Experienced traders will agree that every foreign exchange trader will experience at least one devastating, trading account depleting loss in their forex career. Yet, the forex market does still remain one of the most lucrative trading markets in the world. The question remains: how do traders fail in this highly profitable financial environment? This article will discuss the most common mistakes forex traders make that lead to losses.
1. Trading with a forex trading plan
All effective business ventures begin with a sound business plan, it is the same with forex trading. In order to be a successful trader you must have an effective trading plan. This trading plan is a guide that details all aspects of one’s personal trading system including the trading tools, analysis and risk management feature. If you do not have a trading plan you do not have a base on which to trade. Furthermore, this plan of action helps remind you of your trading style should you ever fall subject to emotional trading.
2. A lack of discipline when trading
A lack of discipline on the foreign exchange Melbourne market is synonymous with emotional trading on this market. It occurs when you experience an emotional reaction to a trade result. When a trader experiences a succession of losses or a particularly damaging loss they may find it difficult to handle psychologically. It is common for traders to show a fear of the market which influences their future trades. As is mentioned, a strong trading plan can help a trader maintain discipline or rectify an emotional trading mistake.
3. Learning through trading mistakes
The most effective way to succeed on the forex market is through studying your past mistakes. If you are experiencing losses it is best to step back and find out why. By identifying these problems you will be able to adapt your strategy accordingly and rectify the behaviour. A trading plan can only guide your behaviour, but it is you who sets that guide. It is advised that new traders use demo accounts when adjusting their trading plans in this manner. This way learning from one’s mistakes will not be as costly. Another method is by shadowing a forex professional and adjusting your strategy according to their trading results. This latter method also allows you to gain advice from the professional.
4. Inadequate risk management on the foreign exchange Melbourne market
One of the most important parts of a trading plan is risk management. All forex trades involve a degree of risk and it is essential that you prepare for it. The most common method to reduce the chance of losses is by using a stop loss order. By placing a stop loss order you are preparing for a loss should the market turn against you. Further methods include the availability of different strategies for different conditions. This ability to adapt reduces disadvantageous trades.