Forex trading, contrary to popular belief, is an extremely difficult form of finance. The forex market is unpredictable, nearly impossible to predict on a long-term basis, and ever-changing. There are so many factors that contribute to forex that it’s nearly unthinkable for a single person, even experienced forex traders, to fully wrap their head around it.
Think about it: how many factors go into calculating the economic health of a huge financial entity like the US, for instance? Taking into account only domestic events, there’s job data, central bank policy, political events, stock market health, general industry, specific industries, and how they affect the overall market, and much, much more. Then, there’s are also international events: diplomatic relationships, trade balances, and how global power standings are affected by events in other countries.
And remember, forex is traded in pairs. So, even if you’re confident in your USD analysis, you have to do that for at least another country or bloc. And that’s all for a single forex pair.
A lot of forex traders go in underprepared, don’t put in the required effort, and don’t follow intelligent trading routines. It’s no surprise that 70-90% of all FX traders fail, depending on the brokerage.
This article highlights the mistakes most new forex traders make and explains how to avoid them by approaching the market with a healthy, growth-based mindset.
Gurus and Influencers for forex traders
With the growing popularity of forex and retail finance, faux gurus have come out of the woodwork. These people claim that forex trading is an easy way to earn extra income, even going as far as suggesting that traders can’t lose money with certain tactics.
This is obviously untrue. Referral programs, follower counts, and general clout inspire gurus and influencers to tell people what they want to hear. However, this can be incredibly harmful, especially when their followers are goaded into investing more than they can afford to lose.
Not all influencers and gurus are bad. Some genuinely try to educate their audience and create a healthy trading community.
However, it’s smart to avoid them if:
- They are promising easy earnings
- They are emphasising market simplicity
- They are overreliant on technical analysis, with statements that if a certain pattern appears on a chart, a specific thing must happen
- They are encouraging people to register or deposit quickly
- They are making promises that sound unrealistic
Avoiding people who don’t mean well is the first step towards finding your footing in forex. However, knowing what not to do wrong is not the same as knowing how to do something right. That takes us to our next point.
Education above all
Some people aren’t really interested in trading forex, but only in increasing their earnings. These people see forex as a way to achieve their goals, but don’t want to get into the gist of it.
Unfortunately, in forex, there are no shortcuts. Those who don’t put in the required effort will get burned at some point.
As such, traders need to familiarise themselves with key concepts and underlying mechanisms that turn the cogs of the forex market. That may sound intimidating, but it’s much less scary than going in guns blazing and suffering debilitating losses.
It’s also much less frightening when you understand that you don’t need a college-level education. You simply need to learn the basic principles of how things work and then build on that. General economic principles like opportunity cost, supply and demand, and the functioning of speculative markets are a good starting point.
FX-specific education for forex traders
Once traders learn about markets in general, they can progress to forex education. Terminology is a good starting point, as it helps traders understand the articles and learning materials they’ll encounter. Broadly, the best way to learn this is to Google unfamiliar terms and then ask AI tools if the explanation doesn’t suffice.
Some key terms include:
- Margin/leverage
- Pips
- Lots
- Bid/ask
- Bull/bear
Beyond that, understanding monetary policy, inflation, interest rates, and such will drastically help understand the forex market. Once traders have a firm grasp on all of this, it’s time to move to analysing the market.
The two basic kinds of analysis are fundamental and technical. Fundamental analysis is about what we mentioned at the start of the article: the underlying principles that make prices move. Technical analysis, on the other hand, focuses on the market itself, with things like trends, chart analysis, indicators, and past performance.
Getting to know trading software is next. MetaTrader 4 is the most prominent platform, so it’s a good starting point for most traders. A good way to do this is to get a demo account with a brokerage and follow one of the many available tutorials online to identify key features.
The last step is choosing a strategy and devoting yourself to learning the specific assets you are interested in trading. This step is the most complex and will depend on many factors, such as the time you’re willing to devote to trading and trader preferences.
All of this can be a lengthy process, but it’s much better to take your time than to rush things. Underpreparedness is one of the most common forex trading pitfalls, so by prepping properly, a trader puts themselves in a much better position.
Risk management
The next most common thing that makes traders fail is getting too ahead of themselves. They place a few good trades, feel like they’ve got everything under control, and then a few big losses wipe all their progress and then some.
Risk management is a key aspect of trading. Without it, it’s impossible to expect any sort of longevity. And while managing risk is an incredibly deep topic, for starters, it’s only important to know the basics:
- Don’t overleverage: Leverage is an alluring tool, but also an extremely dangerous one. Winning while using high leverage feels great, but when a highly leveraged trade goes south, it can decimate an account. When starting out, traders should always err on the side of caution when margin trading.
- Don’t overcommit: Beginner traders should only risk a small portion of their capital for each trade. Anywhere between 0.5% to 2% is the level most people recommend. This will prevent one bad trade from destroying a good portion of the trading funds available.
- Calculate portion size: Sometimes it can be difficult to determine how large a trade you are actually placing. Using portion size calculators can help determine the right size based on your capital and risk tolerance.
- Always set stop losses: These close your trade automatically once it reaches a certain point. This allows traders to control their risk precisely and not worry about their positions, even when they are away from their platform.
As traders get more skilled, they may opt to break some of these rules and employ more complex risk management mechanisms like hedging, for instance. However, this should be done only after a trader has amassed both experience and knowledge.
Forex traders branching out
Another reason that forex traders fail is that they confine themselves to their own box. They limit themselves to only a few currency pairs or, for instance, majors as a group.
This limits their potential severely. Sometimes, market conditions can be just bad for their preferred asset, and they are leaving other opportunities completely unexplored.
Once they have a firm grip of their starting assets, traders can access new avenues by branching out their skill set. They may opt to learn how new pairs work or explore CFDs, which most forex brokers also offer. This way, they can increase the tools at their disposal to handle different market situations and conditions, as well as deepen their market understanding as a whole.
Wrapping up
The main takeaway is that forex trading takes time and caution. Traders shouldn’t rush into things before preparing for what the market can throw at them, and when they do access the markets, they shouldn’t get carried away and forget to manage their losses.
Only by investing the effort and care needed can traders hope to navigate the complexities of the forex market, but for those who do put in the effort, it can be immensely rewarding.
Disclaimer: This information is not considered investment advice or an investment recommendation, but instead a marketing communication.
