Why do hundreds of thousands online traders and investors trade the forex market every day, and how do they make money doing it?
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.