It is very important that forex traders approach the currency market with a spirit of positive expectancy. This positive attitude will help to prepare the mind to take full advantage of the opportunities that the market will present. Becoming a successful forex trader can be challenging but anyone can take a shortcut by figuring out what the losers are doing and make up their mind not to follow. The statistics show that only 10 percent of forex traders are successful, here are the reasons why the other 90 percent donât succeed:
- Trading without a plan or strategy. A good general will never go into battle without a plan, neither should anyone approach the forex market without a clear trading strategy.
- Trading against the trend. Even a miss-timed entry can become very profitable, if it is entered in the right direction. The reverse is also true; a seemingly sound technically entry can be disastrous if entered against the trend.
- Using a new strategy without first back-testing it. Many new and promising trading strategies, have been discounted after back testing has shown that they donât work. Consequently, it would be foolish not to back-test a new strategy to determine its success rate and to ascertain the market conditions under which itâs most reliable.
- Not visualizing the perfect trade setup. While having the right trading tools can help one identify more trading opportunities, if a trader canât visualize, what is for them, an ideal trade setup, then the market will stir him to trade every blip on the chart. For this reason, it is a good idea that the trader posts screen-shots of his preferred trade setup somewhere near his trading station. This will help him focus on trading the setups that have worked the best in the past.
- Not following a trading strategy. Much of what happens in the forex market is random but the trading strategy exists to help the trader select those moves that offer the best opportunity for making money while reducing the risk of loss. If a trading strategy is not followed it is useless, no matter how good it looks on paper.
- Trading to pay the rent. The psychological pressure of making a living from trading can cause a trader to do some pretty strange things, like trying to find trading opportunities where there is none. While many traders thrive under pressure, it is better to have the flexibility to sit and wait for good trading opportunities than to be forced to find opportunities where none exist.
- Trading without protection. To trade without a set exit strategy, such as a stop loss, is to give the market the opportunity to ruin an account. Stop losses may be abandoned if only a small percentage of the trading capital is used or leveraging is kept to a minimum. In this case, excellent money management becomes the downside protection.
- Adding to a bad trade. If a trade goes negative by a significant amount, the trader can assume that heâs wrong about the direction or timing of his entry. He shouldnât compound the problem by risking more money in anticipation of a turnaround. He should wait for any bad trade to clear up before going at the market again.
- Closing good trades and letting the bad ones linger. Assuming that trades are not entered and closed on a whim and good money management is followed, a forex trader is guaranteed success if he gets rid of those trades that are not going according to plan and hold on to the good ones.
- Entering un-diversified trades positions. The effect of entering a EUR/USD and an AUD/USD in the same direction, is to double the exposure to the USD. Researching the correlation between currency pairs is essential to any forex trading risk management strategy. The easiest way to avoid overexposing a trading account is to avoid trading, at the same time, any two pairs that have the same currency. This is a simple approach that is not perfect but itâs nonetheless a good start. A better approach is to fully research any correlation, between the pairs that are traded, to determine their risk profile.
- Failure to keep trading records. Every trader should keep a trade journal to document all that he does regarding his trading. Whether he felt sick or had an issue with his computer or entered trades according to the trading strategy should be recorded. Itâs also a good idea to record screenshots of the trading charts, as they were seen while entering trades. In the future when the trader asks, âwhat was I thinkingâ¦?â his records can answer.
- Failure to review trade records. Periodic reviews of trading records will highlight areas where improvements can be made. It is common for traders to make the same mistakes many times over but properly kept trades records will show up problem areas and should help the trader find ways to improve his trading.
- Closing a trade simply because it went negative. It should be expected that the majority of trades will be negative at some point, even by a few pips. However, many trades that start out badly eventually will make money. Closing every trade that goes negative is really counterproductive and ruinous.
- Not specializing in or limiting the number of pairs traded. It takes time to learn the nature of a single currency pair and to monitor its several time frames and technical indicators. One has to also be mindful of the diversification risk that trading multiple pairs can cause. Consequently, trading more than 3 pairs at once is not recommended.
- Using high leveraging. The higher the amount of leverage that is used the smaller the amount of pips the market can go against a trade position without causing a margin call. Profits can be huge when highly leveraged trades are used but a trader must remember that using high leverage will also magnify losses. For a more detailed discussing on leverage please see âLeveraging the Double Edged Sword of Currency Trading.â
A forex trader can get away with making a few mistakes here and there but to compound an error, by doing many things wrong, is the reason why 90% of traders fail. Successful trader or not, we all need to constantly improve our game plan, but we truly make progress when we learn from our mistakes and vow never to repeat them. Review the above-stated pointers often and make the necessary changes -- your trading will be better for it.