How to avoid pitfalls in Forex trading

May 28 • Forex Trading Articles • 1379 Views • Comments Off on How to avoid pitfalls in Forex trading

The ongoing question of ‘why investors/traders lose?’ tends to linger in the Forex market. It can’t be that the retail trading markets are like a bent poker game; rigged against the player, as that’s impossible in such a transparent business and marketplace. So does the problem lie with us? “Yes”, is the simple answer and in this article we’re going to cross reference some recent published facts, regarding the trading fail rates and the mistakes we make, whilst suggesting methods for avoiding these pitfalls.

Researchers have discovered that 80% of day traders quit inside two years, 40%quit in the first month, by year three only 13% are left day trading, by year five only 7% remain. Traders with a ten year negative track record still continue to trade; certain day traders continue to trade despite the painful negative experience.

How to become more confident in trading

So the question is; how do you become part of that 7% and perhaps show the determination of the ten year veteran, but ensure that you’re profitable? The answer lies in ensuring that quite simply you stay in the game as long as possible with your first account. The evidence supporting 40% of potential traders quitting after the first month, suggests that far too many approach the industry with a gambling attitude; they hear about trading Forex, they try, it doesn’t work out they give up. Equally worrying (at the other end of the spectrum), is the ten year trader who can’t make it work.

When you discover Forex trading as a potential career, or opportunity to boost meagre savings returns, take a long term approach, focus on the long term goals and improvements you can make to your own life and those closest to you. Do not give up too soon, you may be closer than you think to achieving success.

The average investor underperforms market indices by approx. 1.5% per year. Active tradersunderperform by circa 6.5% annually. Approx.only 1% of day traders profit. Profitable day traders account for only 1.5% of the active investor market.

Forex trading is not easy, if it was there’d be no market. Is there something that needs adjusting with our method here? If an investor could simply buy the dips of the SPX index and make better returns than a more active trader, then the issue could be with the trading method. If the trader is actively rather than passively investing and not breaking even, then their method is questionable. Set reasonable profit targets, perhaps 1% account growth per week, it doesn’t sound like much, but that would be a stunning 50%+ return a year.

 

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Do not approach Forex trading as a gambler

It would appear that the gambling instinct is strong in our psyche, the finest traders do not possess this trait, and they see trading as a cold, unemotional challenge to be solved. They manage risk, employ sound risk and money management technique and do not have outrageous expectations for what they can achieve. If you have that gambling urge it needs correcting before you approach trading, or it needs eradicating shortly after you discover the industry. You need to think and trade like a robot, perhaps adding automation will aid this process. Gamblers will get lucky, they also experience unlucky periods, gambling is not a process on which to build a trading plan.

Investors repurchase equities they sold for a profit, but avoid those sold for a loss. Individual investors trade more actively when their most recent trades were successful. Investors prefer to tradeequities in the industry in which they are employed.

In Forex repeating the same methodology that works is not a bad habit, however, revenge trading is. Expecting the same result on a currency pair or equity simply because it returned profit previously is poor practice, it also suggests emotion is replacing logic. Each moment in the market is unique, no two situations are ever identical. Trading the sectors you have a deep understanding of makes sense; sector analysts work closely with traders to only trade certain equities in major investment banks.

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