Even if the exact percentage is debatable, the fact is that most Forex traders lose money. Still, Forex continues to be by far the biggest market in the world in terms of trading volume. Why is that? Well, the reason, of course, is the minority of traders who do succeed to profit. And the other traders hope to join their party.
So how do they do it? What is the entry ticket to the successful traders’ club? If we had a simple answer to that question, we’d probably be thinking of ways to spend our money right now, and not writing about ways to earn it. We can, however, let you in on what NOT to do if you plan on becoming a successful Forex trader. Read on and find out about the most common mistakes Forex traders are making.
Making Emotional Decisions
Many traders, especially newbies, don’t make decisions based on solid information, in-depth research and proven methods. They make them based on their emotions and a desire to buy an island in the Caribbean after a few months of trading. If something sounds improbable, if not impossible, it’s usually because it is. Always remember that trading takes skill and experience and that skill and experience take time. Do your research, know your facts and make decisions based on them. You will not eliminate the risk, but it will be decreased substantially.
Hate to break it to you, but you are most likely not the smartest guy in the room. And admitting it will be rewarded. Well, it would actually be more honest to say that not admitting it will be punished, but that just sounds harsh. Either way, overestimating your trading skills and knowledge will probably result in money loss. Therefore, don’t be too aggressive when it comes to trading and don’t go too hard against trends. There are situations when this kind of behavior is a good idea, but you should most certainly not make a habit of it.
Investing Too Little or Too Much
Don’t be too conservative when it comes to deciding on your start-up capital. If your initial investment is too low (think under $1,000), you will probably go for very high leverage trading. That will, in turn, make you too sensitive to even the slightest changes on the market.
On the other hand, your investment going sour should not be able to drastically influence your current quality of life. If losing the money would greatly affect the way you live now, the risk is simply too big.
Both too low and too high investments lead to unstable decisions and actions. And this is not what we are aiming for.
Failing to Manage Risk
This is a big one. Using good risk management techniques can really make a world of difference when it comes to trading. Here we will go over two major aspects.
- Stick with trades that offer at least 1:2 risk to reward ratio — in other words, every pip of risk you are taking should be covered by at least two pips of potential reward. That way you are covered even if things go south.
- Do not risk more than 5% of your account balance — this will make sure that even when you don’t get it right, and there will be times like that, you still have the 95% of your account balance at your disposal.
Buying a Forex Trading System
You’ve probably encountered ads or recommendations to buy a magical Forex trading system. They supposedly do all the work for you and let you just sit and collect the fruits. These are just as they sound — too good to be true. As with other things in life, there is no magical recipe. Don’t buy into the Forex trading system hype. Invest in improving your trading skills and knowledge, and you are on a good path to becoming a profitable trader.