Monday, February 7, 2011

45 Ways to Avoid Losing Money Trading Forex

This article looks at the most common reasons why professional and new traders lose money on the forex market. Instead of learning from failure, learn how to avoid it.

1. Knowledge Deficiency � Most new forex traders do not take the time to learn what drives currency rates (primarily fundamentals). When some news or a statement is due out, they close out their positions and sit out the best trading opportunities; they are taught to only trade after the market calms down. So essentially they miss the whole move and then trade the random noise that follows a fundamental price move. Just think for a moment about technically trading the aftermath of a price move; there is no potential.

2. Overtrading - Trading often with tight stops and tiny profit targets will only make the broker rich. The desire to �just� make a few hundred dollars a day by locking in tiny profits whenever possible is a losing strategy.

3. Over leveraged - Leverage is a two way street. The brokers want you to use high leverage because that means more spread income because your position size determines the amount of spread income; the bigger the position, the more spread income the broker earns.

4. Relying on Others � Real traders play a lone hand; they make their own decisions and don�t rely on others to make their trading decisions for them; there is no halfway; either trade for yourself or have someone else trade for you.

5. Stop Losses � Putting tight stop losses with retail brokers is a recipe for disaster. When you put on a trade, commit to a reasonable stop loss limit that allows your trade a fair chance to develop.

6. Demo Accounts � Broker demo accounts are a shill game of sorts; they�re not as time sensitive as real accounts and therefore give the impression that time-sensitive trading systems, such as short-term moving average crossovers, can be a consistently profitable trade; once you start dealing with real money, reality is quick to set in.

7. Trading During Off Hours � Bank FX traders, option traders, and hedge funds have a huge advantage during off hours; they can push the currencies around when no volume is going through and the end game is new traders get fleeced trying to trade signals. There is only one signal during off hours � it is better to stay out.

8. Trading a Currency, Not a Pair � Being right about a currency is half a trade; success or failure depends upon being right about the second currency that makes up the pair.

9. No Trading Plan - "Make money" is not a trading plan. A trading plan is a blueprint for trading success; it spells out what you see your edge as being; if you don�t have an edge, you don�t have a plan, and likely you�ll wind up a statistic (part of the 95% of new traders that lose and quit).

10. Trading Against Prevailing Trend � There is a huge difference between buying cheaply on the way down and buying cheaply. What was a low price quickly becomes a high price when you�re trading against the trend.

11. Exiting Trades Poorly � If you put on a trade and it�s not working make sure you exit properly; don�t compound the damage. 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.

12. Trading Too Short-term � If you�re profit target is less than 20 points, don't do the trade; the spread you pay to enter the trade makes the odds way against you when you go for these tiny profits.

13. Picking Tops and Bottoms - Looking for bargains works well at the supermarket but not trading foreign exchange; try to trade in the direction the price is going and your results will improve.

14. Being Too Smart � The most successful traders I know are high school graduates. They keep it simple and don�t look beyond the obvious; their results are excellent.

15. Not Trading Around News Time � Most of the big moves occur around news time. The volume is high and the moves are real; there is no better time to trade fundamentally or technically than when news is released; this is when the real money adjusts their positions and as a result the prices changes reflect serious currency flow (compared to quiet times when bank traders rule the market with their customer order flow).

Introduction to Foreign Exchange Markets

The forex market is a non-stop cash market where currencies of nations are traded, typically via brokers. Foreign currencies are constantly and simultaneously bought and sold across local and global markets, hence investments appreciate or depreciate in value based upon currency movements. Foreign exchange market conditions can change at any time in response to real-time events.

The main enticements of currency dealing to private investors and attractions for short-term forex trading are:

* 24-hour trading, 5 days a week with access to global forex dealers
* An enormous liquid market making it easy to trade most currencies
* Volatile markets offering profit opportunities
* Standard instruments for controlling risk exposure
* The ability to profit in rising or falling markets
* Leveraged trading with low margin requirements
* Many options for zero commission trading

Forex trading
The investor's goal in forex trading is to profit from foreign currency movements. Forex trading is always done in currency pairs. When trading currencies, trade only when you expect the currency you are buying to increase in value relative to the currency you are selling. If the currency you are buying does increase in value, you must sell back the other currency in order to lock in a profit. An open trade (also called an open position) is a trade in which a trader has bought or sold a particular currency pair and has not yet sold or bought back the equivalent amount to close the position.

Private investors can trade in forex directly or indirectly through:

* The spot market
* Forwards and futures
* Options
* Contracts for difference
* Spread betting

It is estimated that anywhere from 70% to 90% of the forex market is speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency.

Exchange rate
Currencies are traded in pairs and exchanged one against the other when traded, so the rate at which they are exchanged is called the exchange rate. The majority of the currencies are traded against the US dollar (USD). The four next-most traded currencies are the euro (EUR), the Japanese yen (JPY), the British pound sterling (GBP) and the Swiss franc (CHF). These five currencies make up the majority of the market and are called the major currencies or "the majors". Some sources also include the Australian dollar (AUD) within the group of major currencies.

Banks and/or online trading providers need collateral to ensure that the investor can pay in case of a loss. The collateral is called the margin and is also known as minimum security in forex markets. In practice, it is a deposit to the trader's account that is intended to cover any currency trading losses in the future. Margin enables private investors to trade in markets that have high minimum units of trading by allowing traders to hold a much larger position than their account value.

Leveraged financing
Leveraged financing is the use of credit, such as a trade purchased on a margin. It is very common in forex trading, and results in being able to control $100,000 for as little as $1,000.

Although Forex trading can lead to very profitable results, there are risks involved: exchange rate risks, interest rate risks, credit risks, and country risks. Approximately 80% of all currency transactions last a period of seven days or less, while more than 40% last fewer than two days. Given the extremely short lifespan of the typical trade, technical indicators heavily influence entry, exit and order placement decisions.

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