated by the open bar, and not experienced in the benign backtest.
Trade management, arguably, can only be developed during live trading. It is therefore imperative that new systems are (live) traded small and over some time for the establishment of management rules.
As Buzz points out, to do otherwise significantly increases the probability of becoming a ‘trapped’ trader and in Forex, margin can grow at a blistering pace. Trade small, build slowly with particular attention on trade management rules and above all—don’t get trapped.