The forex market is the largest and most accessible financial market in the world, but although there are many forex investors, few are really successful. Many traders fail for the same reasons that investors fail other asset classes. In the same way, the extreme amount of leverage – the use of borrowed capital to increase the potential return on investments – provided by the market, and the relatively small amounts of margin required when trading currencies, deny operators the opportunity to commit numerous low-risk errors. The specific factors of the commercial currencies may cause some operators to expect higher returns on investment than the market can offer consistently, or to take more risks than they would when they operate in other markets.
The global Forex market has more than 4 trillion dollars in daily trade volume, making it the largest financial market in the world. The popularity of Forex attracts traders of all levels, from novices who are learning about financial markets to the most professional and experienced veterans. Because it is so easy to make Forex Trading – with all-day sessions, access to significant leverage and relatively low costs – it is also very easy to lose when performing Forex Trading.
Causes why most traders fail
Certain errors can prevent operators from achieving their investment objectives. The following are some of the most common pitfalls that can affect currency traders:
The biggest mistake a trader can make is to let emotions control business decisions. Becoming a successful forex trader means achieving some big profits by suffering many minor losses. Experiencing many consecutive losses is difficult to handle emotionally and can test the confidence and patience of a trader. Trying to beat the market or give in to fear and greed can make winners fall short and losing trades get out of control. The conquering emotion is achieved by trading within a well-built business plan that helps maintain commercial discipline.
Trade without a plan
Whether trading in forex or in any other asset class, the first step to success is to create and follow a trading plan. Do not plan to fail is an adage that applies to any type of trade. The successful operator works within a documented plan that includes risk management rules and specifies the expected return on investment (ROI). Adhering to a strategic business plan can help investors avoid some of the most common commercial pitfalls.
Learning through your own mistakes
Undoubtedly, the most expensive way to learn to operate in the currency markets is through trial and error. Discovering the right commercial strategies by learning from your mistakes is not an efficient way to trade in any market. Given that the foreign exchange market is considerably different from the stock market, the probability that new traders suffer losses that paralyzed their account is high. The most efficient way to become a successful forex trader is to access the experience of successful traders. This can be done through a formal business education or through a mentoring relationship with someone who has a remarkable track record. One of the best ways to hone your skills is to follow a successful trader, especially when you add hours of practice on your own.
Have unrealistic expectations
No matter what they say, currency trading is not a plan to get rich quickly. Becoming competent enough to accumulate profits is not a sprint, it’s a marathon. Success requires recurring efforts to master the strategies involved. Swinging fences or trying to force the market to generate abnormal returns usually causes traders to risk more capital than they justify the potential gains. The previous commercial discipline of betting on unrealistic gains means abandoning the risk and money management rules that are designed to avoid market remorse.
Poor risk and money management
Traders should focus as much on risk management as they do on strategy development. Some naive people trade unprotected and refrain from avoiding losses and similar tactics with the fear of being stopped out too soon. At any given time, successful traders know exactly how much of their investment capital is at risk and are satisfied that it is appropriate in relation to the projected benefits.
As the commercial account grows larger, the preservation of capital becomes more important. Diversification between trading strategies and currency pairs, along with the appropriate position size, can isolate a trading account from non-correctable losses. Top traders will segment their accounts in separate risk/return tranches, where only a small part of their account is used for high-risk operations and the balance is negotiated conservatively. This type of asset allocation strategy will also ensure that low probability events and interrupted transactions can not devastate one’s trading account.
Take the time to find a reputable broker
The Forex industry has much less supervision than other markets, so it is possible to end up doing business with a less reputable Forex Broker. Due to concerns about the security of deposits and the general integrity of a broker, Forex traders should only open an account with a member company of the National Futures Association (NFA) and that is registered with the Trade Commission of Futures of US Merchandise Traders must also investigate the offers of each Broker’s account, including the amounts of leverage, commissions and spreads, initial deposits and withdrawal and financing policies of the account.
Keep the chart clean
Once a Forex trader has opened an account, it can be tempting to take advantage of all the technical analysis tools offered by the trading platform. While many of these indicators are well adapted to the currency markets, it is important to remember to keep the analysis techniques to a minimum so that they are effective. The use of the same types of indicators -such as two volatility indicators or two oscillators, for example- can be redundant and can even give opposite signals. This should be avoided. Any analysis technique that is not used regularly to improve business performance should be removed from the chart. In addition to the tools that apply to the graph, the overall appearance of the workspace should be considered.
Use of reasonable leverage
Forex trading is unique in the amount of leverage that is offered to its participants. Used correctly, leverage provides growth potential; However, leverage can easily amplify losses. For example, if a merchant has $ 10,000 in a Forex account, a position of $ 100,000 (a standard lot) would use 10: 1 leverage. While the trader could open a much larger position if he or she were to maximize the leverage, a smaller position will limit the risk
Understand the tax implications and treatment
It is important to understand the tax implications and the treatment of Forex trading activity to be prepared at the time of tax. Consulting with a qualified accountant or a tax specialist can help avoid surprises at the time of paying taxes and can help people take advantage of various tax laws.
Treat Trading as a Business
It is essential to treat Forex trading as a business and remember that individual wins and losses do not matter in the short term. As such, traders should try to avoid becoming overly emotional, either with wins or losses and treat each as just another day in the office. As with any business, Forex trading incurs expenses, losses, taxes, risks, and uncertainty. Also, just like small businesses rarely succeed overnight, so it is also for most Forex traders. Planning, setting realistic goals, staying organized and learning from successes and failures will help ensure a long and successful career as a Forex trader.