Agony Aunt: Fear can be well-placed

Dear Janine,

I have looked at the foreign exchange market [forex] for a long time and have been unable to get started.

I know that you must take losses to succeed at forex but somehow I am in fear of losing everything.

I know enough to know that I don't have to gamble to be successful at trading.

My system would be technically based and trading with the trend and also looking at trading pull-backs. How can I get the gambling instinct out of my trading system and just trade on what I see?

P.S. Is there a support group in Christchurch for currency traders.

ANSWER:

A touch of fear rumbling in your belly is a brilliant start for a successful trader, even if that might startle you.

In trading circles, emotion is regarded as a cancer which should be squashed before it kills off the glistening riches.

A fearful trader bottles and exits too early. Likewise, a misplaced dose of cockiness can lead to a spectacular wipe-out of wealth.

A technical trader for those not in-the- know is a mathematical whiz kid who uses patterns and trends in past data to predict the future.

It suits people who like following rules. The disadvantage is ostrich-type behaviour.

Their heads are stuck so far underground, they lose the ability to feel a gut reaction or a little emotion.

But zero emotion can be as dangerous as too much emotion. Be grateful that you're experiencing cold feet and celebrate that you're sensible enough to worry about losing everything.

It's a sign that you not only understand risk, but you feel risk as well.

So many traders don't know when to step away. The wise ones never trade for the sake of it - doing nothing is a skill.

As for getting shot of the gambling instinct, it's essential to have a set of written risk controls in place.

Examples include your maximum trade value per currency pair, stop loss value, number of trades placed at one time, strength of signals, capital at risk, leverage levels and percentage of gains you must bank rather than reinvest.

Knock a nought off your numbers and trial the system for three months on small volumes to get a grip on the discipline.

Bear in mind a system and risk controls can improve the odds, but they don't eliminate losses.

I hope you wouldn't put your super-plan or your home at risk to embark on this venture.

As for a support group, give Oli Hille of the Solomon Wealth Fund a call.

He's a Christchurch-based currency trader who runs a group and has good success.

That said, don't beat yourself up if you bail out. Some of us are cut out for it and some aren't.

I should probably show my hand and tell you my own career started on an FX trading floor.

Even with that background, nothing inspires me to trade.

I'm too risk averse. One ex Kiwi trader recently told me he'd never trade on his own account, because he can't see the flows he used to see from the inside of a bank - luckily, that aspect wouldn't worry a technical analyst.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.