Failure has a direct impact that’s so profound it influences success. Whether you subscribe to the science of performance or not, being cognizant of your errors and missteps equips you with the necessary know-how to overturn any failure. But the thing is you don’t really have to fail to understand how you could win, and that’s by learning from the mistakes of others. If you’re aware of what doesn’t work, you will avoid it.
In this article you will learn the five forex trading errors you can keep clear of to gain a level up in trading.
Using Funds That You Can’t Afford to Lose
First off, forex trading is a game of speculation. It’s not investing. When you park your money in a currency like the Australian Dollar, there’s no yield. The same amount of Australian dollars that you keep underneath your pillow tonight will still be the same amount of dollars a year later — its value in the market, though, may change but that’s another story. The only way for you to grow those Australian currencies is to invest them.
The other way is to anticipate factors that may affect the value of the Australian dollar against other currencies — put differently, speculate and execute a trade. While speculation isn’t the same as gambling, there’s a high degree of risk involved because the market behaves unpredictably. But, that’s not to say that profit is an unworkable objective because some can earn a living from trading currencies.
Speculation entails the use of risk capital or funds that are specifically set aside for ultra-risky moneymaking propositions. With speculative investments like forex, there’s no guarantee of profit — no determinable yield. Sure, the potential reward may be abnormal, but so is the risk which is why the money you can lose should be your betting chip and not your sole milkless family cow.
Using Actual Profits as a Yardstick for Success
A common mistake of new traders is that they keep track of their progress by counting the dollar figure of the profits they earned. For example, you managed to make $250 with the EUR/USD pair in one day with your $1000 trading account.
It’s a big accomplishment, right? But a glance over your trading history points out that you traded a standard lot (100,000 units) which means you used a hundred times leverage and that your trade could have gone either way — a $250 gain or loss. The pips in your fleeting victory is a mere 25, a fractional movement for an active pair like the EUR/USD.
Also, using percentages is a big no-no because it underscores the same issue. The use of high leverage can beef up your “results,” but it doesn’t take away the fact that you’re soaking in more risk. Plus, remember that speculating can go 50-50 on you all the time, so, in this case, pip tracking would be a more realistic way to gauge progress.
Using High Leverage
Trading on margin echoes the case made in the preceding error, but the main point here is that high leverage doesn’t take you on the yellow brick road all the time. Plenty of new traders lose in the market because of their uncontrolled use of leverage.
It’s always best to manage your profit expectations or in other words, be realistic with the return you can garner. If your account is $1000, then your millionaire aspirations should be subdued for now as it is entirely impossible for you to achieve a lifestyle of daily piña coladas at a white sand beach resort with 0.10% of a million as capital.
Trading With A Disreputable Broker
It’s easy to fall prey to the wild promotions of some online brokers, but you are smart enough to know that any advertisement implying a get-rich-quick scheme is dubious. Regardless, you still have to be careful when considering the institution you plan on working with because as you sharpen your skills to spot frauds, the fraudsters sharpen their deception tools too.
What you must have at a bare minimum is a willingness to probe your brokers. You must be ready to scrutinize them before entrusting your funds. You should look for the company’s registration with the U.S. Commodity and Futures Trading Commission (CFTC) or the Financial Conduct Authority (FCA) if your broker is in the UK. Moreover, look for any background material about the company, any risk disclosures, and other pertinent information.
Here’s some precautionary measures from the CFTC.
Trading Without Knowing How
Now, the worst thing for you to make is to start trading with real money before you know how currency trading works. You can’t trade right away if you can’t even define what a pip is or if you still find forex charts to be as clear as mud.
Trading currencies require patience to learn and time to gain experience unless you have an infallible gut instinct that could earn you Nostradamus for a last name. Most brokers out there will try to convince you that you’re ready to trade forex even though you’re not and that’s because they can’t wait to collect their commissions from your trades.
The best barometer for knowing if you’re ready is if you can prove — even with a demo account — that you can profit consistently for a specified duration.
So, it’s best for now if you devote time to learn before you dive right in. Intellinvestors has plenty of free resources that you can make use of to improve your knowledge in the financial markets.
It’s not necessary for you to go through all these mistakes to come out a little wiser. By heeding the points in this article, you have a leg up in trading as you are now aware of what you should not do. In summary, to avoid an early rout, you need to remember to trade only with risk capital, pips should be your scorecard, refrain from using high leverage, trade with a reputable broker and learn as much as you can before you put in real money, and you’re well on your way.
Do you want to know how currency trading works? Click the button below to read our article about the topic.