Avoiding false dawns in the forex market

There are no shortcuts to profitable forex trading. While some may be born with a slightly better aptitude or temperament for forex, it still takes year of experience and work to hone the skills needed to win.

While there are certainly no shortcuts in the forex market, there are many false dawns and it’s it’s unfortunate that so many traders experience them early on in their trading careers.

Guest post by  FXTM

Inevitable false dawn

A false dawn occurs when a trader experiences a big win, or run of successive wins, that causes them to have an over-confident attitude with regard to their trading ability.

After trading, (usually for just a short time), a trader might hit a couple of wins and immediately think to himself that he has some kind of innate gift. He might think that he has a natural talent or disposition for trading. Before long he will believe his wins came purely from his own skill, a pattern that can go on for a surprisingly long time; days, weeks, even months.

But the problem is that there is a great deal of random luck involved in forex trading and false dawns occur all the time. Sure, you can limit the effects of random luck over the long term, but in the short run, luck will always be the biggest determiner of your trading performance. In that respect, false dawns can be dangerous. Sometimes you may not know whether you made money on a trade through judgement or through luck. Exactly the same can be said for losing trades.

What to do?

If you are new to the markets and you’re winning then you could be experiencing a false dawn. In other words, you’re wins may be down to fluke alone and not any skill on your part.

The important thing is to realise that your wins were probably down to luck and that you should carry on trading with a level head. Most importantly you should refrain from increasing your size until you are completely sure that your lucky period is over.

It is possible that you are a natural born trader, but even so, it still pays to be cautious and doing so will pay dividends in the long run.

One good rule of thumb is based on your trade rationale. If you made a lot of money trading but you can’t really explain why, then it’s very likely you’re in the middle of a false dawn.

Take it slow, put a bit more thought into your trades and try to ride the wave.

Further reading:  6 Steps to creating a robust forex system