The foreign exchange market, otherwise known as Forex or simply FX, holds a great potential for a substantial return on investment. Trading with the right currency pair and using the right strategy can yield profitable results in short-term periods. That’s why it’s no surprise that over $5 trillion worth of currencies is being traded on the Forex market every day. Many people try their luck on the Forex market; some are experienced investors, while others are rookies when it comes to trading.
However, trading in currencies is no walk in the park, especially for those that are new to the whole concept of trading on the Forex market. That being said, even a simple mistake can cost you a lot or might even cost you your entire investment. It’s important to understand that trading currencies simply demands good planning and well-designed strategies before it can become a profitable investment. Here are a few Forex trading mistakes to avoid.
Trading without a plan
As mentioned before, a currency trade demands a good plan. Without it, you’re just trading aimlessly with a great risk of going broke sooner. A good trading plan consists of different strategies that work out the best in certain market conditions, a thorough market assessment, as well as an exit strategy to prevent further losses. What’s more, there’s no way to get rich fast without a solid plan.
That’s why 95% of rookie traders fail at their first trade attempt, believing they can multiply their investment on a single trade. The fact of the matter is that no one can successfully predict the outcome of the trade, based on an uneducated guess. Buying, selling, and choosing the right currency pair all demand careful planning. Without a plan, there’s no guarantee you’ll be a successful currency trader, especially in the long run.
Trading without practice
If you start trading without even the basic knowledge and understanding on how the Forex market works, you’ll only waste your investments. Forex market is complicated and difficult to master. That’s why you simply can’t neglect the fact that you need to have some practice before you start off with the trade. It’s highly recommended for novice traders and those who are yet to experience Forex market for the first time to try out different strategies using a demo account.
A demo account is a simulation of the actual trade, where you can trade currency pairs without actually risking your investment. Since there’s no real money involved, you can get a better understanding of the market and how certain conditions affect it. Moreover, you can hone your skills and adequately prepare for the actual trade.
Poorly choosing your broker
Inexperienced traders oftentimes make a mistake of choosing the wrong broker. The main reason is that the Forex market has its share of frauds, brokers that have financial issues, as well as brokers that are simply managing their business poorly. Therefore, if you trust such a broker with your money, you’ll easily lose your entire investment. The key to successful Forex trading is having a trustworthy broker you can rely on.
Finding the legitimate brokers isn’t that difficult at all. You only need to do a bit of research. For instance, every country has their own regulatory body which determines the legitimacy of Forex brokers. Australian brokers, for example, belong to the Australian Securities and Investment Commission (ASIC), while the U.S. brokers are licensed by National Futures Association (NFA) or the U.S. Commodity Futures Trading Commission (CFTC).
Not being comfortable with your losses
It’s important to understand that losses are an essential part of the Forex trades just as winnings are. Even veteran traders lose on various trades. However, losing doesn’t have to be a major setback. In fact, knowing when to stop trading is the best way to keep your losses at a minimum.
Experienced traders will deal with their failure and take a step back to determine the best way to score big on the next trade and cover their losses. On the other hand, inexperienced traders will make the mistake of trying to cover the losses or break even straight away, which can result in losing even more. The key is to keep your head cool while assessing the situation and wait for the perfect opportunity to regain your losses.
Relying on the news and speculations
There are many sources of information that provide news and articles about the latest state of the Forex market, as well as the economic state of countries in which pairs you trade. However, day trading isn’t affected by the fundamental points of view. As a matter of fact, your trading plan gives you an advantage in currency trade, and any straying from your plan that’s influenced by news and speculations could hurt your investments.
After all, good investments may go down temporarily, while the bad ones may experience a rise. But, if your trading strategies work, you shouldn’t be influenced by long-term fundamentals, regardless of what they suggest your trading strategy should be.
Trading on Forex market is essentially complicated and may oftentimes prove to be quite daunting. However, with a good trading plan, meticulous assessment of the market and a good exit strategy, even a novice trader can eventually become successful, while earning a considerable return on investments along the way.