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THE 8 MOST DANGEROUS MISTAKES OF FOREX
THE 8 MOST DANGEROUS MISTAKES OF FOREX
(AND HOW TO AVOID THEM)
With my little years in FX Trading, I sat down one day to cross check the causes of my SUCCESSES & FAILURES. The personal determination to reflect on this was driven by my desires to improve on my performance in the future. I now ask the Question “what makes a good Investor?” pondering on that question I discovered that the 8 most dangerous mistakes of FOREX that I am about to write on are what they totally avoided in the course of their trading experience. I discovered that their no.1 ingredient is PATIENCE. Often, beginners to the game always hope for annual returns in hundreds and thousands of percents and then you will see many snake-oil sales men that are willing to encourage them with impossible promises. Success in FOREX TRADING requires a certain amount of psychological devotion, and a well long-term outlook.
Now let’s take a look at the 8 most dangerous mistakes of forex.
Traders of all markets and levels tend to fall victim to impatience when it comes to expectations on returns. An attitude that exists among newbies. The notion that success is a given, and that it must appear quickly and without much effort is nothing but a lie.
Success in investing is measured in years and not in weeks or months as some has been made to believe. Any successful trader will tell you that investment in the market is a long term proposition.
Names like Soros and Buffet are often mentioned when it comes to success in the investment world, but their seeming overnight success was in fact not overnight at all, far from it, but it was the result of years and years of steady, compounded returns.
Let us ask ourselves the following questions?
1. Are my expectations realistic?
2. What are my Long-Term financial goals?
If those questions have been settled (i.e. has a realistic expectation and having/ planning a long term financial goal) then 90% of the problem of impatience has been settled.
For a more practical challenge of impatience, namely impatience with a particular trade, CONFIDENCE is the key. How does someone gain CONFIDENCE? It is simply by practice. PRACTICE, PRACTICE AND PRACTICE. This is when the issue of PERSEVERANCE comes in, because during practice, inevitably there will be mistakes and mistakes are part of the learning process in life. So you need to PERSEVERE during the practice. Remember; no stain no learning. So exercise enough PATIENCE and you will see your dream coming true in the world of investments with a Long-Term Financial Goal.
NOTE: Did you know how much $1,000 with a return of just 3% per month compounded over the next seven years will be worth?
2. OVER RELIANCE ON EXTERNAL SOURCE
This is another problem of traders and investors, because investing successfully is a difficult task, so the bias that every trade or investment that they make must be right makes the investor or trader begin the search for the HOLY GRAIL.
They (traders and investors) now begin to fall prey to those predators that gives mouth watering advice/ advert. I don’t know many people who have made money consistently following other peoples advice- be it the advice of Brokers or Investment advisors. Generally, most people either lose all their capital or get discouraged and get out of the picture.
When others teach you how to approach the markets, chances are they only superficially teach you what they actually do. It is not that they mean to deceive you. The only problem is that they usually find it difficult to transfer that information to someone else. But what I believ is that if at least two people can do something well, then that skill can be taught to other people with that person developing and improving on the skill.
To unlock the “HOLY GRAIL” you need to appreciate your own ability to think and be unique. People make money by finding themselves, achieving their potential, and getting in tune with themselves so that they can follow the flow of the market. Getting in tune with yourself means finding a balance between your profits and losses and still remain calm.
So don’t sell yourself short! Practice, practice and practice in a demo account till you gain the confidence in yourself(showing a consistent pattern of profit) and not on an external source for trade executions.
If you want any advice , please seek advice on skills and not what to do in the markets.
3. LACK OF CLEAR OBJECTIVE
Objectives are a critical part of any system, and yet few traders bother to spend time working on them.
Traders and investors merely understand this part of system development and usually fail to spend more time on it. Once an investor or trader lacks a clear objective there is the tendency of Flip- Flopping.
A trader or investor who doesn’t know what he or she wants to accomplish in the market will continue to change from one trading system to another. Until a trader or investor knows where he or she is going, he can never get there.
I can not overemphasize the importance of establishing trading related objectives. They are the foundation upon which all successful trading is built. They are also the most easily neglected area.
Set trading related objectives and give it enough time for maturity. Then assess yourself for strengths and weaknesses, for time, resources, capital and skills.
Set for yourself a realistic objective.
4.UNDERCAPITALIZATION IN MARKET
This is another mistake traders and investors make. Because traders know that trading is a low barrier business, (you basically need a computer connected to the internet, a broker and a modest amount of capital) makes them come in to the market with very little capital believing that they will become rich in no time forgetting the importance of the size of the starting equity.
Most investors / traders doesn’t have the psychological strength to stand just 3 straight losses in a row which is not uncommon with many profitable strategy. The trader that comes into the market with very little start-up capital might have lost very substantial amount during this string of losses. This can make the trader lost confidence in himself and the strategy. To now break even becomes a very difficult task. Good start –up capital makes Position sizing/pyramiding viable.(I will discuss on position sizing/ pyramiding in my sub sequent article).
The only conspicuous solution to the problem is just simply coming into the markets with capital that will make you and your strategy stand the tests of the market. i.e that will make you stay in the market while taking some small losses before the expected big move comes.
5. LEVERAGING (THE DOUBLE EDGED SWORD)
The issue of leveraging, or to be more exact OVER-LEVERAGING has taken on greater importance. It is one of the least understood concept in forex.
Leverage allows you as a trader to be able to trade more than the equity in your portfolio. Account leverage is the leverage that your broker gives you to trade with, while the real leverage is the one that you use in trading at anytime relative to your account size.
Let us illustrate this with the following example.
If the market were to move 100 pips (1%), your account will react in the following ways based on your real leverage.
REAL LEVERAGE %PRICE CHANGE IN MARKET % PRICE CHANGE IN ACCOUNT
100:1 1% 100
50:1 1% 50
30:1 1% 30
20:1 1% 20
10:1 1% 10
5:1 1% 5
1:1 1% 1
In other words, if you real leverage was 30:1 (your position in dollars is 30 multiply your portfolio), your account will fluctuate by 30% with just a 100 pips move in the market. And we know that this that it is not really hard for most currencies to have a 100 or more pips move in a day and yet most traders ignore this aspect of real leverage.
Real leverage is important because it create the equity swings which are terrifically exiting when in your favour, and terrifically frightening when against you. That is why I call it a double edged sword.
Over-leveraging multiplies the effect of drawdown when you guess incorrectly.
Don’t over-leverage your account. If you want to leverage at all, 50:1-100:1 is ok. Calculate your full exposure and always remember that less is more.
You mat hit a home run with trades that are over-leveraged but think of it, if the trade doesn’t work out as initially planned. So try as much as possible to be on the safe side.
6. INADEQUATE RESEARCH
This is another mistake most traders and investors make. The rush that oh I need to get into the market and start trading on any currency and make money is always the cause of this. Instead of the trader to make thorough research on the kind of currency he is willing to trade, to know the currency behavioural characteristics, the economies of the currencies involved in the pair, where the current price is, what has been the main trend for some time now e.t.c he just jump in and out of trade without any clear picture of what he/she is trading on.
Do your research on the kind of market you will be thoroughly and properly. Know the currency you are investing on inside out. Concentrate on 2-3 currency pairs and you will see that your trading ability on them will increase dramatically and your success ratio will improve.
In the Forex market today, most brokers promote short term day trading systems because they know that the more positions you open the richer they become charging their own commission.
Many traders don’t understand this. They convince themselves that spread and slippages is an irrelevant cost of doing business, but it is an important part of your trading equation (spread+ slippage =?). When a trader over-trades, the cost of these might add up and become a headache during losing strings.
Be wary of systems or techniques that promote excessive trading. The commissions and slippage will all serve to erode your eventual profit. So, try as much as possible not to over-trade.
8. CHOICE OF BROKER
The problem of the choice of broker is a very common one, especially among new traders. Traders/ investors always fail to do the research on the broker they intend to choose. Once a broker can give mouth watering offers lie low spreads, 30% of your first deposit, instant trade execution, no delay in withdrawal, a trader will be tempted to open a live account just to get these entire offers neglecting the fact that they might just be ordinary screen offers. So as a trader/ investor one needs to be very sure.
You need to make sure that you choose a broker that is registered with the relevant regulatory bodies. Test them on a demo account. Virtually all brokers have a demo account for clients now. So, before you fund your live account check for some of these:
1. Trade execution
2. Customer support relationship
4. Registration procedures
5. Make sure you know to details the safety of your funds
And for traders that has already opened a live account with any of these brokers, make sure you as well check all these things with your broker. If you suspect unfaithfulness it is better for you to withdraw your funds and trade with a credible and trustworthy broker.
REMEMBER: People tend to gravitate towards the things that don’t work. It is human nature. You can learn the real “success secrets” to the markets only if you pay attention to what really works. The HOLY GRAIL is not what you would expect it to be. It is something that is different for each person. It is a hidden secret that you will have to discover for yourself, but it is obvious once it is realized.
Like JP Morgan said “To be a money master you must first be a self master”. So, the most important factor in your success is YOU.
Have a splendid time TRADING.