The Most Often Textbook Failures Of Currency Traders And The Best Way To Evade Them
by Chris on February 15, 2010
Beginner currency traders often overlook the obvious: many before them have made serious mistakes. Making the same wrong decisions all over again simply does not make sense. What a serious forex trader should do is to learn from them and adjust his or her method accordingly.
Analyzing these assumptions and wrong steps will improve one's chances of succeeding in this profession. If you are a newbie, then the experience of others can only make you better. Always remember to evade these errors:
Wrong timing of Stops
While stops are absolutely necessary in currency trading, the wrong timing can crumble your whole system. Sure, you could be thinking of clogging your cash leak, but the key to doing that is the perfect timing: the transaction should still be leaning in your favor. Appropriate money management should be at play here. Risk/reward ratio should be optimal before placing a trade. Consider and research your alternatives.
Underestimating the risks of leverages
Okay, you might be thinking of a fast profit if you use a 300:1 leverage on a transaction. However, are you certain that profit will come in? Many people think of leverages as free poker chips where in fact, the risks are higher. It is all about making sure you have a good solid hand. Even then, seasoned traders are always careful only risk 2-3% of their trading capital on a trade. Evaluate your risks and rewards, do not be dazzled with the profit potential and the thrill of trading.
Daytrading
Some traders might think that daytrading holds no or fewer risks, which may be true to some extent. However, there is a reason why long term trading still holds: it gives you more time to wait out a position that will be in your favor, yielding more profits. Daytrading can work, but only to a select few.
Getting sucked in by "miracle" software
There are dozens of methods that claim you can beat the market and make massive profits just by using them. Some of them can help but a lot of them are fraud. The main thing to bear in mind is that there is no sole software out there that is foolproof. It's okay to get indicators and guidelines from a few, but it all rests in your acumen. Before risking your money on any such software, you better test it thoroughly.
The same thing goes for systems and strategy on paper. Even if you have back tested it, would the conditions you have used to test that be the same conditions that will happen in the near future?
Getting overwhelmed with emotions
Currency trading requires objectivity, cool thinking and the ability to make correct decisions. Be too afraid to risk, and you will not profit at all. Be too reckless and you will lose your shirt in no time. Here is a smart thing to do: read up on forex trading psychology. Watch yourself and do not work obsessively. Have a life.
Trusting your own judgement too much
Even if you are a very seasoned trader, sometimes your judgement about the market may be just wrong. Therefore, seek feedback and confirmation. The best thing you can do is to find a reliable forex signal provider. Forex signals are market forecasts and trading recommendations and are available online. If a signal from a professional service provider is in compliance with your own opinion, then you may have a very good risk/reward ratio opportunity at hand. But always make your own due diligence first, examine the past performance of the service provider, as only reliable forex signals will make you profit.
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