The forex market is vast and easy to access. There are a lot of forex traders, but very few ever post significant profits. The forex market has all the same pitfalls of the regular market with some added risks. There are extreme amounts of leverage provided and small amounts of margin required which creates a situation where very high losses can occur.
Based on some factors investors may even expect more return than the market can consistently offer while taking more risk than they would in other markets. Here are some of the common trading mistakes that most forex traders make:
Typical of any investment market, letting emotions get the better of them is a common mistake of beginner and veteran traders alike. To become successful in forex trading you must have a few big wins that out earn many small losses. This can be very stressful for traders not used to consistently losing in order to make a large gain. Inexperienced forex traders are prone to cutting off winning trades early and letting losers go far too long. For these reasons a well defined trading plan is essential to forex trading.
Having a plan is even more important in forex than other markets. Creating and following a trading plan is essential to success. A trader needs a plan that accounts for failure as much as success with well defined risk management rules. This type of plan can help you evade common pitfalls and emotional hazards that could turn a good trade sour. A winning trader would never sell themselves short by entering a trade without a detailed plan.
You should have a plan for as many scenarios as possible. Before the markets even open, be ready for every trade you are going to make. Analyze every situation and plan every move and counter move for every eventuality. This will significantly reduce the chance of taking heavy losses. Then be aware of how the market is changing. New opportunities and new risks will appear and you must be ready to alter your strategy in order to keep up.
A winning trader adapts his strategy to the market and does not try to use an old strategy on a new and changing situation. You must plan for any event even ones that are low probability. Expect the unexpected. Through a process of education and adaptation, a good trader stays ahead of the trend instead of reacting to it. Always be on the lookout for new and creative ways to profit.
Learn everything before you start risking real money. Expensive classes and training sessions are nothing compared to how much you can lose in a bad trade. Learning through personal experience is not an efficient way to do anything, especially when your mistakes could cost you dearly.
Forex markets are high risk markets where new traders are much more likely to sustain account crippling losses. So go to those training sessions, read everything you can and if you can shadow a winning trader and learn from their mistakes without risking your own funds.
There is no such thing as a get-rich-quick scheme, not even in forex trading. Becoming good enough at something as complex and time consuming as forex trading is a massive undertaking. So as a new trader even with all the training you can find, expect losses. And, expect losses in your trading plan.
Do not try to go all in. Instead play it safe remember that small losses are good losses. If you can minimize your losses it will be much easier to out earn them on your winning trades. Forex is as much about minimizing loss as it is about maximizing profit. Stay disciplined and stick to your trade plan.
Developing a strategy to win trades is nice, but developing a strategy that reduces losses is even better. Remember, reducing losses is often more important than maximizing profits. You would be naïve to think that out of all the forex traders you are the only one who does not need stop losses or other similar tactics to protect you from loss.
At any point during a trade a good trader will know exactly how much they have at risk vs. how much reward is possible. They are always ready for the markets to turn against them and have plans in place to prevent losses and protect their gains.
If you want to trade in high risk scenarios, make sure you section off a portion of your funds to high risk trades while trading most of it more conservatively. By allocating assets in this manner you will manage risk and protect yourself from large losses. Remember, only a few bad trades can devastate your account if you are not careful.
Another problem with leverage is that it increases transaction costs. New forex traders often do not expect this and are surprised to see how far behind they start when a transaction cost sets them back. Before the trade even starts a high transaction cost could make a small gain actually be a loss to the trader's account.
All these factors together make the forex market a disaster waiting to happen. Just remember that leverage is useful but dangerous. A good rule of thumb is to never leverage more than 2% of your total funds. With this rule and a strong trading plan you can use leverage to your advantage and avoid the pitfalls of the inexperienced.
Forex trading is like any market and has many of the same problems that plague investors. Avoid these disasters in waiting by learning every aspect of the market. Build a relationship with other successful forex traders and learn from their experiences. Risk and money management is even more important in this market than others and do not expect return on investments to come quickly or easily.
Finally, when managing an account be sure to sufficiently capitalize, use appropriate trade sizing and limit financial risk by leverage intelligently. With some discipline and patience success in forex can be yours.