Anyone familiar with the financial markets would know that stock traders must assess thousands of companies before picking the right stocks. On the other hand, forex traders have the advantage of thoroughly researching the limited number of currencies traded in the market.
Forex markets have the largest trading volume in the world. This also makes these markets extremely liquid and also volatile. A huge part of the foreign exchange trade includes spot transactions, forwards, foreign exchange swaps, currency swaps, and options. It is important to be aware of the risks involved at the very beginning especially when trading forex as leveraged products.
1. Lacking a working strategy
It’s an absolute no-brainer that a common problem that most forex traders come across is not having a good working strategy. Do you actually check the currency prices regularly?
Does the crossover of indicators affect you? You should be able to identify the factors that can affect your investment or trade. It is likely that you will be able to come up with a couple of good and effective strategies only after a series of trial and error.
As a forex trader, you are responsible for the success of your strategies. Let the strategy you’ve picked run its course without changing it or doubting it. After a series of trial runs on your forex demo account, when you’ve finally concluded that a certain strategy is efficient, let it do its job. If you get carried away by short-term losses and exit a trade even though your strategy is for a long-term investment, you cannot blame the strategy for failing!
Make the most of your forex demo account that most forex brokers offer free of cost. Test your strategies and experience how it may react. Once you have a fair idea, just have faith in your strategy and don’t let impatience or emotions get in the way.
2. Managing and Avoiding Risk
Risk management is not at all difficult if you understand the nuances that affect market prices. No forex trader should enter a trade without having a risk management strategy in place. Knowing when to enter and exit the trade at the very beginning will help you minimize financial loss.
A risk management strategy should not discourage you from trading or using leveraged products. But it should safeguard your funds in a way that does not compromise your financial security. Set aside some funds that you’re willing to risk and take into account your risk-reward ratio before entering a trade.
A typical practice that most web trader recommend is risking not more than 1% of your funds in a single trade. This step acts as a guarantee that your loss would not be more than what you can stomach.
3. Trading based on emotions
How well you keep your emotions in check and the way your trading psychology acts in the course of trades go a long way in deciding what your trading career may look like. The highs and lows of the market owing to the constant fluctuations that forex may be subject to can take a toll on one’s mental state. It often leads to impulsive decisions that rarely bring a fruitful result.
What can you do to keep emotions in check? Start with having trading strategies in place because when you have a well-thought-out plan, you may already be aware of the numerous possible outcomes. Next, maintain a trading journal so you can evolve your strategies as per the demands of the market. Most importantly, always know what your entry and exit points are in every trade.
A trading plan is like paying an insurance premium. You do have a fair idea as to when you may need it but if you happen to face an unpredictable situation, you most likely know what your next steps have to be already.
4. Feeling overwhelmed
Our world is full of information and data. It applies to the trading world too and thus, when you start learning, you may feel as if there’s an information overload. Yes, of course, there is a lot to learn but the key to process all the factors and variables is to take it one thing at a time. Trying to learn everything at once will leave you overwhelmed and you may not be thorough with anything at all. A little knowledge can be dangerous, thus, take it slow and
make sure you’re actually learning and not sifting through a sea of information.
As you learn, you may want to try out different strategies. If you don’t want to put your money at stake, make sure your broker offers you unlimited access to a forex demo account so you can practice the strategies until you find those that work in your favor. Master a few strategies first and then pave your way into the trading market as you broaden your scope of knowledge.
5. Fundamentals – The neglected essentials
Technical analysts and Fundamental analysts may not always see eye to eye. Thus, you should not listen to the former if the advice is to not take into account the fundamentals that affect currency prices. At the end of the day, any change at the macroeconomic level is bound to have an impact on the forex market especially if it is associated with the forex pairs you’re trading. Understanding fundamentals is very important because it helps you
assess whether the support and resistance levels can withstand the market trends.
Your technical indicators are deductions based on data and history. So if it indicates that the prices will remain constant but your fundamental indicators say otherwise, what should you pick?
It will be wise to take into account your fundamentals because technicality relies on numbers but fundamentals will help you gain perspective into how we got to those numbers. Therefore a good strategy is one that is a combination of fundamentals and technicals so you know exactly when to enter or exit a trade and decide whether to follow
the trend or not.
Bottom line
You must develop a keen eye to see trading both as an art and science. To stay in the game, you should be able to analyze data and to decide your next move, you must be able to understand the factors that can affect the market.