Forex
Trading – The Six Major Reasons Traders Lose Money
by Stephen Todd
In FOREX trading, there are six major reasons
traders lose money. If you can avoid these pitfalls then you can
join the minority of winners that pile up the big profits consistently.
Here are the trading traps that will cause you
to lose money:
1. The Contrarian’s Disease
You should have a contrary opinion to the other
Forex traders in the market – most traders lose money, so
you want to trade in opposition to the herd.
Most traders lose because they lack discipline
and money management - but they’re very often right about
market direction. It’s the trader’s inability to maximise
these opportunities when they’re trading the FOREX - and stay
with the trend, that makes them lose money.
Many traders are looking to pick tops and bottoms,
and never focus on trend following. Picking tops and bottoms is
impossible. You can’t predict the turning points in FOREX
trading - so you need to change your focus to trend following, not
prediction.
2. The Chartists Trap
In FOREX trading many traders fall into the trap
of putting all their efforts into studying charts. Studying charts
is important - but you must not be too subjective, or you will end
up losing.
Avoid methods that need too much subjective analysis,
such as Elliot Wave and cycles - and gravitate towards indicators
that define trends - such as moving averages and momentum oscillators.
Be objective and not subjective in your FOREX
trading.
3. Ego
FOREX trading attracts some of the cleverest
people in the world, these traders are smart - but they also have
big egos. An ego is a bad trait in FOREX trading - as it means you
always want to see the market, as you want to see it - and not how
it really is.
Traders need to ask themselves this question:
Do you want to make money or feel smart? The market won’t
accommodate both of these desires – if you want to make money,
leave your ego behind.
The humble trader who has an objective and disciplined
FOREX trading plan, realizes the market can make him (and everyone
else) look stupid. However, he’s only interested in making
money, and he’ll generally out perform an ego filled trader,
who wants to beat the market.
4. Guru Syndrome
When you’re trading in the FOREX market,
it’s tempting to follow someone who’s made money - or
says they have.
It’s a fact that most traders want success
given to them by someone else, and these traders can’t take
responsibility for their own actions.
In the game of FOREX trading, the only way to
succeed is on your own - if you can’t accept this, then do
something else.
5. Chasing your Tail
Many traders get impatient when FOREX trading
- they start trading using one method, get frustrated with it when
it’s not performing - they then switch to a different method,
and so on.
Bad periods are normally followed by good trading
results (if you’re using a soundly based system) - so patience
and discipline are needed. By frequently chopping and changing systems,
you’ll lose money.
If you have a trading plan that you believe in,
then stick with it - and stop chasing your tail. Stay focused, and
be patient with your system.
6. Using Options Incorrectly
When you’re FOREX trading, using options
gives you staying power - and limited risk, which makes options
a great trading tool.
Many traders use options incorrectly - they focus
on buying options with small time value, and that are way out of
the money. This is a guaranteed way to lose money when options trading!
What you need to do is focus on buying options, at or in the money
- with lots of time value - also use spreads to increase your chances
of success.
In conclusion - Don’t try and be too smart
- the above pitfalls are made by some of the brightest traders around.
In most cases these mistakes come from thinking you have to be clever,
or use complicated methods to succeed - however the reverse is true.
Keep your method simple, keep your focus, accept
responsibility for your actions, and accept that the market will
make you look stupid at times – it does it to everyone!
If you watch out for the six pitfalls outlined
above, you’ll be able to make big long-term profits - and
that’s the ONLY goal in FOREX trading.
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