market will disappear for a time, maybe even forever, and thus your fascination with
it might wear off too.This is why many forex traders, although they have learned true principles, are still losing money as fast as they can trade. They want to chase the mystery of the market.They enter the cage to get the fruit because
that’s more exciting. It’s also more
dangerous. Even fatal.
4: Know your limits
One mistake Possums make is that they never set limits. They’ll waltz into the cage
and go for the fruit with reckless abandon.You might attribute this to stupidity, and
you may be right. But it also might be due to their over-exuberance. Their inability to contain their excitement over finding some fruit.
You will be tempted to snatch the fruit as soon as you can see it. You might be
tempted to violate your principles when you see the market take a big swing, or after
Alan Greenspan says something on television, or the latest job report comes
out. Sometimes, you’ll be tempted to set your stop-loss very widely (thus risking the
loss of a lot of money) or to not set a stoploss at all.
In order to succeed, you must set stops.You have to be able to tell yourself that it’s
time to get out of the market, that you’ve tried to get the fruit – but that today it’s just not going to work. Perhaps your system works 80% of the time, and this time your system has simply failed.
Getting out of the market at the right
time is just as important as getting in at the right time. If your system tends to return 20 pips per trade, then set your stop-loss so that you don’t lose more than you can possibly gain.If you disobey your principles, and you find that you’re in a big, big losing trade,then look at your trading system: do you really see the market coming back to breakeven anytime soon? If not, then get out. If so, then stay in – if you have the usable margin to withstand some heavy losses.
Which brings me to my next point: don’t trade huge chunks of your account. If you
have a $1,000 account, then don’t make trades that require you to put up more than
$100. Also, don’t make trades that can lose or gain more than $3 per pip. If the market takes a real nosedive against you, you could halve your equity before you realize what you’ve done.5: Back off when necessary If you lose a lot of money in one day, or gain a lot of money in one day, back off
from the market. These are dangerous times. I talk about Pride, Fear, Greed, and
Revenge in my Strategy:10 booklet (free, on my site) but it will help to summarize the main points here too.Pride is your worst enemy. There is no
such thing as “good pride” in the forex
market. As soon as you become proud of your success, you’re headed for a fall. When
you’re prideful, you leave yourself open to Greed and Revenge. You feel that you
deserve more profit, are willing to take more (unwise) risks, and you strike back at the market when it beats you. Being prideful in
the forex market is acting the same as the Possum who believes he can go into the
cage, get the fruit, and still get out. It won’t work. Keep your pride in check.
Next, watch out for Fear. When you’re afraid, you make poor choices – you’ll exit a
trade before it becomes profitable or you’ll enter no trades at all. If you give in to fear,then back off the market. Backtest your
system again. Review what made you successful in the past. Take a day off and
reset your bearings. You’ll feel better and be ready to trade the next day.Greed is perhaps the second worst emotion you can ever feel in the forex.

Conclusion

You can succeed in the forex market.As a day trader, you can be paid more handsomely than doctors, lawyers, and just about everyone else. But if you
want to be a member of the elite class of highly successful forex traders, then you have to put the time in. You can’t expect profits to come easily.Successful forex trading will offer you more time, more money – and more stress – than you have probably ever experienced. But you can do it. Success is not about your IQ
– it’s about your work ethic and your discipline. It’s about your ability to stay out of the trap, not set off the land mines, or just simply get out of the market when it’s time. Write me sometime and let me know how you’re doing.

ALL ABOUT WOODCHUCKS

The woodchuck circles the trap many times, and from all
angles before deciding how he is going to get the fruit.
Sometimes he will wait till another animal is in the trap,
then pick the fruit through the wire cage. Woodchucks
know their capabilities. They pal around with others in
their den and know when one does not come home.
They search for the scent of their own, and hear the cry of
the one that is trapped. The big, old woodchucks learn
from others mistakes and do not make the same mistake
themselves. They are not paralyzed in fear, but
cautiously optimistic, ever searching for the food they
want, but holding onto true principles that have kept them
alive. Big, old woodchucks will at times walk away from a
trap because the lure of the fruit is not worth the work it
will take to get out of the trap before the hunter kills him.

Well, the last time I made this mistake, I entered a trade that lost 250 pips in 72
hours. I stayed in the trade hoping that the market would rebound (it never did). I
figured if I just laid down quietly, the trapper would never come and shoot me.
Well, he did. I lost my usable margin on the last day. I lost 75% of my account.
I resolved on that day to never again violate the principles of my trading strategy.
I tell everyone that trades forex the same thing: you can learn this the hard way, or the easy way. But you will learn it eventually: in the world of forex trading, there are only Woodchucks and Possums. If you’re just trading on emotion, speculation, or excitement, then you’re a Possum, and you’re going to get shot. Either take it from me, or learn on your own. I hope you take the time to read the principles below and learn from my mistakes.How to Be a Woodchuck
There are five steps to thinking like a Woodchuck in the forex market.

1: Be hungry and determined

The Woodchuck wants the fruit. He believes that he has a right to it. He is
willing to do whatever it takes to safely get it
and eat it.As for you, you’ve got to want profits.You’ve got to put profits ahead of
everything else. You’ve got to say to yourself that the most important thing at the
end of the money is not making lots of trades, or any trades, but rather the most
important thing is to end the money higher than when you started it. This belief has to drive you. If you trade because you like to
trade, you’re going to lose money – you will end up making stupid trades, getting
trapped, and laying down to wait for the bullet.The Woodchuck wants to fill his belly –but not at the expense of his life.
Remember that.Be hungry for profits, not just for trades.
2: Discover true principles

The Woodchuck, unlike the Possum, can learn from its own mistakes or the mistakes
of other animals. It understands that if it enters the trap, it will be caught. It knocks over the cage, sets it off, and then jumps back. When it senses the danger has passed, it might start poking at the cage from the outside, or try to grab the fruit through the bars of the cage.Likewise, you need to become a student
of the forex market if you want to become successful. The forex market does not
reward lazy people. Plan on spending some money on books to become familiar with
charting patterns. Read everything you can
online about how the market works. Get some charting software – there is plenty of
good free charting software to start you out– and watch the formations. Most
important, start trading on a demo account immediately. Get involved, take notes.
Keep a trading journal that lists every trade and the reason you entered and exited.
As you do these things, you will distill principles of the forex market. From the
jumbled mess of data, patterns will emerge.Effective trading strategies will become
apparent. Profits will still be elusive, but you will begin to learn true principles of trading. Write these principles down as you learn them. They will serve you well later.
3: Obey true principles
Once you discover a set of true principles, they’ll do you no good if you disregard
them. I’ve met forex traders that understood many, many true principles, but
they were still dumb as a bag of hammers and poor as church mice because they
failed to obey them.
Our culture isn’t much fascinated with obedience – if you’ve noticed, we’re all
about how free we are, how unrestricted our behavior can and should be, and so on.
This booklet isn’t a commentary on social issues, but I do want to advise you that
sticking to your principles may seem odd at first.
You might determine that although important, your principles are more
“guidelines” than hard and fast rules. Don’t fall for that! Don’t spend all your time
discovering true principles just so that you can violate them – and lose a lot of money in the process.

HOW TO DISCOVER TRUE PRINCIPLES

1. Find a system to test. Lots of traders use moving averages – when the
moving averages cross each other, they give off buy/sell signals. The
might read candlestick patterns, Elliot Waves, or Fibonacci Arcs. Find a
system that you like and test it. Get charting software that allows you to
backtest your results. AmiBroker and TradeStation both work well.
2. Play with the variables. If someone’s system says to use the 5 and 13
Exponential Moving Averages, then try the 4 and 9 instead. Then add in the
MACD or the CCI or the RSI and look for candlestick patterns. Backtest these
new variables. Are the new ones more profitable?
3. Keep notes of the results. Keeping notes in a trading journal or notebook is
essential. Are you recognizing any patterns (e.g., Fridays are bad days for
your strategy, or the 5 and 13 work well if you wait for a -.0004 MACD?
4. Draw preliminary conclusions. Once you’ve done your testing, write out the
principles that you’ve discovered. Then test the principles with a demo
account for at least 4 months -- did your system work? If so, set it in stone.

Why most people lose money in the forex market

A friend of mine volunteers on a regular basis to rid his
neighborhood of rodents and animal riff-raff: the woodchucks,
groundhogs, and possums that eat up gardens, attack family pets,
and so on. He sets a trap with ripe fruit or tuna fish. The animal
enters the trap for the food. If the animal can’t find its way out,
it is eventually shot and buried.

In the forex market, sometimes you get the fruit.
Sometimes you get trapped and shot. Why?


Possums are relatively easy to catch. They go for the fruit, they get caught, and then,when the trapper approaches the trap, the possum simply plays dead. It plays dead because that’s the best defense mechanism that it has.A woodchuck is tougher to trap. A big one might enter the trap, eat the fruit, and then rip the trap apart, exit, and wander off looking for more food. Or it might roll the trap along the ground, set it off, and then eat the fruit from the outside.There is a fundamental characteristic of unsuccessful forex traders: they trade forex because it’s exciting, cool, or for its sex appeal. The mystery behind the charts, the notion that profits (although elusive) do really exist, and that money can be made
quickly (but not predictably) all add up to create a romantic fantasy that is too
appealing to avoid. When they start to lose money, they leave their positions open,
close their eyes, and hope that the trap is miraculously opened so they can be free
again. This group – the Possums – is the largest block of forex traders.
There is also a fundamental characteristic of successful forex traders. They trade
forex because it makes them rich. They trade because they know how to do it. They
do not trade for fun. Many of them are unimpressed by their own success.Most of them never share their secrets with anyone. They take a methodical, almost boring, approach to forex trading.They painstakingly build systems that,although simple, may have taken years to perfect. In the end, their lives are actually quite boring – reduced to waiting for predictable signals that are obeyed without question.
This group – the Woodchucks – is the smaller of the two groups. The Possums
outnumber the Woodchucks by a ratio of at least 500:1. For every Woodchuck, there
are 500 Possums. Are you a Woodchuck or a Possum?
Possums don’t want to learn the intricacies of the forex market – the charts,
the signals, the nuts and bolts – because they are afraid that once known, all these
details will ruin the romanticism of the entire adventure. The mystery, the elusive
profits, the unknown, all contribute to create an excitement that would be lost if
too much were discovered. Searching for King Tut or the Titanic was big news.
Finding both was big news. When’s the last time you heard about either? Once found,
the mystery was solved and the public went on to other mysteries.
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Woodchucks want to learn the market.They want to know what signals are most
predictive. They want to know everything they can not only about spot trading, but about their broker, their broker’s practices,the governments involved in currency movement, interest rate changes, and the list goes on and on. Woodchucks want to know
as much as they can. It might destroy the mystery, but they’re not in the forex market for adventure. They’re in it for profit. There is a myth in American culture, and it’s spreading around the world: your job should be fun. You should enjoy what you do for a living. “Do what you love and the money will follow.” And so on. Perhaps
we’ve had too strong of a dose of this doctrine. The truth is that although we are
better off choosing a career that interests us,we’re going to be bored at work if we learn our job really well. The promise is simple: if you become a world-class forex trader, at some point your job will be ho-hum. Not all the time, but it’s not going to be an adventure every day of the week. Sorry.On the other hand, consider that
successful forex traders are some of the most highly paid professionals in the world. If you pay them by the hour, they make thousands and thousands of dollars
for every 60 minute period they spend working. Some of them only trade for a
half day. Some trade for 20 hours a day.
Their jobs aren’t always fun, but they do make a lot of money.
Why be a Woodchuck?
Simply put, if you want to survive, then you need to start thinking like a Woodchuck. If you want to make money, you need to
commit yourself to freeing yourself from the trap and getting the fruit. Or, more
importantly, finding a way to eat the fruit without ever entering the trap in the first place. And therein lies the secret. We’re all
going to get trapped from time to time, but we have a choice of whether to free
ourselves or lay down and let the trapper
shoot us.
I learned my lesson early in my career as a forex trader. Although I had spent four
months creating a trading strategy and system, I occasionally really, really wanted the fruit, so to speak. At those times, when I should have stayed on the sidelines of the market, I would enter trades based on rumor, speculation, or even well-informed opinions – instead of my tried and tested strategy. In other words, I would enter the trap and start eating the fruit, thinking that I could get out of the trap without setting it off.