The Biggest Hazards To Avoid When ForexTrading

Trillions of pounds flow through the forex market every single day, and due to the unique quirks of the market compared to nearly every other type of regulated stock market in the world, big trades and events can happen 24 hours a day.

This is part of the reason why forex trading is so popular to the point that traders of all backgrounds and levels of experience can get forex funding if they prove they have both the skills to spot a good trade and the soft skills to show resilience in high leverage scenarios.

Because forex traders make money by taking advantage of much smaller fluctuations in currency prices compared to more conventional stocks, shares and financial instruments, the most efficient way to trade is a matter of high risk and high reward.

All trading comes with a form of risk. After all, stocks can both rise and fall in value based on an incalculable number of events, and knowing when to cash out, either close to a peak or to stem the bleeding is critical in a form of trading where millions of pounds are on the line in a single trade.

Because of that leverage, there are few second chances in forex trading, and with that in mind, here are some of the biggest hazards, pitfalls and traps a forex trader may encounter, as well as how to avoid them.

Keeping Your Head

Ultimately, no trader has a perfect record where every single position they have taken has made money and every trade has been at a profit. It simply does not happen, but it also does not 

necessarily matter, as not all losses are created equal.

Mentality is a common sticking point for many new traders. Losing is not fun and does not feel good in many situations, but seeing a minus sign in a portfolio can make some people react somewhat irrationally, especially if multiple losses happen one after the other.

It is essential to set up a trading plan based around your tolerance for risk and reward. Setting up a stop-loss order can help stop major losses, and the more you trade and get used to handling a portfolio with a lot of leverage, the better you will get at it.

Most successful forex traders know that at the end of the day, it is the value of a winning or losing trade that matters rather than the number. You can have nine trades incur a small loss but one big, well-crafted trade can offset all of it.

At the same time, a successful day could be five trades with minor gains and two minor losses 

that in total equate to a net profit. Success is ultimately determined by the bottom line at the end of the month.

Ultimately, the key is to understand the difference between patience in troubled waters and waiting too long to cut your losses, or the difference between a cautious stop-loss strategy and being too impatient to make a serious gain.

Going For Broke

Unlike other volatile markets, trading forex successfully is about patience, caution and making minor adjustments to trading strategies. It is absolutely not a get-rich-quick scheme, and people who attempt to trade with a high-roller mentality will lose everything very quickly.

The reason for this is that gambling on gains that are simply unrealistic would by definition require you to abandon risk management and any sensible trading plan, something that is unacceptable at any trading level where you expect to make money and outright incomprehensible for forex.

Failing To Segment Accounts

Ultimately, the best way to avoid taking on too much risk in your portfolio is to segment your account before you start, allocating certain amounts for low, medium and high-risk trades.

Whilst traders can afford to take greater risks when only a few thousand pounds are on the line, and there has been a rather infamous trend of retail traders who will set up exceptionally risky portfolios, this is not the case with large accounts, and every forex account is large.

As with any other form of investment, diversification is key, and putting all of your eggs into only a few baskets is ultimately asking for a lot of trouble.

Chasing The Train

Ultimately you can only take advantage of opportunities on the market that are available, and it is better in forex to wait for the right opportunity to present itself, than to take on additional risk in order to get any trade off the ground.

An account of one forex trader talked about the experience of waiting for trades to short the Euro in 2012. He managed to get one trade for eight pips (0.0008) in an entire day, but the next day had considerably more success with six successful trades and a profit of 184 pips.

As with many other aspects of forex trading, the ultimate virtue to have is patience; with the market not closing like other stock markets, you have more time to survey the market and make your move.

Trying To Learn From Experience

A lot of people like to learn by doing, and whilst that is a perfectly acceptable way to learn how to play an instrument or become fluent in a foreign language, you cannot learn forex trading by trial and error.

The key issue at play here is the scale of the errors in question. Because of the amounts of money involved in forex and the fact that forex trading is fundamentally different from other stock markets, a new trader is likely to bankrupt themselves with their first inexperienced attempt.

However, this is where funded trading comes in, as alongside the capital necessary to trade in the forex market, a trader will also have access to education, training and mentorship schemes with traders who have success in the field.

Learning from your own experience is a one-way ticket to sudden bankruptcy, but learning from the experience of others is an exceptionally shrewd strategy.

Not Having A Plan, A Backup Plan And A Backup-Backup Plan

A common adage in life that is particularly applicable to trading is that failing to prepare is preparing to fail, and nowhere is this more true than in forex trading.

A successful forex trader has a plan for any potential eventuality that has a non-zero chance of happening and thus can modify their strategies based around the market as it actually exists rather than the most likely market to exist. 

After all, the fallacy of probability is assuming a one per cent chance cannot happen and getting caught out.

The more you develop your trading plans around planning for the market, the more creative your 

strategies can be, the more you can stay ahead of other traders and the more success you can make in the end.

Not Understanding Leverage

An inherent difference between forex trading and any other form of trading is the role leverage plays in a lot of trades.

Financial leverage is the use of debt to multiply an investor’s buying power in the market, which would if successful vastly increase financial returns. However, at the same time, it can also magnify losses exponentially.

In most markets, traders use a leverage of around 2:1 owing to the volatility of the general stock market. However, as the forex market is seen as less volatile in the long term given that currencies are not typically expected to collapse entirely and are also more liquid than other markets, leverage can sometimes be offered at unfathomable ratios.

Brokers offering 100 times leverage to traders is not uncommon, and some will allow for as high as 400 times leverage, although typically only for trades that are as close to a guarantee as makes no difference.

To put numbers that large into perspective, with a 100:1 forex trade, a change of one penny in the pound is enough to cause a 100 per cent loss. As well as this, each loss lowers the value of the account, meaning that the relative costs increase.

If you are following a sensible trading strategy where you never put yourself in a position to lose more than three per cent of your trading capital, whether this leverage is offered or not is largely immaterial since you will only use as much or as little as you are comfortable with.

Ultimately, the big mistake a lot of new traders make is forgetting the golden rule of only investing what you can afford to lose.

Forgetting The Rest Of The World

It can be easy to forget that at the end of the day, forex is currency trading, meaning that a lot of the factors that will affect the value of any trade are socioeconomic, macroeconomic and political factors outside the traditional scope of the market.

It is always worth carefully looking into wider news that might affect the currency prices in a region, such as political policies, wider news events, budget announcements or major institutional news.

A change in political leadership, a fiscal event, a policy u-turn and a wave of other events can affect currency events, and if you are prepared you can strike at the market first.

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