IS FOREX A SKILL OR A LUCK? [ 10 Main mistakes of Forex Traders]
Risks on your way in Forex
Risks management is a key factor in trading as a successful forex trader. You can be a very talented investor and still lose badly due to improper risk management. Risk-taking is not just about calculating the gains and losses of a trade, but also about your emotions and self-esteem. If you take too much risk, you can lose everything. But taking too little risk means you will never make any serious money. The problem is that risk appetite is individual to each person.
Risks in the Forex Market can be divided into 4 groups:
- Trading risks
- Psychological risks
- Technical risks
- Non-market risks
Let's take a look at the main trading risks:
Exchange rate risks
Exchange rate fluctuations in Forex trading are the basis for profit-making. Currency markets are very difficult to predict as many factors affect currency rates. You should therefore not forget about setting a stop loss.
Leverage is quite attractive between 10 and 2000, but there is a major leverage risk inherent in this attractiveness. You have you choose commensurate leverage and insure yourself against incurring losses.
Forex broker risks
Your broker may change the terms of forex trading and they become less favourable for you or if your broker becomes insolvent, you may not get your money back. Trade with brokers you trust.
The main psychological risks:
Lack of confidence in yourself and your abilities, focus on the opinion of other traders.
Every trading system is unique, it can be based on known algorithms, but all parameters are determined by the trader himself. The trading system is not known, it is better to master your skills on a demo account until you achieve a stable result.
If you manage to earn much and do not incur losses for a long time, some people start to feel like professionals who have understood the market. Such overconfidence usually leads to a sad outcome.
Trading without any system or sense of purpose.
Entering the market because you think it will be this way and not that way usually brings a negative result. Every trade should be justified.
Attempts to make a perfect trading system.
There are certain limits, once reached, you should stop and just let the system work, bring income.
Panic in the market.
Quite often, especially after an important news release, the currency price starts jumping around like crazy. Consciousness tends to be zero.
The main technical risks:
- Unstable internet connection.
Internet connection interruption at the wrong moment can lead not only to missing a good entry but also to not being able to close a deal manually if it's provided by the trading system.
- Insuficient computer power.
If you open many tabs with charts, there is a possibility of slowness, not quite adequate display, and gaps.
- Power failure.
This does not happen often, but it does happen, so it is worth providing backup power options.
- Hardware failure.
The operating system or the trading terminal may crash at the most inopportune moment.
Non-market risks in Forex are those risks that arise artificially, irrespective of market instruments.
Lets us consider the main non-market risks:
Actions of central banks and national governments as well as of legislative authorities.
The essence of these actions is the imposition of administrative barriers that in one way or another prevent the implementation of market trading in its pure form.
This is an official statement by high ranking officials at press conferences, in the news, or on social media.
Only some of these can be monitored in time, the rest may appear suddenly in the information field, provoking the markets to react
Natural disasters, terrorist attacks
These are force majeure, i.e there is no way to foresee them.
Forex scams and fraud
Offers and advertisements which sound too good to be true are more often than not talking about fraudulent foreign exchange trading.
Based on the above it should be remembered that is impossible to avoid risk completely, but it can be optimised or reduced to a minimum. Risk management on the Forex market is a set of measures and actions that allow you to correctly manage your capital, preventing the loss of a significant part of your funds. Risk management is a part of the trading system that tells you exactly how many lots should be held at any given moment and how much risk should be taken.
10 Main mistakes of Forex traders
The first major mistake trader make is not having a system. Even if you trade like a professional, you won't always do well without a cheat sheet. Anyone who wants to be successful must have a plan.
The second major mistake traders make is not having an algorithm. Even if you have a really good system, but it is only in your mind you are bound to lose capital. You need a clear algorithm, a step-by-step plan that consists of the most important things:
- What to do and in what situation.
- The sequence in which to do everything.
The third major mistake is that most traders do not place stops. Eventually, this approach will take you out of the market for sure. It all depends on:
- Speed of the Internet
The more you earn in the beginning, the harder the impact will be when you lose it all. A good trader never takes a risk and puts a stop where it is required.
The fourth major mistake trader make is the lack of money management. Some traders don’t even know what it is at all. Money management is a big component of successful trading on the market. Not a single professional trader in the world works without money management. As it is responsible for:
- Selecting the size of positions
- When to increase the volume
- When to reduce the volume
The fifth major mistake traders make is to close a trade before reaching a profit. Many close a profitable trade with their hands earlier than necessary, losing good money on it. This way you just break your stats.
The sixth major mistake traders make is that most don’t even keep statistics. Statistics are the basis for your trading system. It is the only way you can see where you are going wrong and where you are making money. Trader´s statistics show what you are doing and what you will do in the future. You cant eliminate mistakes without statistics because without them you simply won’t see them.
The seventh major mistake traders make is to change their strategy while trading. It is foolish to change your strategy during trading and justify yourself for various reasons. In reality, you just could not follow your strategy and started changing it. You should improve your strategy only on statistics and during non-business hours.
The eighth mistake is taking big risks. Excessive risk always leads to losing money or huge drawdowns.
The ninth major mistake is trading in times of trouble. Trading at a time when one is emotionally unstable due to conflicts at work, or something else is a shortcut to a loss. Trade only when your head is clear and in a good mood, and you don’t have any debts or obligations hanging over you.
The last major mistake is wanting to do everything at once. Remember that there will always be a market, there is no need to rush and do everything at once. If you rush today, you won’t be in the market tomorrow.
Remember about all the mistakes and do not make them.
Reasons Why Forex is not Gambling (Forex Trading vs. Gambling)
Some people and sometimes traders themselves say that Forex is like gambling at a casino. You also bet and you cannot predict in advance whether you will win or lose. However, using this logic, we can say that investing is also a casino. In this case, neither the amount of winnings nor the probability of winning is known in advance. That is why it is necessary to make a clear distinction between gambling and earning or investing.
To solve this problem, let us look at the distinctive features of gambling. The main one is that there is no pattern in gambling which allows profits to be made with a probability above 50%. This is because crossing this limit will lead to bankruptcy of any gambling establishment, since, on average, a player will win, not lose.
Consequently, gambling initially excludes the possibility of systematic earning, i.e. it is aimed precisely at entertainment. Of course, it is possible to win money in the casino but is only by chance, not by regularity.
Unlike gambling, the Forex market or the process of investing funds has its own laws due to which a trader or investor can make a forecast of future market movement and this forecast can be made higher than 50%. This automatically transfers these typed of activities from the category of gambling to the commercial sphere where the level of income is determined not by chance but by the experience and abilities of a person.
Additional evidence that the forex is not the same as the casino, is the fact that the strategy, strictly speaking, will not work in the casino, because there is no way to minimize the number of consecutive losses. For example, if a player in the casino, all the time puts on “red”, following the theory of probability, there may always be a situation where the “red” will fall as 5 and 10 and 50 or even 100 times in a row. It is possible. In the Forex market, as a rule, the price changes within reasonable limits, and on it you can play, extracting profit.
Since Forex is not a gambling business, there are investors willing to give their funds for trust management to experienced traders, expecting to make a profit of 20 per cent or more per annum. On the one hand, this is a rather risky kind of investment, but on the other hand, it allows earning 50 per cent or more per annum. At the same time, investing in securities, precious metals and the like usually yield only about 20 per cent a year. So one can make a lot of money on the Forex but at the same time there is a higher risk of losing everything and everybody decides for himself what he is ready to do: to invest in securities or to play on the stock exchange.
Luck - Is that the only thing you need for trading?
“Better to have luck than skills” - How often have we heard this expression? In a way, it is quite ridiculous, we assume that luck cannot be learned, while skills can, however, we favour luck and only develop skills after a long time. Most people would prefer to have the true skill or, even better, skill and luck.
Luck and skill in trading can sometimes be difficult to separate. Many price movements are often noise which makes traders take almost random profits on many timeframes and think they have found the grail. Our probability of success with any trading strategy will never be 100 per cent, so we must be able to cope with disappointment regarding opening one position or another and losing money frequently. Even the best traders will experience drawdowns. But this should not keep us from pursuing true skill and mastery.