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Or put another way, they are under-capitalized in relation to the size of the trades they make. The forex market allows traders to leverage their accounts as much as , which if fully used can lead to massive trading gains in some few cases, and crippling losses in most others. Even with the more common leverage offered by most forex brokers, if the trader were to fully use the leverage offered, his entire account can be wiped out in one trade. The trader was trying to carry too big a position with too little money.
It is interesting that US regulators recently took the extra step to limit the leverage of US brokerage firms to They did so with the stated objective of trying to protect the retail investor from hurting himself. But limiting the capacity of leverage will not protect a US client from abusing leverage and destroying his account. A greedy US client can still blow up his account if he were to use the full leverage offered: the only difference being that he can only control half the lot size as he did under the leverage, and thus it will take him 2 bad trades of pips instead of 1 bad trade of pips to completely wipe out his account.
One should trade how a professional would use leverage. Remember that trade leverage can be a powerful tool to maximize your returns, or it can be your downfall. Leverage is a double-edged sword that amplifies the downside as much as it adds to the potential gains. Use it wisely and sparingly. The new forex trader thinks that if he can couple the use of high leverage with frequent trading, he can make huge profits.
What he does not notice is that the forex market is volatile and changes direction all day long, and it is impossible to expect profitable trades from every price movement. They are taking too many trades of short duration, trying to trade each change of direction on a small time frame scale, and often get chopped up in the process. They are also increasing their cost of trading as each time they trade they are paying the spread or commission.
There are various reasons that forex traders over-trade, such as excitement of trading, revenge trading to make up for past losses, missing a forex trade and then chasing the market, etc. Ultimately, overtrading is the result of having no discipline, no plan and no patience. The plan and system will force you to trade under a set of rules of entry and exit. You should curb your excitement and adrenaline in trading for each change in direction and place trades only when they are required by the system.
Follow the rules of the system or plan, not the micro vacillations of the market. They come into trading without even opening a forex book or educating themselves about currency trading. Some forex traders barely understand what technical and fundamental analysis is, and they execute trades on whim, intuition, gut instinct, the market moving sharply in one direction or the news of the day suggesting the direction in hindsight. A new forex trader should strive to know the main components that constitute the market, as well as the main factors that drive it.
There is a lot to learn. One should try to learn and be fluent in the research and analysis of both technical and fundamental factors shaping the market. It is not enough to follow just one school or approach. You have to be curious and open-minded enough to explore a multitude of factors and indicators that shape and plot the market. Our own CashBack Forex Academy is here for you to learn for free.
In addition, you can search Google and visit niche forums and social networks for you to learn more about topics you are interested in, and for you to participate in online discussions. Everything you need to know about forex is out there on the net, and it is up to you to learn and explore all you can.
The more knowledge and information you obtain, the better ideas you will have about this market, which in turn will help you make wiser and more balanced decisions about it. It is also not enough that you have a theoretical knowledge of Forex. You have to put it in practice and develop experience. Often new traders become so fascinated by an indicator or system that they dive right into real trading with it in the hopes of getting rich quicker.
The allure of quick profits prevents them from waiting patiently and practicing first with demo accounts and micro accounts. Or perhaps they already practiced with a demo account for a couple months, made some decent trades, and have convinced themselves that they or their system is capable of beating the market. Then they try their hand at a real account and discover that greed and fear interfere with their trading and that the market of tomorrow bears little resemblance to the market of the last few months.
Their lack of experience as traders makes them undisciplined, impatient and emotional, causing numerous trading mistakes. Their lack of experience with the multiplicity of forces affecting the markets, as well as its high degree of randomness, causes them to underestimate and overestimate the market, causing numerous false interpretations of market direction. Their lack of experience with money management causes them to risk too much on each mistaken trade and they eventually get wiped out.
It is best to imagine the forex market as a highly dangerous arena that takes years of experience to survive, let alone profit from. While two months may be enough time to learn how to drive a car, it might take years of sweat and blood and failure to learn how to survive crashing your trading account. It may take many more years after that to learn how to fully master yourself and the markets so that you can consistently profit from it.
Bear in mind that the professional trader on the other side of the trade has often 5 more years of full-time experience trading the market, and works with an equally experienced team of traders with cutting edge tools at their disposal.
If you compare this scenario to a Wild West gunfight, you are the citizen with an old pistol sauntering into the street to brazenly dual with a dozen veteran gunslingers armed with an assortment of pistols, rifles and Gatling guns. The fact is that every trader must work hard all the time to become better with time.
To be good at forex does not necessarily depend on that much screen time and experience, but one should remember that like many other focused and technical endeavors, it takes a lot of time to develop and hone the skill set. Human traders have a number of weaknesses, the foremost being Greed, Fear, Ego, Addiction and Laziness. Greed : One of the seven deadly sins, it is the main cause why traders lose in forex. Because of our short lifespan and eagerness to make money fast, greed leads us to trade without first taking the time to build up the requisite knowledge and experience of the markets.
Greed forces us into the market too soon when we are unready. Greed also makes us more aggressive, causing us to over-trade or over-leverage, which in turn causes us to trade our account into oblivion. Fear : Healthy fear is to know that the markets are dangerous and that we first need the requisite skills and training to survive in them. Unhealthy fear is to think that the market is so dangerous that it is paralyzing for us to initiate trades, causing us to watch the market action without being part of it.
Unhealthy fear is also when a trader puts in a big order because of greed, and then when the market moves against him, he cuts the trade at a loss too early, fearing a bigger loss yet never allowing the trade room to breathe.
Or if the market moves in his direction, he closes the trade too fast with small profits, fearing that the market might move against him yet never allowing the trade room to mature. Ego: Ego is when any amount of knowledge or experience goes to inflate the head into thinking it knows enough or all there is to know. Just when you think you know enough, the market will force you to reconsider, go back to the drawing board and learn some more.
It is best to be a humble trader, manage your trading in a modest way, and be prepared to learn new things every day and with every trade. Too much ego creates perpetual states of illusion and denial and stops the learning process. You must remember that trading is not a betting game to make money fast. It is a business to make money slowly and you must put in the time and effort to become a good trader.
Laziness : Most people never use the full potential of their brains. Our brains are more powerful than the most powerful of computers, but it requires work and motivation to flip them on. It is too easy for us to glide through life at low brain output, living in the illusions of the past or future, but unable to fully compute the present and question everything around us. Lazy traders hardly ever do their homework before trading, to research the right setup and the important news of the day, and never do their homework after trading, to analyze their past trades and learn from their mistakes.
Instead, their trades are begotten from luck, they end up failing, and there is nothing learned from their trading errors. After failing all the time, they then put all their hopes in a trading robot to trade for them, without putting in the massive effort and testing it takes to distinguish the few good robots from the majority of bad ones. The only way to overcome the human limitations above is to acknowledge their existence and work hard to avoid them.
To that end, one must strive to develop a solid trading plan and system see below that forces the trader to be patient, calculating and free from emotions and ego that affect your ability to trade. Many traders trade without a plan or system. They do not define specific risk and profit objectives before trading. Consequently, they overtrade and use their equity to the limit are under-capitalized , which puts them in a squeeze and forces them to liquidate positions.
To trade without a trading plan is to be subject to all the human limitations covered above. Not following a disciplined trading plan or system leads to accepting large losses and small profits. Many traders do not define offensive and defensive plans when an initial position is taken. They allow emotions to overcome intelligence when markets are going for or against them. They do not have a plan to follow.
A good plan must include defense points stops. You need a good trading plan that gives you a definite trading system with defined rules for you to follow for every trade. The system has to be clear and defined without being rigid and inflexible. It should have preconditions for entering a trade, determining lot size, and exiting a trade. A good trading plan will turn a human trader into more of a trading robot, trading by a set of rules and conditions without the twin emotions of greed and feed, interpretive bias, ego, addiction, laziness of mind and body, and limitation of time and attention.
Tailor your plan to yourself. Every trader is unique and requires a different set of approaches to trading. Some few traders succeed in scalping, but it does not mean it is suitable for you. It is your responsibility to figure out what kind of trader you are. A good trading plan will take a considerable amount of time, discipline and patience to adhere to in the way it was intended. In the end, for many reasons, the human trader sometimes cannot stick to the trading plan.
If you know you cannot stick with a trading plan for whatever reason, your best bet would be to seek out a good robot that can enter and exit trades with predetermined lot sizes under predefined logical conditions without emotion. If you can program or learn how to program in MetaTrader language, you are even better off, because you can then create the robot that becomes the best substitute for yourself and your ideas about the market.
Also, do not make the mistake of jumping from one system to another. Once you decide on a trading system, you should stick with it through the losses. Every strategy in the world experiences losses. When you experience a string of losses, your first thought might be to abandon it and seek a new one, when you should instead continue trading it; even it is through a demo account without risk.
You could always explore your other options in other demo accounts. Most forex traders totally forget about the risk of forex trading, thinking only about the win and never planning for the worst. Yet the worst does transpire more than one thinks. Trading without safeguards can be like skydiving without a parachute. Averaging Losses Traders tend to lose more when the market continuously moves against them when averaging down. To overcome this fatal strategic error, remind yourself that you should never average a losing position unless it is already accounted for in your predetermined trading plan.
By using a predetermined automatic stop loss, you will be able to avoid falling into this trap. Summary Trading Forex successfully and profitably requires a tremendous effort on the part of the trader in order to overcome the aforementioned mistakes. One way to avoid these mistakes is to use automated trading systems. This method of trading will actually help traders, both novice and experienced, overcome many of the common hurdles detailed above.
DupliTrade is an automated trading platform that lets you copy the trades of experienced strategy providers from their accounts straight to your own MT4 account. Explore the blog further to learn more about automated trading. Start your demo now. Stay up to date! Here are 5 of the most fatal mistakes that cause traders to lose money: 1.
The average forex trader loses money, which is in itself a very discouraging fact. But why? Put simply, human psychology makes trading difficult. Forex traders can lose money by trading too aggressively, particularly when bucking obvious trends. Your first, safest priority. In order to avoid losing money in foreign exchange, do your homework and look for a reputable broker. Use a practice account before you go live and be sure to.