This two-part report clearly and simply details
essential tips on how to avoid typical pitfalls and start making
more money in your forex trading.
Trade pairs, not currencies
- Like any relationship, you have to know both sides. Success
or failure in forex trading depends upon being right about both
currencies and how they impact one another, not just one.
Knowledge is Power - When
starting out trading forex online, it is essential that you understand
the basics of this market if you want to make the most of your
investments.
The main forex influencer is global news and events. For example,
say an ECB statement is released on European interest rates which
typically will cause a flurry of activity. Most newcomers react
violently to news like this and close their positions and subsequently
miss out on some of the best trading opportunities by waiting
until the market calms down. The potential in the forex market
is in the volatility, not in its tranquility.
Unambitious trading - Many
new traders will place very tight orders in order to take very
small profits. This is not a sustainable approach because although
you may be profitable in the short run (if you are lucky), you
risk losing in the longer term as you have to recover the difference
between the bid and the ask price before you can make any profit
and this is much more difficult when you make small trades than
when you make larger ones.
Over-cautious trading - Like
the trader who tries to take small incremental profits all the
time, the trader who places tight stop losses with a retail forex
broker is doomed. As we stated above, you have to give your position
a fair chance to demonstrate its ability to produce. If you don't
place reasonable stop losses that allow your trade to do so, you
will always end up undercutting yourself and losing a small piece
of your deposit with every trade.
Independence - If you are
new to forex, you will either decide to trade your own money or
to have a broker trade it for you. So far, so good. But your risk
of losing increases exponentially if you either of these two things:
Interfere with what your broker is doing on your behalf (as his
strategy might require a long gestation period);
Seek advice from too many sources - multiple input will only result
in multiple losses. Take a position, ride with it and then analyse
the outcome - by yourself, for yourself.
Tiny margins - Margin trading
is one of the biggest advantages in trading forex as it allows
you to trade amounts far larger than the total of your deposits.
However, it can also be dangerous to novice traders as it can
appeal to the greed factor that destroys many forex traders. The
best guideline is to increase your leverage in line with your
experience and success.
No strategy - The aim of
making money is not a trading strategy. A strategy is your map
for how you plan to make money. Your strategy details the approach
you are going to take, which currencies you are going to trade
and how you will manage your risk. Without a strategy, you may
become one of the 90% of new traders that lose their money.
Trading Off-Peak Hours
- Professional FX traders, option traders, and hedge funds posses
a huge advantage over small retail traders during off-peak hours
(between 2200 CET and 1000 CET) as they can hedge their positions
and move them around when there is far small trade volume is going
through (meaning their risk is smaller). The best advice for trading
during off peak hours is simple - don't.
The only way is up/down -
When the market is on its way up, the market is on its way up.
When the market is going down, the market is going down. That's
it. There are many systems which analyse past trends, but none
that can accurately predict the future. But if you acknowledge
to yourself that all that is happening at any time is that the
market is simply moving, you'll be amazed at how hard it is to
blame anyone else.
Trade on the news - Most
of the really big market moves occur around news time. Trading
volume is high and the moves are significant; this means there
is no better time to trade than when news is released. This is
when the big players adjust their positions and prices change
resulting in a serious currency flow.
Exiting Trades - If you place
a trade and it's not working out for you, get out. Don't compound
your mistake by staying in and hoping for a reversal. If you're
in a winning trade, don't talk yourself out of the position because
you're bored or want to relieve stress; stress is a natural part
of trading; get used to it.
Don't trade too short-term
- If you are aiming to make less than 20 points profit, don't
undertake the trade. The spread you are trading on will make the
odds against you far too high.
Don't be smart - The most
successful traders I know keep their trading simple. They don't
analyse all day or research historical trends and track web logs
and their results are excellent.
Tops and Bottoms - There
are no real "bargains" in trading foreign exchange.
Trade in the direction the price is going in and you're results
will be almost guaranteed to improve.
Ignoring the technicals-
Understanding whether the market is over-extended long or short
is a key indicator of price action. Spikes occur in the market
when it is moving all one way.
Emotional Trading - Without
that all-important strategy, you're trades essentially are thoughts
only and thoughts are emotions and a very poor foundation for
trading. When most of us are upset and emotional, we don't tend
to make the wisest decisions. Don't let your emotions sway you.
Confidence - Confidence comes
from successful trading. If you lose money early in your trading
career it's very difficult to regain it; the trick is not to go
off half-cocked; learn the business before you trade. Remember,
knowledge is power.
The second and final part of this report clearly
and simply details more essential tips on how to avoid the pitfalls
and start making more money in your forex trading.
Take it like a man - If you
decide to ride a loss, you are simply displaying stupidity and
cowardice. It takes guts to accept your loss and wait for tomorrow
to try again. Sticking to a bad position ruins lots of traders
- permanently. Try to remember that the market often behaves illogically,
so don't get commit to any one trade; it's just a trade. One good
trade will not make you a trading success; it's ongoing regular
performance over months and years that makes a good trader.
Focus - Fantasising about
possible profits and then "spending" them before you
have realised them is no good. Focus on your current position(s)
and place reasonable stop losses at the time you do the trade.
Then sit back and enjoy the ride - you have no real control from
now on, the market will do what it wants to do.
Don't trust demos - Demo
trading often causes new traders to learn bad habits. These bad
habits, which can be very dangerous in the long run, come about
because you are playing with virtual money. Once you know how
your broker's system works, start trading small amounts and only
take the risk you can afford to win or lose.
Stick to the strategy - When
you make money on a well thought-out strategic trade, don't go
and lose half of it next time on a fancy; stick to your strategy
and invest profits on the next trade that matches your long-term
goals.
Trade today - Most successful
day traders are highly focused on what's happening in the short-term,
not what may happen over the next month. If you're trading with
40 to 60-point stops focus on what's happening today as the market
will probably move too quickly to consider the long-term future.
However, the long-term trends are not unimportant; they will not
always help you though if you're trading intraday.
The clues are in the details
- The bottom line on your account balance doesn't tell the whole
story. Consider individual trade details; analyse your losses
and the telling losing streaks. Generally, traders that make money
without suffering significant daily losses have the best chance
of sustaining positive performance in the long term.
Simulated Results - Be very
careful and wary about infamous "black box" systems.
These so-called trading signal systems do not often explain exactly
how the trade signals they generate are produced. Typically, these
systems only show their track record of extraordinary results
- historical results. Successfully predicting future trade scenarios
is altogether more complex. The high-speed algorithmic capabilities
of these systems provide significant retrospective trading systems,
not ones which will help you trade effectively in the future.
Get to know one cross at a time
- Each currency pair is unique, and has a unique way of moving
in the marketplace. The forces which cause the pair to move up
and down are individual to each cross, so study them and learn
from your experience and apply your learning to one cross at a
time.
Risk Reward - If you put
a 20 point stop and a 50 point profit your chances of winning
are probably about 1-3 against you. In fact, given the spread
you're trading on, it's more likely to be 1-4. Play the odds the
market gives you.
Trading for Wrong Reasons
- Don't trade if you are bored, unsure or reacting on a whim.
The reason that you are bored in the first place is probably because
there is no trade to make in the first place. If you are unsure,
it's probably because you can't see the trade to make, so don't
make one.
Zen Trading - Even when you
have taken a position in the markets, you should try and think
as you would if you hadn't taken one. This level of detachment
is essential if you want to retain your clarity of mind and avoid
succumbing to emotional impulses and therefore increasing the
likelihood of incurring losses. To achieve this, you need to cultivate
a calm and relaxed outlook. Trade in brief periods of no more
than a few hours at a time and accept that once the trade has
been made, it's out of your hands.
Determination - Once you
have decided to place a trade, stick to it and let it run its
course. This means that if your stop loss is close to being triggered,
let it trigger. If you move your stop midway through a trade's
life, you are more than likely to suffer worse moves against you.
Your determination must be show itself when you acknowledge that
you got it wrong, so get out.
Short-term Moving Average Crossovers
- This is one of the most dangerous trade scenarios for non professional
traders. When the short-term moving average crosses the longer-term
moving average it only means that the average price in the short
run is equal to the average price in the longer run. This is neither
a bullish nor bearish indication, so don't fall into the trap
of believing it is one.
Stochastic - Another dangerous
scenario. When it first signals an exhausted condition that's
when the big spike in the "exhausted" currency cross
tends to occur. My advice is to buy on the first sign of an overbought
cross and then sell on the first sign of an oversold one. This
approach means that you'll be with the trend and have successfully
identified a positive move that still has some way to go. So if
percentage K and percentage D are both crossing 80, then buy!
(This is the same on sell side, where you sell at 20).
One cross is all that counts
- EURUSD seems to be trading higher, so you buy GBPUSD because
it appears not to have moved yet. This is dangerous. Focus on
one cross at a time - if EURUSD looks good to you, then just buy
EURUSD.
Wrong Broker - A lot of FOREX
brokers are in business only to make money from yours. Read forums,
blogs and chats around the net to get an unbiased opinion before
you choose your broker.
Too bullish - Trading statistics
show that 90% of most traders will fail at some point. Being too
bullish about your trading aptitude can be fatal to your long-term
success. You can always learn more about trading the markets,
even if you are currently successful in your trades. Stay modest,
and keep your eyes open for new ideas and bad habits you might
be falling in to.
Interpret forex news yourself -
Learn to read the source documents of forex news and events -
don't rely on the interpretations of news media or others.
A veteran of online trading, John Gaines offers
the financial services industry his perspectives and expertise on
a variety of trading systems and financial instruments, including
forex, CFDs, futures, options and stocks.
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