Ideas To Avoid Losing Money Trading Forex

In this Wiki, we are going to take a look at some ideas and concepts that may help you avoid losing money while trading in the Forex market.

Ideas To Avoid Losing Money Trading Forex

Knowledge Deficiency

Most new Forex traders don’t take the time to learn what drives currency rates (fundamentals and sentiment). When high impact market news is due out new traders must close out their positions and sit out some of the best trading opportunities. They are taught to only trade after the market calms down. Essentially they miss the whole move and then trade the random noise that follows a fundamental price move. Just think for a moment about how to technically trade the aftermath of a major fundamental price move; there is little to no potential because the market prices in the event and then goes on a quest to find information on what will happen next.

Overtrading

Tradingoften with tight stops and tiny profit targets will only make the broker rich, never the trader. The desire to “just” make a few hundred dollars a day by locking in tiny profits whenever possible is a losing strategy. It always best to take only the highest quality trades rather than settling for mediocre low probability trades.

Over leveraging

Leverage is a two way street. Brokers want you to use high leverage because that means more spread income given your position size determines the amount of spread income they generate. The bigger the position size, the more spread income the broker earns. Using high amounts of leverage could potentially lead to losses accumulating faster which the broker may also like if they are a market making and B-booking your trades. This means that they will simply let you lose your money to their wallet.

Relying on Others

Real traders rely on fundamental information and accurate news sources. 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. However, having a successful mentor to offer insights and bounce ideas off of is always a great idea.

Stop Losses

Putting tight stop losses with retail brokers is a recipe for disaster. When you put on a trade you need to commit to a reasonable stop loss limit that allows your trade a fair chance to develop. There is a lot of noise that happens throughout the trading day and giving your trade some breathing room can be effective at keeping you in good positions.

Demo Accounts

Broker demo accounts are not as time sensitive to price as real accounts and therefore give the impression that time sensitive trading systems, such as short-term moving average crossovers, can be consistently profitably traded. Once you start dealing with real money you are sure to notice the difference quickly. Also, there is a major psychological difference between trading with fake and real money. Real money can drag emotions into the game more than a demo account ever could. If your demo account scares you then you need to work on your trading psychology. When you start trading live money start with a small amount that you are comfortable with and slowly bump up your account balance as you feel more comfortable.

Trading During Off Hours

Bank FX traders, option traders, and hedge funds have a huge advantage during off hours as they can push the currencies around when no volume is going through and the end game is that retail traders get chopped up trying to trade their technical signals. Trading during peak hours ensures that the liquidity is high enough that no one player can bully the market and the field is level for all participants. The best sessions to trade are the London session and the first half of the New York session.

Trading a Currency, Not a Pair

Being right about a currency is only half the trade. Success or failure depends upon being right about the second currency that makes up the pair as well. The easiest trades will be the ones where you buy fundamentally strong currencies against fundamentally weak currencies and vice versa. Buying a strong currency against a strong currency will typically lead to much more difficult trades and lower probability of working out in your favour.

No Trading Plan

“Make money” does not constitute an intelligent trading plan. A trading plan is a blueprint for trading success. It spells out what your edge is and should be understandable to someone who has no knowledge of trading. If you don’t have an edge, you don’t have a plan, and likely you’ll wind up a part of the statistic pool (part of the 95% of new traders that lose money and quit).

Trading against the Prevailing Trend

There is a huge difference between buying cheaply on a pullback against the macro trend and just buying cheaply. What was a low price can quickly become a high price when you’re trading against the macro fundamental trend. Sure, there will always be sentiment-driven moves against the macro fundamentals but it’s your job as a trader to identify those pullbacks as trading opportunities and not a potential shift in the big-picture fundamentals.

Exiting Trades Poorly

If you put on a trade and it’s not working out then make sure you exit the trade properly. Don’t compound the damage by adding to the losing trade. If you’re in a winning trade don’t talk yourself out of the position because you’re nervous about giving back some of the profits or want to relieve stress. Stress is a natural part of trading but having a well-thought-out trading plan will help to give you conviction in your trading decisions and this will allow you to trade without as much stress.

Trading too Short-Term

If your profit target on a particular trade is less than 15-20 pips then you might want to consider finding another trade with higher profit potential. The spread or commission you pay to enter the trade eats away at these tiny profits. Also, consider your stop loss distance. It doesn’t make much sense to take a 15 pip profit while using a stop loss of 150 pips. it would make even less sense if you weren’t using a stop loss at all. You would have to have a huge win ratio in order to pay for any losses.

Picking Tops and Bottoms

Looking for bargains works well at the supermarket but not trading Forex. Most novice retail technical trading systems revolve around trying to predict when a move will end rather than trying to get into a move after a pullback in a long term fundamental trend. Using a fundamentally based system that enters on pullbacks against the overall trend will dramatically improve your trading results and take out a lot of the stress from constantly trading on the wrong side of the professional market.

Being Too Smart

The most successful traders I know are not the rocket scientists. Most don’t even have university degrees. They keep it simple and don’t look beyond the obvious. People who spend their time trying to outsmart the markets are unknowingly trading all alone. We want to know what the big boys know so that their massive buy and sell orders push the market in our direction while we enjoy the ride.

Not Trading Around News Time

Most of the big moves occur around news and economic release times. The volume is high and the moves are real. There are few better times to trade the fundamentals when news is released as long as you have an edge that involves the news. This is when the big money players adjusts their positions and as a result the price changes reflect serious currency flow when compared to quiet times when Bank traders rule the market with their customer order flow.

Emotional Trading

When you don’t pre-plan your trades it’s essentially a thought and not a trade idea in line with your trading plan. Thoughts are emotions and are a very poor basis for placing trades in the markets. Do people generally say intelligent things when they are upset and emotional? Typically not!

Lack of Conviction

Conviction only comes from successfully trading over a sustained period of time. If you lose money early in your trading career it’s very difficult to gain true conviction because you will likely not stick with your trading system for very long. This can lead to a cycle of switching trading methodologies before you ever have a chance to gain any real momentum. Learn the business of trading before you trade so that you give yourself a professional head start. You would not try to open up a restaurant without some very good and detailed plan would you? Trading is no different than any other type of business.

Lack of Courage to Take a Loss

There is nothing macho or gutsy about riding a loss, just stupidity and cowardice. It takes guts and intelligence to accept your loss and wait for the opportunity 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 getting married to any one trade is only taking away your ability to profit from other opportunities.

Interpreting Forex News Incorrectly

The 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 the impact the news is likely to have on a particular currency and then trade in line with that. Most central banks will tell you what news or economic data sets they are focussing on anyways. Your job is to follow their lead and ignore the rest. Lucky or Good Your account balance changes don’t necessarily tell you the whole story about your trading abilities. The fact is if you’re taking a lot of risk and making money you will eventually crash and burn from a trade that goes the wrong way. Looking at the individual trade details will give you more insight into your overall level of trading risk and skill. 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.

Courage Under Fire

When a policeman breaks down the door to a drug dealers 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. Same with trading, it’s ok to be scared but you have to pull the trigger. No trigger – no trades – no profits – no trader. You will have to learn to pull the trigger and have enough conviction in your edge to stay with the trade as you planned out.

Quality Trading Time

3 hours a day of quality focused trading time should be enough to get you well on your way to trading better. When you’re trading being 100% focused is essential, half way doesn’t work. Don’t think that time spent in front of the computer watching the rates has any correlation to profitability because it doesn’t. Spend less time, but when you are trading be 100% focused on trading and fully tune into the market.

Rationalizing

This is an absolute Killer. Put your trade on and let it run. If it hits your reasonable pre-determined stop then you should close it out or let the automatic stop close the position for you. Think of yourself as a fighter and you just got knocked out. Moving your stop is like getting up after being crushed with a knockout blow and trying to fight some more. It’s pointless and things will only get worse. Come back the next day and try again. A small loss will not hurt you but a catastrophic loss will.

Mixing Apples and Oranges

Have you ever done this? You see the EURUSD trading higher so you buy GBPUSD because it hasn’t moved yet. This is a mistake. Most of the time the reason the GBPUSD hasn’t moved yet is because it’s already overbought or some early morning UK news was bearish. Don’t mix apples and oranges, if EURUSD looks like it’s being bid up then buy EURUSD and make sure there is a good sentiment or fundamental reason.

Too Much Detail

If you’re trading with 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 in line with the fundamentals is all you need.

Giving Up Too Easy

Your first trade of the day may not be your best but certainly, it’s no reason to quit. You can’t make money by making excuses. Getting trades wrong is natural and should be expected with regularity. You will need to do your best and avoid having any recent losses affect your next trade. Recency Bias can be a major psychological impediment to successful trading.

Jumping the Gun

You will need to learn to wait for your trade signal to be clear. When you put on your trade you should give it a decent size stop loss so that you don’t get knocked out by a little bit of random noise. Sure, you might miss a couple trades by not just jumping into the market straight away but over the long run you will save yourself a lot of stop losses and frustration.

Afraid to Take a Loss

Trading is not personal, it’s business. Don’t think that a poor trade is a reflection on you or your trading skills. It could be you are just ahead of the curve or a commercial order hits the market and temporarily created a small unexpected price move. Place your stop beforehand and never increase your pre-determined risk. If the trade is going bad it will probably get worse. Isaac Newton is famous for saying “A body in motion tends to stay in motion” so why would you want to fight the power of the trend.

Trading for Wrong Reasons

Just because the EURUSD is going up is not in itself a reason to buy. Buying EURUSD because it’s moving down is not a good reason to take a trade either. The only reason that you should take any trade is because a setup is in line with your edge and your trading plan. If you’re bored then don’t trade. The reason you’re bored is because there is no quality trades to take in the first place. It’s better to not be in the market then losing money in a market that is not conducive to trading.

Wrong Broker

A lot of forex brokers are just plain horrible. Get setup with a good one. Look for one that is regulated by the FCA. Read Forex user forums and chats in several different places to get unbiased opinions of which brokers are decent in terms of customer service, liquidity, withdrawals, and spreads.

Simulated Results

Look out for “black box” systems. These are trading systems that don’t divulge how the trade signals are generated. The vast majority of them are absolutely nothing more than simple systems that will not deliver what the seller is promising. They show you a track record of extraordinary results that may or may not be fabricated. If you think about if you build a trading system with half a dozen filters using the benefit of hindsight you too could come up with a great system. Of course, going forward is an entirely different story. High-speed number crunching capabilities allow for building great hindsight trading systems that don’t perform going forward. Beware of the "too good to be true" scenario.

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, it’s likely that your trading will remain unfocused and directionless. Make a plan, have rules, follow those rules, set goals that are realistic, and you will have a much easier time tracking your results.

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