You might think that trading forex is relatively simple. You buy a currency at a certain price and hope to sell it at a profit. The truth, however, is that the pool of successful forex traders is startlingly small, despite how deceptively easy forex trading looks – or perhaps because of it. If you know why other traders are falling short, you can avoid the perils. Here’s what to avoid if you don’t want to fall on your forex trader sword.
Trading without a strategy
The saying that “failing to plan is planning to fail” is true in every discipline, but especially the fickle, free-wheeling world of forex buying and selling. You must know how much you are willing to risk and when, and what kind of profit taking you are seeking. Once you’ve set these parameters in place, it will stop you from attempting a trade just because it looks good in the moment, despite it veering wildly outside your strategy circle. You may think “just once”, but then you get into a rabbit hole and have to attempt the next unfamiliar move to dig your way out. That is not a strategy; it’s a gamble.
Not being market responsive
Closely related to the previous point is failing to read markets well – either because you don’t understand them properly or are too lazy to pay them enough attention – and to come undone as a result. No set of forex trading tips will ever include a pointer to the effect that you can divorce your strategy from an intimate understanding of the market, as the two are very closely related when it comes to forex. You need to remain agile and plan for as many unexpected market twists as possible so you sail with the wind even in adverse conditions.
Using a trial-and-error approach
You cannot afford to learn from your mistakes in forex trading, at least not consistently. Given the leverage involved, mistakes are costly and are best avoided. The only time you might want to go the trial-and-error route is in a demo situation where you’re simulating profits and losses, not making real trades. The best way to garner experience and minimize mistakes is to shadow an experienced trader or ask someone with a good track record to guide you, and then be open to their direction.
A lack of discipline
Greed, fear and impatience are all emotions, and you cannot be ruled by them; no successful trader will give in to them. Not only must you detach yourself emotionally, but you must become mentally resilient in the face of successive losses.
Temper your expectations. Currency trading is not a get-rich-quick scheme, no matter how many stories you hear of other traders who hit a home run. Going after unwinnable profits will only make you risk more capital than you can afford. In keeping your eyes on the prize, don’t lose sight of the risk and money management rules that exist for a good reason: to prevent you from losing it all.
Putting a little money down and raking in a massive profit is everyone’s dream, but the spread-betting and leverage involved in forex trading means that just as you could win in massive increments, you could lose in massive multiples, too. To make matters worse, leveraging means that even the smallest market change has an amplified effect. For example, an average 100:1 leverage means a 100% loss could result from a small change, such as just -1% in price.
Forex and CFD trading often lure in the big hitters, but in working up your swing, you could hit a whole lot of air and miss the ball completely. It is almost a given that you will take longer than you did to master stock trading, but it’s better to be safe than very, very sorry. If you catch yourself falling into any of these pitfalls, take corrective action and never repeat the pattern.