PITFALLS TO AVOID IN FOREX TRADING
I have been on the forex trading journey for a while now. I have learnt the hard way what to do, how to do it, and when to do it. I have also learnt what not to do. If you want to avoid the dangers that lurk in the world of forex trading, this article is for you.
Underestimating forex trading and assuming it will be easy.
It is best we get to understand certain realities; forex trading is not easy. The faint-hearted should not attempt forex trading. Many have been attracted by the illusion of quick profits and obscene returns. Possibly you have watched a video where a trader (possibly a scammer) is showing off lots of profits, either in terms of real money or on the MT4 screen in blue (indicative of profits). Usually, thereafter, many individuals express desire to start forex trading with little to no knowledge. The assumption is that if I dedicate a few days or weeks, I will be able to trade profitably. Many people walk away when forex trading is unyielding after a few inconsistent attempts. No worthwhile endeavour in this world is easy.
Point to note: the majority of would-be traders take 2–5 years of trading before breaking even. When I say break even, I imply there is a sunk cost (lost capital or blown accounts). Approach forex trading with the expectation that it will demand more from you. Make no mistake, there is success and fulfilment in forex trading in the long run.
Linear thinking and unrealistic expectations
If I make X trades per month and make Y profits multiplied by 12 months, I will make Z dollars by the end of the year, so the argument goes. I used to think like this. Linear thinking convinces you that everything in forex is additive or multiplicative; there are no delays, no losses, and no compounding.
Repeatedly, I have advised individuals to approach forex trading as a business first and then look to cash in on the profits much later, when the business has grown. You have to be willing to put in months—possibly years—before you reap the benefits. Remember, the forex market transfers wealth from the impatient and incompetent to the patient and competent.
Poor risk management and position stacking
In relation to linear thinking, when greed sets in, sense leaves the equation. Traders make reckless decisions that expose them to unnecessary risks. This includes oversized lots and position stacking. Often times traders will trade aggressively by placing unnecessarily large lot sizes on small accounts. Other traders will stack trades; place several trades of one instrument with the objective of maximizing returns. The outcomes are usually heart-breaking. This is one sure way to blow your accounts in pursuit of unrealistic profits.
In forex trading, you focus on protecting your capital and minimizing risk before you can think about returns. Take care of your downside; the upside will take care of itself. Remember, forex trading isn’t a sport; aggression is not required.
Comparison, the thief of Joy
My little experience has taught me that the grass isn’t always greener on the other side. Comparing your journey, process, and profits is a sure way to entertain doubt and jealousy. Doubt has a way of convincing you that others are doing better than you. I was once told that comparison is the thief of joy. Sometimes I have compared my own analysis with that of other traders and altered my analysis, missing out on profitable trades. It doesn’t matter how much your competitors are making; stick to your journey and trading plan and submit yourself to time. Interestingly, once I am done training a student, the first instruction is to unfollow me on all social media platforms. I need them to develop confidence in their skills without comparing themselves to me.
Stale knowledge and complacency
I suffer from this disease, as do many former masters. Champions have this insatiable desire to always improve for their own satisfaction. In trading, the same approach is required if you are to advance to mastery. I have noticed that once you settle into your rhythm and style of trading, one tends to let go of the hunger to do better. Over time, you fail to notice simple errors that compound over time and derail your journey. If you are still analysing the market the same way you did 12 months ago, something is wrong.
I make it a habit to always clear my charts and analyse markets afresh. It takes time, but it allows me to look at the market differently once I’ve gathered new information and knowledge. I make it a habit to schedule two learning sessions per week where I watch masters in forex trading and seek to learn something new.