Before diving into forex trading, people frequently advise that losses are inevitable. You know that the vast majority of traders fail to achieve consistent profitability. Taking heed of this warning, you educate yourself and cautiously enter the markets.
Then, surprisingly, you start experiencing early success. You win a trade, then another. Your confidence skyrockets. While a healthy dose of self-belief is valuable, it can quickly escalate into overconfidence. After a string of winning trades, you begin to feel invincible. And this is precisely where the danger lies. Early success, instead of being a stepping stone, can become a stumbling block.
Here’s how early success, if not managed carefully, can lead to significant problems:
- Increased Trade Sizes: As your account balance grows, the temptation to enlarge your positions and accelerate your profits overwhelms you. Greed takes hold. Do your larger trades proportionally match your increased account size, or are you taking significantly larger risks? Typically, people choose the latter, exposing a larger percentage of their account with every trade. Early success blinds many to this escalating risk.
- Trading More Frequently: You might believe that if trading makes money, then more trading equals more profit. However, this also dramatically increases your chances of incurring substantial losses. The feeling of invincibility fueled by early success can push you to overtrade.
- Ignoring Stop-Loss Orders: Feeling financially comfortable with more capital, you might be tempted to bend the rules and widen your stop-loss points. This, instead of giving your trade more breathing room, often ends in significantly larger losses. Early success can breed a dangerous disregard for risk management.
- Extended Trading Hours: Why not expand your trading hours when you’ve experienced such recent success? You might forget that your system might not be working optimally in all market conditions, fatigue can creep in, and you may lose sight of the broader market picture. The confidence derived from early success can lead to ill-timed trades.
- Neglecting Your Trading Plan: You start to believe that your recent wins are due to your own inherent skills, not the trading plan. You might begin to view the plan as unnecessary, believing you can simply win on your intuition. Here, the path to a margin call is drastically shortened. Early success can ironically make you believe you don’t need the very tools that might have led to it.
Perhaps, a period of limited success, or even experiencing some initial losses, is more beneficial in the long run. This can help build resilience and a respect for the market, rather than falling into the overconfidence trap that can follow early success.
What do you think about the potentially detrimental impact of early success in forex trading?
Want to trade forex? Here’s a list of forex brokers to check out plus analysis and predictions for major currencies.