Trading psychology plays an essential role in the success of a trader. Above all, a trader is a speculator that focuses on finding the best trading opportunity in a day/week/month.
However, that’s not the easiest task for them all. Coping with the ups and downs, the swing of the market is the most terrible challenge.
Can you stand a swing lower on your bullish position? Or, would you resist at a correction on your overall trend?
To cope with the realities of the Forex market, one must:
- Understand trading is a series of winning and losing trades
- Winning trades must outpace the losing ones in both size and number
- Understand the biggest enemy to sustain profitability is the trader himself/herself
All three points listed above require a thorough understanding of a trading account, what makes it and how to use its features.
Interpreting a Trading Account
A trading account has three important elements:
- Free Margin
Everything else comes secondary. Upon opening an account, the trader must fund it.
The amount goes directly in the Balance field. At that moment, the same amount will appear on the Equity as well, while the Free Margin will show the same number.
In other words, let’s assume a trader funds a trading account with a thousand dollars. The same amount appears in all three fields: Balance, Equity, and the Free Margin.
Things will change the moment the trader opens a position. From that moment, the Balance shows the less valuable information to the Forex trader, while the Equity shows the real value of the trading account.
After the trade opens a position, the Balance remains unchanged. You’ll still see the thousand dollars until the position hits the take profit, stop loss, or the trader simply closes it earlier.
But the actual state of the account appears on the Equity tab. It is there when you’ll see in real time, how the open trades perform.
As for the Free Margin, brokers require a margin (kind of a collateral) for the open positions. Depending on the leverage the trading account has the margin blocked in a trade differs. The higher the leverage, the smaller the amount needed as margin.
On the other hand, the more significant the volume traded, the bigger the amount needed as margin. If a trade hits the trade profit or stop loss, or the trader chooses to close it, the blocked margin will become available for a new trade.
The secret is to find an equilibrium between all three elements, especially between the Equity, open trades, and the Free Margin.
All the aspects covered in this article contain basic notions of reading a trading account. Yet, few traders master them.
Greed and fear govern us all. One fears to lose even a dollar, panics, and close a position. In doing that, he/she won’t let the profits run. The next time he/she’s willing to do that, the market will go against the initial position.
Greed makes traders keeping a position when it is unnecessary. While the Forex market does move fast, it won’t run a thousand pips in a trading day. I mean, it can move, but rarely that’s the case.
All in all, traders will do best if they’ll come to the market having realistic expectations. Moreover, they’ll learn to better stand the market swings, from just understanding the basics of a trading account.