The foreign exchange market is the largest and most accessible financial market in the world, but although there are many forex investors get is actually a success. Many traders fail for the same reasons that investors fail in other asset classes. In addition, the extreme amount of leverage-using borrowed capital increases the potential return on investment from the market and the relatively small amount of margin required when currencies are traded, deny many operators to make low-risk errors. Specific factors of currency trading can cause some traders expect a higher return on investment, the market can offer consistent, or take more risk than they would when shopping in other markets.
Risk of trading the Forex market
Certain errors can prevent retailers achieve their investment objectives. Below are some of the common pitfalls that can affect forex traders:
Not maintain commercial discipline
The biggest mistake any trader can do is to let emotions control business decisions. To become a successful Forex trader does achieve many victories while suffering many smaller losses. Discover many consecutive losses is difficult to handle emotionally and may test the patience and trust a trader. Try to beat the market or give in to fear and greed can lead to short cut winners and let the lost trades out of control. You conquer emotions achieved by trading within a well constructed trading plan that helps maintain commercial discipline.
Trade without a plan
If a forex trading or any other asset class, the first step to success is to create and follow a business plan. “Not to plan is planning to fail” is a saying that applies to any kind of negotiation. The successful trader operates within a documented plan, which sets out risk management plans and indicates the expected return on investment (ROI). Adhering to a strategic trading plan can help investors avoid some of the most common business problems; If you do not have a plan, you sell short, what you can achieve in the foreign exchange market.
Not adapt to the market
Before the market even opens, create a plan for each trade. Implementation scenario analysis and planning of moves and countermoves for each potential market situation may reduce the risk of large and unexpected losses significantly. As the market changes, it offers new opportunities and risks. No panacea or infallible “system” can prevail sustained long term. The most successful traders adapt to market changes and modify their strategies to meet them. Successful negotiators plan low probability events and are rarely surprised if they occur. Through a process of training and adaptation, they remain at the forefront and continue to find new and creative ways to take advantage of developing markets.
Learning through trial and error
Undoubtedly the most expensive way to learn to trade in foreign exchange markets is through trial and error. Discovering the appropriate trading strategies learn from their mistakes is not an effective way to trade any market. When the currency is significantly different stock market, the likelihood that new operators who have accounts plague loss is high. The most effective way to become a successful Forex trader is to gain access to the experience of successful traders. This can be done through a formal business training or through a mentoring relationship with someone who has a remarkable track record. One of the best ways to hone your skills is the shadow of a successful business man, especially when added hours of practice on their own.
Have unrealistic expectations
No matter what anyone says, currency trading is not a scheme to get-rich-quick. Be competent to accumulate profits is not a sprint – it’s a marathon. Success requires repeated efforts to master the strategies involved. Swinging for the fences or try to force the market to provide abnormal returns usually results in trader risking more capital than justified by the potential benefits. Trading discipline to bet on unrealistic profit means giving up the rules for risk management and money, which is designed to prevent market remorse.
Poor risk management and money
Traders should put as much focus on risk, as they do in developing the strategy. Some naive individuals change unprotected and refrain from the use stop-losses and similar tactics in fear of being arrested too soon. At one point, successful traders know exactly how much of their capital investment is at risk, and are convinced that it is appropriate in relation to the expected benefits. When trading account grows, the capital preservation more important. Diversification among trading strategies and currency pairs, together with the appropriate position size, you can isolate a loss account is not corrected. The top traders segment their accounts in separate sections of the risk / return, with only a small portion of your account is used for high-risk operations and balance negotiated conservatively. This type of asset allocation strategy will also ensure that small probability and broken traffic can not destroy their own trading account.
Although these errors can affect all types of traders and investors, the questions inherent in the foreign exchange increase trading risks. The significant amount of financial leverage available to forex traders represent an additional risk to be managed.
Gearing allows operators to improve returns. But proportional leverage and financial risk is a double-edged sword that amplifies the added inconvenience and the potential for gain. Forex market allows traders to use their accounts up to 400: 1, which can lead to massive trade gains in some cases – and account for losses in other stop. The market allows traders use large amounts of financial risk, but in many cases it is in the best interest of a trader to limit the amount of leverage used.
Most professional traders use leverage of 2: 1 by trading a standard lot ($ 100,000) for each $ 50,000 in their accounts. This coincides with a miniature mass ($ 10,000) for every $ 5,000 and a micromass ($ 1000) for each $ 500 of the value account. The amount of leverage available comes from the amount of margin runners required for each operation. The margin is simply a good faith deposit that you make to isolate the potential loss broker a deal. The bank gathers deposits on a very large margin deposit margin is used to perform operations on the interbank market. Anyone who has ever had a deal go horribly wrong knows the terrible margin call, which brokers require additional cash deposits; If you do not receive, they sell the position at a loss to offset other losses or recover their capital.
The cause of many forex traders that are not undercapitalized relative to the size of trades they make. Is greed or the prospect of managing large amounts of money with only a small amount of capital, which forces forex traders to take a huge financial risk and fragile. For example, with a leverage of 100: 1 (a fairly common gearing ratio), it only takes a change of -1% in price lead to a loss of 100%. And all losses, even small ones, as a trading stopped early, only exacerbates the problem by reducing the balance in general and further increase leverage.
Take advantage increases not only the loss but also increase transaction costs as a percentage of account value. For example, if a trader with a mini account of $ 500, using a leverage of 100: 1 purchase five mini lots ($ 10,000) of currency pairs with a spread of five pips, the trader incurs also a $ 25 cost transaction [5 pip spread) x 5 lots]. Before trading begins, he or she has to catch up, because $ 25 of transaction costs account for 5% of the account value. The higher the leverage, the greater transaction costs as a percentage of account value, and these costs increase with decreasing value of the account.
Although it is expected that the currency market is less volatile long-term the stock market, it is obvious that the inability to withstand periodic losses and the negative impact of these recurring losses through high leverage is a disaster, he is expected to occur. These issues are exacerbated by the fact that the foreign exchange market have a considerable degree of macroeconomic and political risks that may create inefficiencies short-term price and wreak havoc with the value of certain currency pairs.
Many of the factors that cause errors forex traders are similar to those that affect investors in other asset classes. The easiest way to avoid some of these pitfalls is to build a relationship with other successful forex traders can learn the negotiating disciplines required of asset classes, including rules of monetary risk is necessary to act in the foreign exchange market. Only then will you be able to properly plan and trade return expectations that prevents you from taking big risks to potential benefits.
While understanding the macroeconomic, technical and fundamental analysis required for currency trading is as important as the commercial psychology, one of the biggest factors that separates success from failure is the ability for an operator to manage a business account. The keys to managing accounts include ensuring adequately capitalized, using the appropriate size of the trade and limit the economic risk of using smart gearing levels.