Thousands of forex traders around the world access the globe’s largest financial market each and every day, but despite the multitude of forex investors, very few actually achieve long-standing success. Factors that are unique to currency trading cause many traders to believe they can consistently experience greater profit returns than the market can truly support, or take substantially more risks than they would if they were trading other markets. These consistent mistakes keep most traders from achieving their financial goals. Here are some of the most common forex trading pitfalls and how to avoid them:
Not Maintaining Trading Discipline:
Becoming a successful forex trader means accepting the possibility of taking many small losses while achieving the occasional big win. This can take an emotional toll on any trader and is a process that can test their confidence and patience. Giving in to fear and greed only leads to market losses, as this is when most traders cut their winners short and let losing trades run entirely too long. Conquering emotions and maintaining trading discipline go hand in hand and the Trading Platform that you work with can ensure that you are consistent with your trading habits. A successful forex trader must maintain trading discipline and never give in to their emotions, which is often easier said than done.
Not Utilizing a Trading Plan:
When tackling the complex forex market, the first step in becoming a successful trader is developing and implementing a trading plan. Failing to plan is essentially welcoming failure. Not prescribing to a strategic plan that involves specific rules for risk management and specifies the ROI is a common pitfall suffered by many forex traders.
Not Adapting to the Market:
A trading plan should be developed each day prior to the market opening. Large, unexpected losses can be greatly diminished by analyzing various trading scenarios and planning specific moves according to the market conditions. There is no such thing as a foolproof system, as the market seems to constantly change, but the most successful traders are able to adapt to the market and change their trading plans accordingly.
Relying on Trial and Error:
Learning the currency markets through trial and error is an expensive route that is unfortunately taken by a majority of novice traders. Given the nature of the forex market, there is a high probability that new traders will not be able to recover from crippling losses. All successful traders have recognized that having access to experienced traders and leveraging their experience is necessary for the success of inexperienced traders. Thankfully, there are experienced traders and other valuable resources available for novice traders to shadow and learn from. This is one of the best ways for every trader to hone their skills and improve their profits.
Having Unrealistic Expectations:
Many novice traders jump into the forex market with unrealistic expectations of hitting it big overnight. However, becoming a successful trader is not a sprint. In fact, it is more like a marathon in which traders learn something new with each passing mile. Taking questionable trades or trying to squeeze abnormally high-profit returns from the market is a recipe for failure. This shows a lack of trading discipline, and completely ignores sound and prudent risk management strategies.
Improper Risk and Money Management:
Risk management should be at the forefront of any trading strategy. Some naïve traders do not use stop losses and other effective risk management tactics due to the fear of getting stopped out too early. In addition to always knowing the amount of capital at risk and the projected profits with each trade, successful traders always use stop losses and other risk management strategies. Generally, the greater a trading account becomes, the more important it is to diversify currency pairs and trading strategies, adhere to proper position sizing, and help insulate the trading account from losses. Some savvy investors actually segment their trading accounts into specific risk/return categories, which they use to target trades across a wide spectrum of risk percentages. This helps to diversify a person’s trading and ensure that they gain maximum profits from minimal exposure.
Proper Leverage Management
Although traders in every market can become afflicted by such mistakes, the huge leverage of the forex market presents traders with the added risk that must be properly managed. When properly used, leverage can allow traders to maximize the profit returns of their trades, but using too much leverage can result in serious losses, which are inevitable in the world of forex investing. Unlike any other market, forex traders are able to leverage their trading accounts to a massive 400:1 ratio, which can lead to huge profits for some or unsustainable losses for others. Using the available leverage is often too tempting for some traders, who take on the huge financial risk afforded by the market.
In most cases, traders should try to manage the amount of leverage they take on in order to limit any significant losses. Most successful traders utilize a leverage amount of 2:1. Using this ratio, a trader with an account of $50,000 would trade one standard lot of $100,000. Every broker has its own leverage limits, and the margin for each trade is determined by the leverage allotted by a broker. Margin is essentially a deposit that is made by a trader in order to insulate the risk taken from the broker when granting a trader a particular amount of leverage. A trader that uses too much margin becomes subject to margin calls, which requires that they deposit more funds to cover a substantial loss.
The leading cause for this is the undercapitalization of a trader’s account in relation to the size of the trades that they make. Greed or the ability to attain lucrative profits with little capital often coerces traders to take on too much financial risk. For instance, at a common 100:1 leverage, it only takes a minuscule 1 percent price change to result in a 100 percent loss of capital. Not only does this amount of leverage magnify potential losses, but the transaction cost in relation to the value of an account also increases. For example, using