Whatever you are trading, whether it is stocks, futures, bonds, foreign currency or anything else, there are certain conditions which must exist for the market to be attractive to the trader and profitable for him. The four characteristics of a good investment market are liquidity, transparency, minimal trading costs and trending.
Liquidity
Trading in its simplest form comprises two elements, a sale and a purchase, and the liquidity of a market is nothing more than the ease with which a trader can both buy and sell. For a market to be truly liquid however a trader must not merely be able to buy and sell with ease, but he must also be able to do so in substantial volume without this having a marked effect on the price of the items being traded.
If a market is not sufficiently liquid delays in buying and selling can often result in considerable differences between the price when an order is placed and when it is executed. Additionally, traders can often find that it is difficult to sell items in a market with poor liquidity.
The foreign currency market is arguably the world's most liquid market with an enormous trading volume which is second to none.
Transparency
When we talk about the transparency of a market we are referring to a trader's access to accurate information throughout the trading process. The greater the access to accurate information, the greater the transparency.
Information is the key to successful trading in many of the world markets and indeed there are numerous examples of individuals and companies running into problems because they did not have access to accurate information.
Fortunately, in addition to being the world's most liquid market, the Forex market is also the world's most transparent market.
Minimal Trading Costs
In any market the market makers need to make a profit and that means that there are inevitably costs to be met by the trader. The secret to a successful market, as far as the trader is concerned, is for trading costs to be as low as possible, as the higher the trading costs the lower his profit, or the greater his loss.
The Forex market enjoys some of the lowest trading costs of any market with no commission or similar trading costs and trading costs being largely limited to the difference between the buying and selling price in any currency trade. This difference, which is known as the 'spread' and which is common to many markets, is also extremely tight in the case of the foreign currency market, keeping trading costs to a minimum.
Trending
In most markets the biggest problem traders face is knowing when to buy and when to sell and it is vitally important that traders have some way of gauging the direction in which a market is moving.
In the case of the Forex market many traders employ a technique known as technical analysis, which essentially studies the past performance of the market and looks for trends which can then be used to predict its future direction.
Such predictive tools are not unique to the Forex market and most markets will display at least some form of trend. However, the Forex market shows particularly strong trending characteristics and this makes it much easier for traders to identify when to enter and exit trading positions than is the case in most other markets.
Trading by nature lends itself to a series of ups and downs, and of course a multitude of ambiguous market conditions. When novice traders first step into the arena, their emotions run with the natural fluctuations of the market as well as the natural fluctuations that come with winning, losing, and having no idea what is going on. It takes a little experience to start weathering the variations and the fluctuations without having to ride out an emotional windstorm as well. With a little practice and a dedicated effort to change the emotional impact, anyone can learn how to view the experience as a job and not an emotional breakdown waiting to happen.
No matter how long you play the game, trading presents numerous challenges and even those who have been successfully trading for more than a decade often find that their emotional reactions still sneak up on them from time to time. Combating this tendency isnt that difficult, but you do have to have a coping strategy to bring yourself back down to a more unemotional response. When you pull it together and watch a risky trade pay off huge, it is normal to get a little happy. When you watch a sure thing tumble down into the abyss of no return, it is normal to get a little disappointed. The key is to take you emotional reactions and give them their space, and then make trading decisions without their influence.
Some traders simply write it down. Whether you choose to jot down your emotional response and leave it on the paper during your work day or you prefer to jot down your next move and reflect upon it in print to make sure there isnt an emotional element factoring into the decision, when pen meets paper, progress can often follow.
Trading most often performs in cycles. You might experience a winning streak only to break even or lose during the next cycle. If you allow your emotions to filter through each and every event, you are going to be exhausted by the end of the day, and burn out isnt too far around the corner. When you practice more rational trading, you tend to view the entire picture rather than the moment to moment experience.
Practicing cautious risk management, especially while you are still developing your fledgling skills, also helps you practice good practical trading without emotional influence. If you have a huge amount riding on a single trade, your emotions are going to be pulling for a strong finish. When you have a little bit dealing over here and a little spread out over there, your emotional investment is much more tolerable and you dont have to sweat the losses or pray for the big wins.
Take your time, use your head, and dont allow either a winning streak or a losing streak determine whether you are going to commit to your trades. Have faith in yourself and have the knowledge to know that when you are winning or losing it just isnt long before the tides change.
The goal of trading is financial gain. Keep your goals in front of you and keep your emotional involvement to a minimum through strong risk management skills and you should be able to use logical reasoning to bring your game to the next level. Just like any other high, sooner or later you are bound to crash. Dont trade on a high for the sake of the high. Youll be penniless and burnt out within a year if you trade on highs for another high.
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