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How (Not) To Lose Money With FX Currency Trading

Forex or FX currency trading is a risky business. Many people go into it with high hopes of getting rich and quickly find that it is easier to lose money in the foreign exchange markets than to make it. Even if you are ideally financed and have the best system, robot or plan, you may discover the sad fact that the one thing holding many traders back from success is themselves.

So in this article we look at some of the major pitfalls of forex trading and how to avoid them.

1. System hopping

One surefire way to lose money with forex trading is trying a system for a few days and giving up on it because it made a loss or two. Before you even start using a system you should be as sure as a person can be that it is going to be profitable. You have to accept losses and stick with it.

Remember that if you bail out every time that you are losing, you never give your systems a chance to put you back into profit. You will lose your shirt for sure if you hop from one system to another without giving anything a chance to work.

2. Dwelling on ‘what might have been’

One of the worst temptations of trading is being drawn into wasting time and energy on thinking about how much we could have made if only we had acted differently. Often a situation will arise that does not quite meet the requirements of your system. You wait, and perhaps it turns out that you could have made a lot of money if only you had acted.

But thinking this way is dangerous. Another time the same situation will turn against you. We tend to remember all of the lost chances to win and forget that by keeping to the plan, we also miss a lot of losing situations.

3. Impatience

You will lose money if you do not have the patience to wait for the right trading opportunity. A short run of losses can make us feel desperate for a successful trade, but we must still wait for the right market signals. Do not be led into acting too soon by excitement or the fear of missing an opportunity.

4. Hesitation

On the other hand, it is also important not to hesitate too long. When the right moment comes along, act with conviction. Have your plan written down and keep it in front of you at all times so that you know exactly when the signs are right for your trade. Do not wait until you see a trend forming to start thinking about your position size, leverage or stop loss. Everything should be in place so that you can take advantage of a genuine opportunity.

5. Letting emotions drive your trading

We all know the danger of letting our emotions lead us in any trading situation, at least in theory. In practice it can sometimes be hard to tell the difference between fear and caution, or between profit maximizing strategies and greed. Having a written plan will help again here, as will training with a demo account where emotions will not be nearly so strong.

Some people find that they cannot make money with a demo account because they are getting into experimental trades, telling themselves that it does not matter because it is not real money. If they do then start trading with a real account they are completely unprepared for the emotional punch of real time trading and have not learned any discipline to help them handle it.

So whether you are trading in demo mode or for real, take it seriously. Be sure to avoid these traps if you want to make money with FX currency trading.

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Saturday, November 20th, 2010 Strategy No Comments