Forex traders are prone to many of the same mistakes that novices make in the stock market. That proverbial rush of blood to the head can make you act irrationally, investing too heavily in an individual trade by risking your bankroll on imperfect trading information. In fact, it doesn’t much matter what type of investment you are making – the risk factors tend to cut a swathe across the spectrum. The common denominator in all risky forex trading activity is the absence of a trading strategy.
It goes without saying that forex trading is inherently volatile. As the world’s most actively traded market with volumes in excess of $6 trillion per day, big profits and big losses are an all too common occurrence. Currency fluctuations of fractions of a penny can have outsized impacts on volume orders. It is against this backdrop that we explore the possibilities of forex trading pitfalls. Forex trading is not unlike other scenarios with less than perfect information at the ready. It is not always advisable to participate in a trade, simply for the sake of trading. Sometimes, it’s better to wait for the right trade rather than to throw your weight behind the wrong trade.
Most traders at least try to familiarize themselves with generally accepted trading strategies before tackling the forex market. The absence of a strategy is a virtual assurance of failure. Since currency prices fluctuate every second of the day, it makes sense to implement a workable set of solutions designed to protect your bankroll, maximize profitability, and minimize losses. These safeguards are readily available to forex traders. For starters, it is strongly recommended to use stop loss orders in FX trading activity. The benefit of such measures is immediately apparent when traders are trying to maintain profitability, while guarding against downside risks.
Educated Traders are Successful Traders
Perhaps, the most useful advice to avoid failure in the forex markets is the following: acquire a sound education in forex trading.
This is no mean feat, since the multi-dimensional approach to trading currency pairs is overwhelming and complex. For example, many novices wrongly assume that the top and bottom parts of the thick body a candlestick indicate the high and low price points during that session of trading. In fact, this is only partially true since the opening price and the closing price say nothing about what happened in between those two ends. The candlestick wicks indicate how far up or down the price moved during the trading cycle. This is more important to an experienced forex trader than the opening and closing prices alone. One can instantly enjoy all of the benefits of forex trading with providers like Plus500, since this broker offers free demo accounts, advanced trading and charting tools, and the option to trade forex CFDs.
A myriad of factors can influence currency price movements in the forex arena. These include fiscal and monetary policy, geopolitical considerations, breaking news, and other economic indicators. By understanding how each of these components impacts on the currency markets, a high degree of accuracy can be enjoyed in trading activity. The oft-touted expression, ‘The trend is your friend’ holds water in the forex market. Trends can be spotted easily, thanks to powerful technical indicators such as bar charts, and more importantly candlestick patterns with bearish (red candlesticks) and bullish (green candlesticks) movements. When you spot a trend, act on it. If a forex pair is trending bearish, get out and cut your losses rather than wait for the trend to continue and erode your profits. Likewise, if you notice a hammer and a bullish trend, you can expect profitability to increase, but again time it right so you exit before the market reversal.
What You Should Not Do as A New Forex Trader
- Don’t over trade at any time – leveraged trades have strong downside risks and you can lose the proverbial shirt off your back. On this topic, you will want to implement stop loss/take profit orders on all forex trading activity. This is just sound financial management that will serve you well in FX trading, and the stock market.
- Don’t pay for a trading program that guarantees profits – as a forex trader, you may be tempted to shelve out big dollar for a guaranteed trading program. No such thing exists. Save your money and invest in a forex education instead.
- Don’t trade against the trend – anything can happen in forex – we all know that. Most short-term trading activity is totally random, and determined by a cornucopia of potentially unrelated factors. There is no real trend to speak of over the short-term (seconds, minutes or hours). Those who know always trade the trend, but only until it bends and then it’s no longer your friend.
- Don’t trade on tilt – if you are on tilt, it indicates that you’re trading with your emotions, not your head. This is a dangerous way to play the forex markets. Every decision that involves real money trading activity must be carefully mapped out to ensure the best possible chances of success. You may think it best to trade the news, but hold your horses. The news has already happened, and you can expect that any potential price movements that are likely to result because of the news have already been factored into the cross rates of the currency pairs in question. Don’t act on old news, thinking that it will move the needle on forex trades.
- Don’t repeat the same mistakes – it was Einstein who said you can’t do the same thing over and over again and expect a different outcome. This holds true in Forex trading too. If you keep repeating mistakes without learning from them, you cannot possibly hope to have a different outcome.
Disciplined traders tend to outperform the others every time. It takes a special kind of person – one who is eager to learn, cautious yet clearly able to take risks, to be a success at forex trading. You can’t possibly hope to make an omelet without breaking some eggs – that’s simply what needs to be done in expectation of bigger profits. Trading discipline works wonders in this regard. Anyone who trades without a plan is invariably planning to fail. The forex markets are a literal hive of activity with traders of every stripe taking part. It’s best to keep your expectations in check, with an eye to learning and understanding everything there is to know about the currency markets.