Trading Tips and Insight
This looks at the most common reasons why professional and new traders lose money on the forex market. Instead of learning from failure, learn how to avoid it.
Knowledge Deficiency
Most new forex traders do not take the time to learn what drives currency rates (primarily fundamentals). When some news or a statement is due out, they close out their positions and sit out the best trading opportunities; they are taught to only trade after the market calms down. So essentially they miss the whole move and then trade the random noise that follows a fundamental price move. Just think for a moment about technically trading the aftermath of a price move; there is no potential.
Overtrading
Trading often with tight stops and tiny profit targets will only make the broker rich. The desire to just make a few hundred dollars a day by locking in tiny profits whenever possible is a losing strategy.
Over Leverage
Leverage is a two way street. The brokers want you to use high leverage because that means more spread income because your position size determines the amount of spread income; the bigger the position, the more spread income the broker earns.
Relying on Others
Real traders play a lone hand; they make their own decisions and don't rely on others to make their trading decisions for them; there is no halfway; either trade for yourself or have someone else trade for you.
Stop Losses
Putting tight stop losses is a recipe for disaster. When you put on a trade, commit to a reasonable stop loss limit that allows your trade a fair chance to develop.
Trading During Off Hours
Bank FX traders, option traders, and hedge funds have a huge advantage during off hours; they can push the currencies around when no volume is going through and the end game is new traders get fleeced trying to trade signals. There is only one signal during off hours it is better to stay out.
Trading a Currency
Not a pair being right about a currency is half a trade; success or failure depends upon being right about the second currency that makes up the pair.
No Trading Plan
“Make money” is not a trading plan. A trading plan is a blueprint for trading success; it spells out what you see your edge as being; if you don’t have an edge, you don’t have a plan, and likely you’ll wind up a statistic (part of the 95% of new traders that lose and quit).
Trading Against Prevailing Trend
There is a huge difference between buying cheaply on the way down and buying cheaply. What was a low price quickly becomes a high price when you’re trading against the trend.
Exiting Trades Poorly
If you put on a trade and its not working make sure you exit properly; don’t compound the damage. 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.
Trading Too Short-Term
If you’re profit target is less than 20 points, don't do the trade; the spread you pay to enter the trade makes the odds way against you when you go for these tiny profits.
Picking Tops and Bottoms
Looking for bargains works well at the supermarket but not trading foreign exchange; try to trade in the direction the price is going and your results will improve.
Being Too Smart
The most successful traders I know are high school graduates. They keep it simple and don’t look beyond the obvious; their results are excellent.
Not Trading Around News Time
Time Most of the big moves occur around news time. The volume is high and the moves are real; there is no better time to trade fundamentally or technically than when news is released; this is when the real money adjusts their positions and as a result the prices changes reflect serious currency flow (compared to quiet times when bank traders rule the market with their customer order flow).
Ignoring Technical Conditions
Determining whether the market is over-extended long or over-extended short is a key determinant of near-time price action. Spike moves often occur when the market is all one way.
Emotional Trading
When you don't pre-plan your trades, it is essentially a thought and not an idea; thoughts are emotions and a very poor basis for doing trades. Do people generally say intelligent things when they are upset and emotional?
Lack of Confidence
Confidence only comes from successful trading. If you lose money early in your trading career its very difficult to gain true confidence; the trick is don't go off half-cocked; learn the business before you trade.
Lack of Courage to Take a Loss
There is nothing macho or gutsy about riding a loss, just stupidity and cowardice. It takes guts to accept your loss and wait for tomorrow to try again. Getting married to a bad position ruins lots of traders. The thing to remember is the market does crazy things often so don’t get married to any one trade; it's just a trade. One good trade will not make you a trading success; rather, it is the monthly and annual performance that defines a good trader
Not Focusing on the Trade at Hand
There is no room for fantasizing in successful trading. Counting up and mentally spending profits you haven’t made yet is fantasy and does you no good. Same with worrying about a loss that hasn't happened yet. Focus on your position and have a reasonable stop loss in place at the time you do the trade. Then be like an astronaut sit back and enjoy the ride, there is no sense worrying because you have no real control; the market will do what it wants to do.
Interpreting Forex News Incorrectly
Fact is the press only has a very superficial understanding of the news they are reporting and tend to focus on one element and miss the point. Learn to read the source documents and understand it for real.
Lucky or Good
Your account balance changes don’t tell you the whole story about your trading; fact is, if you are taking a lot of risk and making money you will eventually crash and burn. Look at the individual trade details; focus on your big losses and losing streaks. Ask yourself this – “if I had a couple of consecutive losing streaks or a couple of consecutive big losses, how would my account balance look?” Generally, traders making money without big daily losses have the best chance of sustaining positive performance. The others are accidents waiting to happen.
Too Many Charity Trades
When you make money on a well thought-out trade, don’t give back half on a whim; invest your profits from good trades on the next good trade.
Courage Under Fire
When a policeman breaks down the door to a drug dealer’s apartment, he is scared but he does it anyway. When a fireman climbs onto the roof of a burning building, he is scared but does it anyway – and gets the job done. It’s the same with trading – it’s OK to be scared, but you have to pull the trigger; no trigger = no trades = no profits = no trader.
Quality Trading Time
3 hours a day of quality, focused trading time is recommended; that's about all your brain allows. When you are trading, you must be 100% focused – half way is a waste of time and does not work. Don’t even think that time spent in front of the computer watching the rates has any correlation with profitability; it doesn’t. Spend less time but when you are trading, be 100% focused.
Rationalizing
Put your trade on and let it run. If it hits your reasonable pre-determined stop, you're out. Moving your stop is like getting up after being crushed with a knockout blow; its pointless, things will only get worse. Don’t ignore the obvious – you are wrong, so get out. Come back the next day and try again. A small loss will not hurt you, but a catastrophic loss will.
Mixing Apples and Oranges
You see the EUR/USD trading higher, so you buy GBP/USD because it hasn’t moved yet. That's a mistake. Most of the time the reason the GBP/USD hasn’t moved yet is because it’s already overbought or some 4:30am UK news was bearish. Don’t mix apples and oranges; if EUR/USD looks good, buy EUR/USD.
Too Much Detail
If you are trading more than 2 indicators, then you need to clean house. Having many indicators stifles trading and finds reasons not to trade. A setup and a trigger is all you need.
Giving Up Too Easy
Your first trade of the day may not be your best but certainly its no reason to quit. I have a preset daily trading limit and I use it; you can’t make money by making excuses. Getting trades wrong is natural and should be expected.
Jumping the Gun
Don’t be penny wise and dollar foolish; wait for your trade signal to be clear. Put on your trade and give it a decent size stop loss so that you don’t get knocked out by random noise. Do trades and don’t buy lottery tickets (extremely tight stops).
Afraid to Take a Loss
Trading is not personal; its business. Don’t think that a poor trade is a reflection on you. It could be you are just ahead of your time or a commercial order hits the market and temporarily creates a small unexpected move. Again, place your stop beforehand and NEVER increase your pre-determined risk. If its going bad, it will probably get worse.
Over-Relying on Risk Reward
There is zero advantage in risk reward; if you put a 20 point stop and a 60 point profit your chances are probably 3-1 that you will lose; actually with the spread its more like 4 to 1 (from entry point if it goes down 17 points you lose or up 63 you win; 17/63 is close to 4-1).
Trading for Wrong Reasons
Because the EUR/USD is going up is not in itself a reason to buy. Buying EUR/USD because its not moving is even worse; you’re paying the toll (spread) without even a hint that you will get a directional move. If you are bored, don’t trade – the reason you are bored is there is no trade to do in the first place.
Rumors
Rumors are rumors almost 100% of the time; think about where in the motion you heard the rumor. If EUR/USD is up 50 points in last 15 minutes and the rumor is dollar negative, well then you missed it. Whenever you trade, determine where in the motion you are entering.
Trading Short-term Moving Average Crossovers
This is the money sucker of the century. When the shorter 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. For the life of me I cannot understand why this is bullish or bearish. Easy to set up on software, complete with lights, bells and whistles, and good for the seller getting thousands for the software but in terms of creating profit, its a zero.
Stochastic
To be overbought means strong and oversold means weak. Try buying on the first sign of overbought and selling on the first sign of oversold; you’ll be with the trend and likely have identified a move with plenty of juice left. So if %k and %d are both crossing 80, buy! (Same on sell side; sell at 20)
Inconsistency
Every business (forex trading included) requires a business plan (trading plan). Unless you have taken the time to write down a set of rules that you can and will follow, its likely your trading will remain unfocused and directionless. Make a plan, have rules, follow them, set goals that are realistic, and you will achieve them.
Master of None
Focus on one currency for technical trading. Each currency has a unique way of trading and unless you get intimate with it, you will never truly understand its underlying idiosyncrasies. Don’t spread yourself too thin. Focus master one currency at a time.
Thinking Long Term
Don’t do it. Stay in the moment. Especially if you’re a day trader. It doesn’t matter what happens next week or next month, if you are trading with 30 to 50 point stops restrict your thought process to whets happening right now. That is not to stay the long-term trend is not important; it is to say the long-term trend will not always help you when you are trading in a significantly shorter time frame.
Overconfidence
Trading is not easy; statistics show a 95% failure rate. If your doing well don’t take your success for granted; always be on the lookout for ways to improve what you’re doing.
Getting Pumped Up
The trick is to maintain an even keel. When you are in a trade, you want to think exactly as you would if you didn’t have a trade on. To do this requires a relaxed disposition; this is not a football game. Don’t get psyched up, relax and try to enjoy it.
