In FOREX trading, there are six major reasons traders lose money. If you can avoid these pitfalls then you can join the minority of winners that pile up the big profits consistently.
Here are the trading traps that will cause you to lose money:
1. The Contrarian’s Disease
You should have a contrary opinion to the other Forex traders in the market – most traders lose money, so you want to trade in opposition to the herd.
Most traders lose because they lack discipline and money management - but they’re very often right about market direction. It’s the trader’s inability to maximise these opportunities when they’re trading the FOREX - and stay with the trend, that makes them lose money.
Many traders are looking to pick tops and bottoms, and never focus on trend following. Picking tops and bottoms is impossible. You can’t predict the turning points in FOREX trading - so you need to change your focus to trend following, not prediction.
2. The Chartists Trap
In FOREX trading many traders fall into the trap of putting all their efforts into studying charts. Studying charts is important - but you must not be too subjective, or you will end up losing.
Avoid methods that need too much subjective analysis, such as Elliot Wave and cycles - and gravitate towards indicators that define trends - such as moving averages and momentum oscillators.
Be objective and not subjective in your FOREX trading.
3. Ego
FOREX trading attracts some of the cleverest people in the world, these traders are smart - but they also have big egos. An ego is a bad trait in FOREX trading - as it means you always want to see the market, as you want to see it - and not how it really is.
Traders need to ask themselves this question: Do you want to make money or feel smart? The market won’t accommodate both of these desires – if you want to make money, leave your ego behind.
The humble trader who has an objective and disciplined FOREX trading plan, realizes the market can make him (and everyone else) look stupid. However, he’s only interested in making money, and he’ll generally out perform an ego filled trader, who wants to beat the market.
4. Guru Syndrome
When you’re trading in the FOREX market, it’s tempting to follow someone who’s made money - or says they have.
It’s a fact that most traders want success given to them by someone else, and these traders can’t take responsibility for their own actions.
In the game of FOREX trading, the only way to succeed is on your own - if you can’t accept this, then do something else.
5. Chasing your Tail
Many traders get impatient when FOREX trading - they start trading using one method, get frustrated with it when it’s not performing - they then switch to a different method, and so on.
Bad periods are normally followed by good trading results (if you’re using a soundly based system) - so patience and discipline are needed. By frequently chopping and changing systems, you’ll lose money.
If you have a trading plan that you believe in, then stick with it - and stop chasing your tail. Stay focused, and be patient with your system.
6. Using Options Incorrectly
When you’re FOREX trading, using options gives you staying power - and limited risk, which makes options a great trading tool.
Many traders use options incorrectly - they focus on buying options with small time value, and that are way out of the money. This is a guaranteed way to lose money when options trading! What you need to do is focus on buying options, at or in the money - with lots of time value - also use spreads to increase your chances of success.
In conclusion - Don’t try and be too smart - the above pitfalls are made by some of the brightest traders around. In most cases these mistakes come from thinking you have to be clever, or use complicated methods to succeed - however the reverse is true.
Keep your method simple, keep your focus, accept responsibility for your actions, and accept that the market will make you look stupid at times – it does it to everyone!
If you watch out for the six pitfalls outlined above, you’ll be able to make big long-term profits - and that’s the ONLY goal in FOREX trading.
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Written By: Stephen Todd
