Handling the Flip Side of Forex Trading

Category: Forex Basics | Wednesday, June 16th, 2010

Estimates and reports claim that only 5% of traders end up with consistent profits. Why is that? Why do 95% people end up losing money? There is some objective reason why some traders make money and others lose it. Some people say luck plays a role, but I feel these are really gamblers, not traders, and so they talk about luck. Sooner or later, this luck runs out, leaving them with big holes in their pockets.

One possible reason is lack of Forex education. Some traders don’t invest in learning how the market works, why it behaves in certain ways, how to place high probability trades, and so on.

Don’t start with borrowed funds or take a loan and end up being in debt while learning to trade. Remember it is always better to have some money of your own to make money. Sometimes starting with a limited capital and big risk, such traders find themselves getting emotional with each swing of the market and jumping in and out and the worst times possible.

People starting out in Forex trading should trade with some small amount of capital. $1000 is a reasonable amount to start off with, even if you decide to trade in micro or mini lots. With a budget smaller than that a trader is actually setting himself up for potential disaster.

Part of being Forex trained before getting into trading is also about learning to manage risk. Risk management is key to survival. Your main focus while beginning should not be to make a profit. It should instead be to protect your initial capital. As your capital gets depleted, your ability to make a profit is lost. I have seen some of the most skilled traders get wiped out because of a poor risk management strategy. Risk management is about being alert about using stop losses and lot sizes based on your initial capital. And learning to identify a bad trade and get out of trade before it’s too late.

Greed also has a major role to play when people lose. The tendency to squeeze every last pip out of a move is a bad idea. Trying to grab every last pip before a currency pair turns can set a trader up to lose the profitable trade that they could be sitting on. As a trader you have to keep in mind that there is really no need to get that last pip. The next opportunity is just around the corner and countless of them are going to crop up every day.

Indecisive trading is another reason for traders to fail. They get into a trade then do not see market moving as they thought and so they back-track and that is when market moves…. It’s an often repeated story in the life of an indecisive trader. It will do a great deal of good to a trader to instead pick a direction and stick with it. All that switching back and forth will just make you lose little bits of your account at a time.

Another mistake traders commit is that they place a trade on a pair, and as it keeps going in the wrong direction, they keep adding to their position as they feel that the markets are about to take a U turn. When traders trade this on these lines they end up with suffering losses and negative trades. It’s better to trade with the trend. As a trader if you think the trend is going to change and you want to take a trade in the new possible direction, you’d do well if you wait for a confirmed trend change.

As traders we all go wrong now and then. The smart thing is to accept your follies work on them and make sure they do not happen again. But some traders are rigid with a terribly low self score. As a trader, sometimes we have to learn to accept our wrong doings and move on, instead of not budging from the idea of being right and ending up with a blown account. Learn to admit that you made a mistake by either entering the trade for the wrong reasons, or at the wrong time or whatever and that it didn’t work out the way you planned it. Believe me it will work. And work better than anything else. It’s okay to have lost a few trades as long as the lessons are not lost on us.

Besides the above mentioned situation, the trader should also avoid over-trading or using too much leverage or picking the tops and bottoms. Let’s discuss each one of them in-depth.

One of the most common mistakes that Forex traders are seen to make is using too much leverage. Especially if they have a small account balance, and want to get into big trades. Under such a condition if the market moves (which it mostly does) against their position even by just a small amount, it can result in considerable losses. It has been generally observed that a new trader is very likely to press the panic button, get emotional and nervous and close the trade for a sizable loss before its time.

Then there is the Over-Trading aspect of trading. Over trading situation crops up when traders try to look for trading signals that are not really there. It happens with the new traders all too often, because they just want to trade. No matter what is the real situation is. They want to do something. The result is generally a poorly executed trade that results in an eventual loss. Over trading can also arise when traders make too many trades all at the same time using more margin than their initial invested capital can bear.

Then finally there is picking the tops and bottoms.

The crux of the matter is as traders we should remember our trade wisdom. We should know that there is a panic button and where it is. We should practice detachment and learn to look at the big picture. Above all traders should be all for using a proper trading system and learning to keep stress in stride.

Join us at Forexoma Live Market Analysis program and learn to become a professional and profitable trader: Click Here to learn more.

Further Reading:

1 Comment:
post a comment

Comment by Chriis

2010-06-17 23:38:28

Again another great article. We have all been there and the hazzards are really high-lighed.

Reply to this comment

© 2010 vTrades Inc.
Forexoma.com website is maintained by vTrades Inc. which is a company owned and operated by Vahid.
Read the Disclaimer and Risk Warning before using www.forexoma.com information, products and services.
You may post a link to the articles contained on this site, however, you are not allowed to post full articles from www.forexoma.com on any other website or blog. Violators will be prosecuted.