Why Most Traders Set Themselves Up For Forex Trading Failure Before They Even Begin?

 source:  forexguy 

In this article we are going to cover some of the real issues on why such a high percentage of new traders fail in this profession. Let’s be honest, if you’re involved in trading of any sort already, then you will be guilty of committing at least half of these points mentioned below at some stage in your trading career.

In today’s article, we’re going to have a look at some of the common killers that plague new and experienced traders. Hopefully by the end of the article you will be more aware for the common traps and won’t set yourself up for Forex trading failure.

When people first find out about the Forex market and see how easy it is to get setup and start trading, their eyes turn into dollar signs. The internet is littered with advertisements for trading systems and trading robots claiming they can return you ‘out of this world’ figures overnight.

All you have to do is buy it, fund your account, switch it on before you go to sleep, and check your millions in your account when you wake up in the morning. Unfortunately you wake up only to find out you’ve lost half of your capital!

The Forex world is filled with marketing scams and false claims. Marketers know how to play on your ‘get rich quick desires’ and seduce you into buying their product.

Remember the age old golden rule, if it’s too good to be true, it is!

Forex is not a means to get rich quick, you can certainly make good money from trading but you must treat it like any other job/profession. If it was so easy to get rich quick from trading, why are a high percentage of new traders a Forex trading failure and lose all their money? Be sure to understand what becoming a trader means and have realistic expectations about forex trading before putting your hard earned money on the line.

Most of the time new traders step into the Forex arena unprepared. They have no plan, and have no idea how they are going to approach their trading. Unsuspecting newbies just jump straight in and make it all up as they go along. A sure fire way for Forex trading failure.

It’s critical that you have a good trading strategy/plan if you’re going to have any chance at succeeding! There is no consistency in playing it how you feel at the time. Without the consistency, it will be extremely hard to maintain steady profits, that’s if there are any to begin with.

Would you open up a new business without knowing anything about the profession first?

No. Any type of trading, especially Full time Forex trading should be treated exactly the same as starting up a new business. As a business owner, you need to do you homework first and prepare yourself for the worst case scenario. Stepping into the trading profession unprepared is like trying to drive your car in the busy city blindfolded and hoping you don’t hit anything. It’s a real good way to become a Forex trading failure.

 

You are you’re worst enemy when it comes to trading, generally it will be your own emotions that cause the death of your trading account. 

Trading emotionally can quickly wipe the coma’s and zeros off your account balance at alarming speeds. It doesn’t matter whether you are a new, or an experienced trader! Greed, fear, revenge, over confidence, impatience and euphoria are all typical emotions. These deadly sins must be addressed and controlled before you stand any chance of long term success.

Unless you want to be a Forex trading failure, you must become the Jedi-knight of discipline. Without disciplining yourself to sickening levels, these emotions will just creep back into your trading life and kill you off like a cancer.

Everyone experiences these emotions at some point in their trading career, but it’s the traders that never find the discipline control to keep their emotions away from their trading. Unfortunately a high percentage of new traders end up being another one of those Forex horror stories.

A fatal mistake amongst the Forex trading failure. It is the misconception that ‘more trades = more money’. This comes from our natural internal intuition of ‘more work = more results’.

In the real world this might be true but far from true in the markets. For every trade that you open, you increase the risk exposure of your account. Opening 5 trades with the same position size is going to be significantly riskier than just opening the one trade, and you would be surprised how many traders practice this sort of aggressive trade opening behaviour.

Let’s say all the trades go south and they all get stopped out, you’ve just lost 5 times the amount you would of if you only had the one trade open. Don’t think Forex losing streaks won’t happen to you, because they will.

Always think worst case scenario! Over trading is often a side effect from greed or overconfidence. Overtrading creates a snowball effect that becomes a larger and larger problem. Where does it normally stop? At a margin call.

Just do a quick search of the forums and you will quickly discover an alarming amount of traders posting their setups from the 15m, 5, and even the 1 minute charts. Scalping has the reputation of gaining quick profits with ‘reduced risk’ by dipping in and out of the market for very short periods of time.

This all falls back on the ‘if I do more work, I will make better returns’ analogy that most traders adopt. Most traders believe the way to trade is to scalping the low time frames with such high frequency to generate good returns grabbing lots of small quick profits.

This risk of having a trade open for around 5 minutes is really no different from the risk of having a trade open for days. In fact, there is higher risk associated with scalping strategies because the stop loss used can be as tight as a few pips. The trade has no room to breathe and the position can be wiped out just from general noise of the market.

So if a scalp trade has increased risk, and you have to take a lot of scalp trades to generate small overall profit, how is that less risk overall? Factor in the increased risk of each scalp trade and multiply that by the high number of trades that need be taken to generate a small capital return, and this is provided that all your trades are winners! How does that compare to taking 1 single trade on the higher timeframe and aiming for a larger return over time.

What scalpers do you know that have a long track record of success? All the scalpers I have come across are a Forex trading failure.

If you had 1 million dollars would you jump on the 5 minute time frame and start scalping?

Scalping is just a viral myth that new traders fall victim to, scalping makes no logical or mathematical sense and it requires you to sit in front of the trading screen for hours watching and waiting for trades. Scalping is for gamblers not professional traders. It’s much better to adopt end of day trading strategies, where you can trade, and enjoy your life at the time.

A controversial subject is the use of indicators and how effective they really are. We believe indicators are one of the causes of the majority of trader’s failure. We are price action based traders, so we don’t apply indicators to our charts. A lot of new traders want to explore their options and try using indicators with their trading.

There may be some strategies available that utilize indicators successfully, but the newbie trader tends to make up his/her own rules.“The more indicators I use with my trading, the more reliable my signals are going to be!” Heard this one before?, it’s another general misconception, using multiple indicators does not mean more reliable signals.

In fact all this does is make a confusing and stressful environment for the trader which will provoke dangerous emotional intervention from the trader, and there is only one way that will end.

The other major problem is that indicators lag behind the price movements, slow to react to things like breakouts, which is a big problem. By the time the indicator gives you the signal to enter the market, the move has already ended and you’ve missed out. Do yourself a favor, remove all the indicators from your chart, don’t be another Forex trading failure. Make the switch to a cleaner trading system. Read about the benefits of price action trading.

Money management is essential to a long term success by cementing consistency to a trader’s performance. It’s alarming to hear how many new traders ‘guesstimate’ their positions size on the fly, and change it as they jump from trade to trade. These type of cowboys end up risking way too much on one trade, and not risking enough on the next.

 

This type of behavior will cause wild swings in equity curves, and will eventually cause the account to crash and burn. Understanding risk reward is a key importance for any money management plan. New traders that actually do have a money management plan unfortunately tend to lean towards negative geared money management. This means for every trade taken, they are risking more than they are aiming for in return.

The rookie error here lies in the way they think about risk. Because the target is so small, the market will easily hit it their trade targets, and by applying a wide stop loss to the trade, it will give the market plenty of ‘room to breathe’, so it has a better chance to hit the small target. This couldn’t be more mathematically and logically flawed.

Let’s say the trader is risking $100 to only aim for a $20 return. That means for every stop out (-$100), the next 5 trades have to be winners just to make up for that one single trade’s loss. The next trade is also stopped out, losing another $100. Now the trader must make 10 successful trades in a row just to make up for these two losses, and if there are any more losers along the way, it will further push the account into the negative.

Smart traders use positive money management, aiming for at least double what they risk. This means 50% of the trades can be losers and the trader will still make money.

There are two types of traders. Technical traders who make trading decisions by analyzing the charts, and the Forex trading failure who follow fundamental trading strategies based off the news and economic events. Retail traders that use fundamental elements to make trading decisions have a much more difficult time making money, because the news can create such volatile and unpredictable trading conditions making it hard to enter or even exit a position.

Professional fundamental traders usually have a background in economics, and are really ‘keyed in’ with the economic and financial events going around the globe. They have a good understanding on how different news releases or economic figures will affect the value of certain currencies. There guys are usually connected to very fast networks to be competitive with the other market participants who are trying to get that first trade in after a news release. By the time a retail trader likes us gets the chance to position in, all the action is over.

Newbies basing their trades on financial news and economic releases usually have no idea what they are getting into. These guys are blindly jumping in with the increased volatility the news creates for that wild trading adrenaline rush! Most traders are just basing their trade decision on expected vs. actual news releases. Traders who try trade the news for quick profits generally have no idea what is really going on and have a short trading lifespan.

So when the newbie finally comes up with a trading strategy, with set rules and a strict money management plan to follow, you would think that this is beginning steps to success. Well it certainly is, but problem is not usually the plan, it’s the trader! One of the challenges of becoming a trader is learning to stick to your own trading plan.

It’s not uncommon for people to take trades, even when their trading plan told them not to. Their trading plan might tell them to exit a trade, but greed kicks in, and the trade is left open with the intention of squeezing more out of the market. Such a shame to see it turn back around to become a loser instead.

Stop losses are moved further away from the entry with the expectation of the trade turning around in their favor eventually. Give it a bit more room to move further into the negative, only to be stopped out anyway and suffer a greater loss than they should of.

Sticking to a trading plan is a strong test of discipline. If a trader can’t stick to a plan they are a going to be another Forex trading failure. There is no room for the weak, it’s a cutthroat industry where the overall time is ‘survival of the fittest’. If you display weakness, the market rip you apart emotionally and take all your hard earned money!

The great thing with Forex is that you can use leverage to control a large amount of money with a small amount of money, significantly increasing your profit potential.

If there was no such thing as leverage then you would need tens of thousands of dollars to invest before you could make noticeable returns. While leveraging is an excellent feature, it is also open to abuse. If something can be abused then it normally will be.

Leverage is a double edge sword because it allows you to make more money with a small amount of capital. On the flip side, leveraging can also lose that money just as fast if things don’t work out in your favor, so it’s best to always plan for the worst.

Uneducated traders often use max leverage settings on their accounts and quickly find themselves being slapped in the faces with margin calls! If you can’t make money with lower leverage, you’re not going to be able to do it with high leverage.

Another Forex trading failure, often fuelled by desperateness, is traders who risk more money than they can afford to lose. Risking valuable capital on one trade can cause the trader to lose sleep at night from high stress levels. You can imagine the stress on the traders shoulders when trading with money they is really needed elsewhere, it’s going to take a lot of control not to get emotional!

I hope today’s article was helpful, and a bit of a wake up call for those traders who continuously making these Forex trading mistakes. Don’t be a douche bag, respect your money, trade with a clear head and look at Forex at an investment, not a cash machine.