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Tuesday, July 20, 2010

Dear Lord, We, The Forex Traders Do Make Mistakes...Guide Us Please!

1.Day Trading and Scalping

Compared to all other types of trading, scalping is by far the hardest to master. Many amateur traders make the mistake of thinking that by trading in the very short term, they increase the probability of profiting from a trade. It's intuitive to think that small, quick trades are easier to profit from, isn't it?

In the Forex market however, the reverse is true.This is because of the volatile nature of the Forex market; market prices can fluctuate rather violently without any good reason at all. Although you risk smaller amounts of your capital when scalping, you're actually dramatically increasing the probability that your stop losses will be hit.

Although I've personally met people who are proficient scalpers, it might do you well to know that they are highly trained and experienced traders. I've never met a beginner trader who was successful at scalping. If you want to try your hand at Forex trading, do try to trade on larger time frames such as using hourly or daily charts instead. Avoid trading using minute charts at all costs!

2.Trading Breaking News

This is one of the most appealing schools of thought among the Forex trading community. Who wouldn't like to benefit from a quick 100 pip gain in less than 10 minutes?

The allure of quick, one time profits is what drives many traders to try their hand at news trading. Personally however, I would strongly discourage most inexperienced traders to news trade.

The reason is simple: the institutional traders (i.e. the big players) have all the advanced technology and knowledge in the world to beat you at this game. Their news feeds are faster, and they have their own in-house economists and currency strategists.

What do retail traders have? A top-notch desktop computer with a high-speed internet connection at best? Even their broker platforms won't be able to keep up with the volatility that occurs during news announcements. And not to mention the larger spreads that retail traders pay compared to the institutional traders.

To be a rich retail trader, you'll have to work on your strengths and avoid your vulnerabilities. News trading is definitely not for the average retail trader, so please pick your battles wisely.

3.Trading Expert Opinion

All the forex news you see looks so convincing and today, we have TV channels and lots of resources on the net but there only opinions. They won't help you win. If they did, more traders would win than they did 50 years ago and this is simply not the case - the ratio remains the same. Sure, the news sounds convincing but chances are its wrong, as it reflects the views of the majority who lose.

The traders who do this need to learn the following - markets move to perception of the news not the news itself and how far it is already discounted. Markets always crash when the news is most bullish and rally when its most bearish and trying to trade on the back of it is a waste of time.

4.Trading a Forex Robot with a Simulated Track Record

You can buy these online and they tell you that you can get rich for a few hundred bucks, you won't be surprised to learn - you can't. Most of these robots have great track records, the problem is there simulated over past data and won't help you make money - there not worth the paper there written on, we can all be rich if we know what happened and could trade it!

A Forex robot software is a software that can help you to calculate and analyze the market trend. Some common functions that can be found in the software will be predicting the possible short term trend, automatically generate buy and sell signal by analyzing the Japanese candlestick indicators etc.

However, due to the convenience of the Forex software, many people have done several mistakes that can cost them thousands of dollars. One of the great mistakes is they tend to have too much faith in the software and decided not to put a stop-loss limit, and they often trade with very little deposit left. Once the prices go against them, and the brokers call for a margin call, it will be a total disaster for them.

Another mistake that people tend to make is they left the Forex robot software alone to do all the tradings automatically without monitoring them, thinking that money will continue to roll in. This is very wrong the Forex softwares can only trade according to the trend. It is vulnarable to the sudden fluctuation due to news. The traders should monitor the chart and the news closely so to avoid any losses due to sudden fluctuation.

5.Trying to Predict Forex Prices In Advance

Prediction is another word for hoping or guessing and that won't get you far in forex trading. You can't predict forex prices in advance so don't try. Act on the reality of price change and trade the truth.

Many gurus sell scientific systems that claim they have found the formula for market movement and all you need do is follow them. If however markets did move to a scientific theory, we would all know the price in advance and there would be no market. Prices move because markets are uncertain not certain!


6.Failure To Use Stop Loss Correctly


Stops are necessary to avoid bad losses, however poorly placed stops can be just as bad. Before placing a trade the trader should consider the risk to reward ratio for the trade. The stop needs to be set with the traders money management in mind and should not be too close or too far away from the price. Traders should also consider moving their stop as the trade goes in their favor to lock in profits and reduce potential losses.

7.Over Leveraging a Small Account

You can get up to 400:1 leverage with many forex brokers and most traders think the more they leverage they use the better - but they get stopped out quickly and their accounts are soon wiped out.

When traders use a high level of leverage the returns can be astounding, but when the trade doesn’t work out the result can be catastrophic. Traders should always calculate the value of the risk they are taking for each trade and ensure that this is appropriate for their account balance. Experienced traders rarely risk more than 2-3% of their account balance on any one trade.

8.Relying Too Much On Technical Indicators

Technical indicators are great tools that assist traders to make decisions. However making decisions for trades based solely on what the technical indicators are telling us can result in large losses. By considering fundamental information together with technical information you will have a much better chance at being successful.

9.Failure To Control Your Emotion And Discipline

Forex trading is a highly volatile market. Emotions tend to run high and low, and either of those extremes can influence your trading decisions, unless you have a strategy planned in advance, and stick to it, no matter what you THINK you’re seeing at the moment. The trick to making money in the currency exchange market is to avoid making emotional decisions and follow a carefully thought out strategy that takes the current market and history into account. Letting your emotions rule your decisions can hurt your trading in several different ways. It’s the reason that most experienced traders tell beginner or novice traders that they need to develop a trading system, and stick to it no matter what. The system tells you when to buy, what to buy, when to trade and what to trade for. By sticking to your system even when you want to fly in the face of accumulated data, you’ll maximize your profits.

A trading system based on Technical analysis of historical market trends is one of the most potent tools that you can utilize if you’re just getting started in Forex trading – and many traders with years of experience continue to use their system to keep the profits rolling in. In fact, many will tell you that when their ‘gut instinct’ and their system collide, the system is almost always right.

Analysis of trends in the market will show you that the market moves in trends within overall patterns that are predictable. No trend moves smoothly in an up or down line – there are inevitable periods of time when values suddenly spiral up or down based on some outside factor. These are the times when emotion can hurt your portfolio. When a currency that you’re holding takes a sudden dip south, it’s tempting to succumb to panic trading, cut your losses and run even if your system tells you to hold on. On the other hand, it’s easy to catch the rising excitement as a trade starts increasing in value and scramble to buy more of the same. These are exactly the times to rely most heavily on your trading system. It will tell you exactly when to trade for maximum profit.