What is the world’s largest and most accessible financial market in the world? It is none other than the forex market and although it has a large number of investors, only a few are truly successful. Most of the traders fail in the forex market for the same reason that investors fail in the other asset classes. Furthermore, the extremely high amount of leverage i.e. the use of borrowed money for increasing the possible return on your investments, offered by the market and the comparatively small amount of margins needed for trading foreign currencies, prompt traders to make numerous mistakes.
There are some factors that are associated with forex trading, which cause traders to expect higher returns than the market can offer consistently. Some traders are driven to take more risk in forex trading than they would when trading other financial instruments. We recently had an opportunity to sit with some experts from GigaFX.com who explained certain hazards and mistakes that prevent traders from achieving their goals and should be avoided. Let’s take a look at what we learned about thecommon and disastrous forex trading hazards to avoid, from GigaFX experts:
Inability to maintain trading discipline
The largest mistake that can be made by any trader is to let their emotions influence their trading decisions. If you want to become a successful forex trader, you have to achieve a couple of big wins and suffer from many small losses. It can be emotionally difficult to handle consecutive losses and is a testing time for the trader’s confidence and patience. Giving in to fear and greed or trying to beat the market can cut down winning trades and push losing trades to go out of control. The only way to conquer emotion is to follow a well-developed trading plan that helps in maintaining trading discipline.
Not having a trading plan
Whether you are trading in the forex market or any other financial instrument for that matter, the first step to success is to have a trading plan in place. As per one of GigaFX experts, a trader should have a documented plan in place, which includes rules for risk management and also highlights the expected return on investment (ROI). Following a strategic trading plan can be extremely helpful for traders in evading some common pitfalls of forex trading. Trading in the market without a trading plan means they are selling themselves short.
Not adapting to the market
You should have a plan for every single trade before the market even opens up. If you conduct a scenario analysis and plan the moves as well as the countermoves for every potential market situation, you will be able to reduce the risk of unexpected and large losses significantly. The market is constantly changing, which means new risks and opportunities are constantly presenting themselves. The most successful traders are those who are able to adapt to the changes in the market and can modify their strategies in order to conform to them. They also plan for low probability events so they are not surprised when they occur. They can stay ahead of the pack through an adaptation and education process and can find creative and new ways continuously for profiting from the evolving market.
To learn through trial and error
There is no doubt that the most expensive way of learning to trade in the currency market is via trial and error. Learning from your mistakes and devising appropriate trading strategies is not exactly an efficient way of trading in the forex market. Since the currency market is remarkably different from the equity market, there is a high probability of new traders sustaining high losses that can be crippling.
Accessing the experience of better and skilled traders is the most efficient way of becoming a successful forex trader. You can do this via a formal trading education or you can also establish a mentor relationship with someone who has a prominent track record. Shadowing a successful forex trader is one of the best ways of perfecting your skills, particularly when you add hours of practice to it.
Maintaining unrealistic expectations
No matter what you hear or read, you should remember that trading in the forex market is not a get-rich-quick scheme. Becoming skilled and proficient enough to start earning profits is not a sprint; it is actually a marathon. You need to make recurrent efforts for mastering the trading strategies that eventually lead you to success.
Trying to force the market into generating abnormal returns or swinging for the fences will usually cause traders to put more capital at risk, which is not required. You will learn in this GigaFX review that not maintaining trading discipline for gambling on unrealistic games means that you are abandoning money and risk management rules, which are aimed at preventing market remorse.
Using poor money and risk management
Similar to focusing on developing a trading strategy, you should also work on a risk and money management strategy. There are some naïve traders who will choose to trade without any protection and will not use tools such as stop losses because they are afraid of being stopped too early. On the other hand, successful traders are aware of how much investment capital they are risking and are satisfied that the projected benefits are appropriate in relation. Capital preservation gains more importance as your trading account continues to grow.
While all types of investors and traders can be afflicted with these mistakes, trading risks can also be increased by some issues inherent in the forex market. This refers to the financial leverage that’s provided to forex traders because it presents additional risk that has to be managed at all costs. Even though it is an excellent opportunity for enhancing returns, the financial risk that comes along with it is a double-edged sword, which increases the risks as much as it adds to your potential gains.
These are some common forex trading hazards that any trader should know if they are serious about trading in the currency market. This will help them in avoiding the pitfalls and get the results they are after.