4 Best Ways To Avoid Losing Money Trading Forex
Forex trading is a skill, and just like every skill, it has to be learnt. However, by understanding some of the common mistakes that traders make, the learning curve can be shortened. Listed below are the some of the best ways to avoid losing money trading forex.
1. Trading Emotionally
One of the key reasons why forex traders lose money is because they trade emotionally. Avoiding emotional trading can be the best way to avoid losing money in forex. When we say trading emotionally, we mean things like revenge trading. People revenge trade when they lose money trading forex and then take ill-conceived trades to try recover that money back.
Another form of emotional trading is over-trading. Some forex traders get a buzz from being in a trade. It is this buzz that makes forex traders again take inappropriate trades just for the excitement.
Another example of emotional trading would be traders not closing losing trades. They don’t close the losing trade because they feel it is bound to turn around, ultimately these can lead to huge losses.
2. Not Using a Stop Loss
Another reason why many forex traders lose money, and is somewhat linked to the above, is related to stop losses. Stop losses are a protection that traders can set to ensure they control the maximum amount of money they can lose on a single trade.
However, many new traders tend to not trade with stop losses. This is because they are told that trades need to be given ample space to move against them before moving into profit. This couldn’t be further from the truth.
If you take high probability trades you shouldn’t need a big stoploss, and if you do, you have taken the wrong trade.
Depending on news events and other market reactions, prices can move extremely quickly. If you don’t have a stop loss, you have no protection against these huge swings.
3. Trading Without a Plan
Yet another reason why forex traders lose money is trading without a plan. A trading plan is a set of rules that you use to determine whether you should enter a trade or not. This could be a simple plan like moving average crosses or a complex plan involving multiple indicators and confluences.
Whatever the plan sticking to it enables the trader to remove the emotions from opening a trade. If it doesn’t meet your plan you simply walk away, no questions asked. Once you have a trading plan you can then begin to modify it and look for patterns between successful and unsuccessful trades, refining your trading plan accordingly.
Not having a trading plan means that you are trading on gut instinct without any real understanding of what you are doing. This is tantamount to gambling, and is one of the biggest mistakes forex traders can make. A successful forex trader needs to be disciplined.
Think of a playbook for a soccer team, or a training regime for a boxer, they are the equivalents of a trading plan. There is a saying, “plan your trade and trade your plan”, and this couldn’t be more true.
4. Oblivious to the News
Finally, another reason that forex traders lose money is being unaware of news releases and economic circumstances. Currency prices are driven by both economic performance for a particular country as well as reaction to things that are happening around the world, such as wars or political instability.
Many forex traders ask the question as to whether technical or fundamental trading is better. The reality is that you need a bit of both to be successful. Technical trading is about finding opportunities on the chart where it is a good place to enter or exit a trade.
However, fundamental data and political news ultimately affects the direction and volatility. Let’s say you discover a head and shoulders pattern on a currency pair, and it’s about to break the neckline. That would suggest a good opportunity to enter the trade.
However, a couple of hours after you enter the trade the central bank of the currency you are selling suddenly increases interest rates. That instantly pushes the trade in the opposite direction and you are stopped out.
So while it’s important to use technical analysis to identify the entries and exits, it’s also vital to keep an eye on economic releases and political events to ensure that your technical analysis is in line with what fundamentally is going to happen to that currency. You don’t need an economics degree to understand fundamentals, there are plenty of resources that forex traders can use.
Just a basic understanding of fundamentals can be the difference between being a successful forex trader or unsuccessful forex trader.
I hope this summary of the best ways to avoid losing money trading forex is useful. There are many more pitfalls that you need to avoid as a new forex trader, but these are some of the most common. Keep an eye out for other articles focusing on other topics to help you become a successful forex trader.
Happy Trading
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