In this article, we’ll explain how you can instantly improve your Forex trading results by fixing three simple, but very common mistakes that you are probably making.
The first mistake concerns risk management. You have probably heard about leverage in trading and maybe this has even attracted you to it in the first place. Leverage allows you to trade with more money than you have in your account, similar to how you can buy a house with only a fraction of the money down, using a mortgage to cover the rest. Of course, using leverage exposes you to the risk of losing more than you have as well as making extra profit. Risking too much in the pursuit of profits is called overleveraging. Overleveraging is involved in most retail traders blowing up their accounts. This is because it only takes a small loss to make a huge dent in your equity. The first thing you need to do is stop using leverage. This is simply a temporary step as part of your development as a trader. This will allow you to focus on the process of trading without worrying about wiping out your account. You will notice a huge difference to your confidence and mindset when you make this small change. But this is only a fraction of effective risk management. It is not just about how much money you risk on each trade. In fact, the biggest way to reduce your risk in trading has nothing to do with money or risk-reward ratios at all. The key is in having the right knowledge so that you simply know what you are doing.
The great investor, Warren Buffet, once stated that risk comes from not knowing what you are doing. This simple fact is actually what holds almost all retail traders back from ever becoming successful traders. We can illustrate this with the example of rock climbing. If we told you that two people were climbing a dangerous cliff and that one of them will fall off. You may say that each climber has a 50/50 chance of making it to the top. However, if you then found out that one of the climbers was highly skilled and had been climbing cliffs like this for 20 years, and he had all of the safety equipment and appropriate gear, while the other person has zero experience in climbing and in fact has never even climbed a small wall. He also has no safety equipment and is wearing inappropriate clothing. Would you still feel that each climber has an equal chance of making it to the top? Probably not. Trading is the same. If you have not learned the correct skills and do not have the right knowledge then it is impossible to build the experience necessary to ever become a competent trader. And if you do not have that valuable knowledge and experience it is highly likely that you will simply continue in a cycle of losing until you run out of money or give up in frustration. The very famous fact that over 95% of retail traders fail to make money is not surprising at all when most of them are not even learning the correct skills and methodology in the first place. This leads us nicely into the second biggest mistake retail traders make. Trying to trade solely using technology-based analysis, systems or robots.
If you have been searching online for information about trading then you have almost certainly encountered educators that focus primarily on technical analysis. You may have even been told directly that this is all you need or that every piece of news or information is displayed in the price. Some educators even go as far as to say that news is dangerous and volatile and should be completely avoided. Instead, they present simple-looking systems that do all of the work for you. It makes trading seem easy and simple and that all you have to do to make money is to follow a few simple instructions or even just plug their system in while you sit back and make money. This, of course, is very appealing to retail traders looking to quit their jobs and make trading their primary income. Unfortunately, this does not work and this is certainly not how professional traders working in banks or hedge funds operate. You can confirm this for yourself by simply watching the main financial news channels. The vast majority of discussion takes place around the fundamentals with only a small mention of solely technical analysis. Very often you will also see traders at their desks on these programs. Look at what is on their screens. How similar does it look to your trading screens right now? What do they appear to be looking at? The short answer is information. The real mistake that retail traders make is that they fail to pay attention to and apply the correct information in their analysis when trying to find trading opportunities. This information is more commonly known as fundamental analysis. Fundamental analysis is designed to help you understand the reasons why the market is moving so that you can make intelligent trading decisions in line with what the rest of the market is actually doing. Trying to trade purely on price movements, with no regard to fundamental analysis is just not how professional traders operate and if you fail to follow their lead you are effectively just an inexperienced rock climber doomed to fail. Of course, technical analysis has its place but you need to understand where it fits in and how to access and utilize the same information that the professional institutions are also using.
If you trade solely on technical analysis then you are effectively trading blind. If you do not know what the rest of the market is doing or the reasons why the prices are moving in the way that they are you will quickly lose confidence in your strategy. And this brings us to the final huge mistake that most struggling retail traders are making every day, switching. Switching is when you find a system or strategy that you like the look of. It seems simple, attractive and you have a feeling that it will give you the consistent winners that you crave. Your next step is to backtest this which seems to show that you will make hundreds and hundreds of pips every day on a regular basis. You begin trading on Monday morning and within a very short space of time the results you get from trading the system live differ greatly from your backtested results. This causes you to almost instantly lose confidence You then revert back to searching for another system or strategy until you find one. You then repeat the whole process over and over in an endless cycle. This cycle is what we refer to as switching. If you are in this cycle then you have probably felt at least some frustration with your progress. You will only ever experience losses in this cycle because you cease applying a strategy at the point where you are in drawdown or have experienced an overall loss. Simply repeating this cycle can only ever chip away at your account and reduce your balance, even if you are not using leverage. It may feel like your knowledge of trading increases almost every day but your performance remains static and poor. This is the direct result of not having the correct knowledge, focusing too heavily on technical based systems and going around in circles between those systems by switching. If you have been making these mistakes then the solution is very simple.
The key to understanding the markets correctly, avoiding an over-reliance on technical based systems and ending the cycle of switching is all in starting to learn and apply fundamental analysis. By doing this, you will be following the same process and using the same information as professional traders working inside funds and firms around the world. The most exciting part is that you will start to see an improvement in your trading almost right away!