The failure rate for many players in the financial services industry – financial advisors and forex traders, for instance – is high. How do you distinguish the women from the girls or the men from the boys?
The Forex market’s accessibility and size is both its appeal and its curse. With easy access to the Forex market, there are lots of investors, but many fail or, at least, don’t reach their full potential. Many traders often think that given how accessible and large the market is and the fact they don’t need to meet any formal educational requirements (like you do if you’re a financial advisor), the market must be easy to navigate.
Alas, if it only were that easy.
One area where some traders run into trouble is leverage. The use of borrowed capital to increase investment returns (that is, leverage) combined with the relatively small levels needed for margin purchases in trading, denies traders the opportunity to make mistakes, even if they are low-risk mistakes. In some situations, traders expect excessive returns that are unrealistic. They also take on excessive risk using leverage than they would in other markets.
Pitfalls In Forex Trading
Some of the most common errors forex traders make are:
If emotions are driving a trader’s decision-making, watch out. To be successful in forex typically means having a handful of big wins and experiencing many smaller losses. Granted, anyone who feels the brunt of consistent losses will be challenged emotionally. Such events are a testament to the trader’s skills and attitude. Poor decisions include trying to beat the market, and trading based on fear and greed.
Engaging in undisciplined decision-making in these cases can result selling winning purchases before they reach their potential or, by contrast, accepting greater and greater losses to avoid making the decision to cut bait. No one can suppress or conquer emotions; what we can do is manage them. From a forex trading perspective, trading discipline is upheld with a good plan.
Poor Planning (Or No Planning)
Regardless of what a trader is trading (i.e. forex or another asset class), establishing and following a plan is the necessity. Traders who succeed write a plan and stick to it. The plan includes determining a risk tolerance level, establishing rules and specifies an expected ROI.
A Version to Adapting In a Changing Market
Speaking of planning, every trade should be mapped out at the start of the trading day. Completing a scenario analysis, planning moves and countermoves for every possible situation can reduce the chance of massive losses. Adapting to a changing market creates new opportunities and challenges for a trader’s method. Traders who are successful adapt to a changing market re-evaluate their strategies and methods. By employing a method that adapts to the circumstances, traders are innovators just as businesses and people in general innovate in a changing marketplace.
Learning By Repeatedly Trying And Failing
Without a plan, many traders attempt to trade by randomly trying things and failing in the hopes that they’ll learn how to succeed. This is learning through trial and error – and it is potentially financially crippling. Strategy in business, politics and warfare is important; it’s also important in trading forex. Repeatedly trying and failing in an effort to learn what is a winning formula is brutally inefficient and financially costly.
The differences between forex and equity markets are stark, which is why new traders think they can play the forex markets the same way as equities. Markets encourage efficiency in the creation of wealth globally. Efficiency should be top of mind for a new trader; efficiency, that is, in learning to become a successful currency trader. A new trader can learn from successful traders – either formally in an educational program informally with a mentor.
Forex trading is not a method of quickly earning a massive income. Knowing what to do, from a trader’s perspective, includes the understanding that forex trading is a long-term undertaking. Setting realistic financial goals is a far better strategy for success than attempting to force the market to produce ridiculous returns. Throwing discipline out the window to roll the dice on all-or-nothing bets typically results in problems for the trader.
Not Putting Enough Thought Intorisk and Money Management
Risk management is equally important to strategy. Traders who are over-confident and possibly naïve think they can trade without risk management and stop losses. A good trader knows at all times the precise amount of investment capital that is at risk and accepts the risk in relation to the potential benefit. With an account becoming larger, preserving capital is vital.
Diversification (without over-diversification) in strategy can mitigate potential losses. Traders who excel in their activities will apportion a small segment of their account for high-risk trades; the rest is traded with more restraint. Such an approach lessens the chance that the unexpected doesn’t wipe out someone’s portfolio.