subject: Common Mistakes New Forex Traders Make [print this page] Everyday retail traders are joining the forex market at an escalating pace. Featuring prominent investing assets like the dollar, euro, yen, and other currencies, strong liquidity, geographic dispersion, and a continuous marketplace, forex trading is growing in popularity.
Yet many beginners fail to adequately prepare themselves to successfully trade money. Even seasoned traders make mistakes. New traders should educate themselves regarding the pitfalls of currency trading before becoming a player in the foreign exchange market.
Beginners should be aware that forex trading often involves substantial leverage. Losing money and making profits is thus amplified through this leverage feature. A common trading strategy in the forex market involving leverage is called scalping. Here, a trader would borrow on margin to buy a currency pair and look to sell it expediently after a small price move. Leverage is a risky technique that would only be employed by experienced traders.
Because leverage is such a prominent component of forex trading, a risk premium should be added into currency valuation. If a trader is hit with a margin call, they must be able to meet the maintenance margin. Develop a trading strategy that fits within the context of a budget. An invaluable tool every forex trader should be familiar with is stop-loss orders. By putting stop-loss order in place, traders can effectively cap their losses.
Many traders develop computer-generated models to recognize trends and key reversals within a currency pair to find entry and exit points. But simulations are not foolproof and real-time currency trading can differ vastly from models. New currency traders should actively monitor forex transactions to avoid losing money on volatile price swings. Data mining in the currency market can give erroneous trend and reversal indicators just as easily as accurate signals.
Predicting forex prices can be difficult without the proper experience or training. Currency prices can be very volatile and they can be manipulated by central banks for geopolitical purposes. In addition to central banks, major players in the currency market include governments, commercial banks, investment banks, hedge funds, and other large financial institutions. Currencies are also subject to technical trading patterns, overarching macroeconomic conditions, and long-term trends, amongst other variables.
A successful trading strategy should be pliable. Don't add to losses by hoping that losing positions will turn around, even if analysis is saying the opposite. Overtrading is another common mistake new currency traders make. If an opportunity presents itself, traders should attempt to capitalize on it. But trading just for the sake of trading is foolish.
There are subtle differences between traditional instruments - like stocks - and the forex market. One common misconception new forex traders sometimes have is thinking transaction costs are substantially lower than other instruments because there are no commissions. While it is true that brokers do not charge commissions for currency trades, equivalent costs are built in by large bid-ask spreads. Another difference is the uptick rule does not apply to the forex market.
Yet despite some minor differences, the currency market is relatively similar to traditional financial markets. Instruments like forwards, futures, and options that are used for stocks and bonds are also common in the forex market, although valuing these currency vehicles differs from their equity and fixed income counterparts.
With the right knowledge and preparation, trading money can be a big moneymaker.
