“Trade ForEx and Fire Your Boss!” or “Earn $100K a Year Trading ForEx!”.
These are probably the types of website headlines that made you consider trading ForEx for a living at the first place. The one I personally fell for when I was curious about ForEx trader’s salary was “Single Mom is Making $10.000 a month trading ForEx with this bulletproof strategy”. I think this guy is still making money with this “bulletproof ForEx strategy”. He certainly did get my 199 bucks few years ago.
The chances are that you probably won’t end up firing your boss or trading ForEx successfully with trader’s $100K a year salary, but, as in my case, you will blow your ForEx account balance within few days.
Sad ForEx Trading Reality
Yes, and those chances are 90%, or 9 to 1, which means that for every one successful newbie ForEx trader there are 9 other that will lose their initial account balance. This is a very high percent and there are various reasons for it.
Bad Money Management
Bad Money Management in overall Risk Management is number one reason why beginner traders fail. It should be essential part of your Fx Trading Strategy and you must take it seriously. Never ever risk more than 2% of your ForEx account balance. It may sound like something easy to remember but you can pretty easily get carried on and forget about this golden rule.
Why only risk 2%? Because you do not want to get in trouble. And getting in trouble in Fx trading is easier than you think.
As no system is 100% bulletproof and with market’s unpredictable nature you will have some losing trades from time to time. How many losing trades you will have depends on your trading skills and experience.
If you are trading with 80% success rate and you have 20% losing trades, you will be closing trades with profit 4 out of 5 times. This does not mean that you will close 4 positions with a profit and then have one losing position, followed by another 4 winning trades. ForEx reality is a bit different. It is more like you will have streaks of 2 or three and sometimes 4 consecutive positions closed with a loss recorded.
If you have been smart and risked up to 2% of your balance with each trade you would have been safe. If, for example, you have risked 7% of your ForEx account balance in each trade, lead by greed, you would have lost one third of your Fx account balance. And remember, this is with 80% success rate. Comebacks in Fx Trading are tough. Be smart.
Bad Risk to Reward Ratio
Essential part of Money Management is Risk/Reward ratio, which is important for defining your Stop Loss and Take Profit points.
For example, your Fx account balance is $1000 and you have done your Fx Technical Analysis and have identified possible profitable trade. You will open your position putting your stop loss at maximum of $20, being a smart Fx trader you are, as that is the largest amount of your balance you are willing to risk. Then you will set your Take Profit point according to your Fx Trading Strategy and your risk/reward ratio. Suggested risk/reward ratio is 1:2. In some cases, according to your chart analysis you may even use 1:3 or larger.
With risk/reward ratio 1:2 you will set your Take profit at $40 point (in pips). If trade is successful you will end up with $40 profit. If not, if trade has gone against you and your Stop Loss got activated, you would have lost only 2% of your Fx account balance. And you would know this trade was not profitable at the first place. Practice.
Greed in ForEx Trading
Greed will be your doom. If you got here thinking of Fx trading as something of a get-rich-quick scheme (and if you were like me you probably did), it is time to rethink your reasons for trading ForEx. You will be having opportunity to make lot of money but that will not be the case if you do not have right mindset.
You should be committed to your trading and consider it more like a business of your own. You do not want to risk large amounts of money with your trades because it will involve powerful emotions and those emotions are not easy to handle.
Beginner ForEx traders tend to set very unrealistic goals in their Fx trading. They want to become rich over night trading ForEx. That is not going to happen.
Common newbie Fx trader mistake: Trade has gone against them, and they start thinking that the currency exchange rate is miraculously going to turn around in his favor. They enter the market with more volume, adding to this losing position, and when miracle does not happen they end up losing lot of money. This was my case. I got stopped out after 7 trades and 3 days trading ForEx.
There is no trader winning 100% of the trades. There will be losses and you have to accept them. If you have done your analysis right you don’t have to second guess yourself. Open your position, put your stop loss and take profit points and leave it there. Don’t mess with your trades once you have placed your market orders.
Overcome Your Fear of Fx Trading
Exercise your simple Fx trading strategy and stick to it. Do not overthink and over analyze your charts. You will get confused. As said before, only 2 things matter in ForEx trading: keeping it simple and practice.
By keeping it simple you will not get in trouble with contradictory signals or clogged charts and you will be able to see and recognize Japanese Candlestick patterns and formations with greater success. With practice you will get confidence, which will eliminate fear of trading and rethinking your decisions.
Once again, consider ForEx trading as your full time job and your money invested as your most important asset and treat it accordingly.
Most Common Reasons Why Beginner ForEx Traders Fail
Trading Multiple Currency Pairs
Focus on one currency pair and stick to it. Problem with this, beside splitting your concentration and focus, is that you can easily get in the trap of being exposed.
For example, you have two open positions with currency pairs:
EUR/USD you have opened long position
USD/AUD you have opened short position
If some fundamental news affecting US Dollar hits the Fx market, your both positions would have been in danger. Stick to one currency pair at beginning.
Trading on Wrong Time Frame Charts
Beginner traders also tend to trade on smaller time frame charts, as there are more trading opportunities. Also was my case. I got stopped out after 7 trades. Today, I trade ForEx once a month or once in two months depending on the setup. Patience will come with time. Trading opportunities are endless but your account balance is not. Remember this.
If you want to be successful Fx trader use higher time charts, 1 hour and above, not just because Japanese candlesticks are more precise but because there is also less exposure to ForEx Fundamentals.
When you look up the internet for reputable ForEx brokers you will be able to find more than 200 brokers listed. Are all of them reputable and safe to use? I don’t think so. If you do half-harted broker selection you may end up scamed for your money, or you can have your identity stolen, or your internet device may get infected or hacked. Or all of the above.
Some things are a must when you are looking for a reputable Fx broker with whom you want to open practice Fx trading account.
Now that you have that get-rich-quick mist removed you can clearly see that ForEx trading reality is full of traps which, if you take them lightly, will ultimately end your ForEx trader career. But if you keep it real and simple and decide to approach Fx trading with cool head and dedication, you might just make it and trade ForEx for a living. It is all up to you.