Education Focus – Avoiding mistakes is the key to a profitable FX account

It goes without saying that to be profitable in the world of forex you have to have an active trading account before you can think of even breaking even in the markets.

For novice traders, however, this is easier said than done. Without the required skill or experience gained through years of trading newbies often find that they’re losing money at such a rapid rate that it becomes impossible to keep their account trad

So perhaps the most pertinent for the novice should not be “how can I make money from FX markets?” but rather “how can I avoid losing money from trading forex?” If you can master the latter then you will have a strong platform from which to project a long and prosperous trading career.

There is, of course, an inevitable attraction to the forex markets for those wanting to make money through trading. High levels of leverage and liquidity, as well as significant intraday volatility, offer the opportunity for rapid financial gain unlike almost any other retail trading tool available.

However, as with most things, what sounds too good to be true often is. 80% of FX traders lose money, in the most part not because they don’t understand the direction or influencing factors in the markets, but because they fall into procedural trading pitfalls that wipe out their profits, or even their account in its entirety.

The key to becoming a successful trader is to recognise the common mistakes that the majority of traders make, and to avoid them. Then, and only then, can you begin down the road to being a successful currency dealer.

So with that in mind, let’s have a look at the most common procedural errors that are blighting the path of novice traders from turning their forex venture into a successful career, and their solutions:

1.       Develop a System

Trading randomly is a recipe for disaster. But as obvious as that statement may seem, it is astonishing how many traders take positions in the market without being able to justify why they’ve done it.

The first, and perhaps most crucial, step on the path to trading success is to take a systematic approach to making trades. Developing a method of recognising buy and sell signals, trends and turning points, is essential in developing a long term strategy to ensure consistent profits from the markets.

Every trader has their own unique trading style, and that is something that may take time to perfect as you investigate using different technical analysis tools and indicators. These tools are most valuable when they are combined, and so finalising a particular method with technical reasoning that works for you can be a process of elimination and experimentation.

Make sure to keep a record of the methodology behind each trade you make, at least initially, including exit points as well as buy and sell signals. This way you can track the success or failure of your reasoning, and adjust your strategy accordingly.

2.       Stay Disciplined

Having developed a system and reasoned methodology behind taking positions in the market it is then imperative that you stay disciplined to that system. A system that is often disregarded is equivalent to no having no system at all, a stance that makes it as close to impossible as you can get to make long term consistent profits from FX.

Trading outside your system is pure gambling. Only 20% of all traders are profitable, and only a fraction of a percentage of gamblers do likewise.

3.       Losing Patience

For new traders eager to make their mark, periods of inactivity can often feel like opportunities to make money are passing you by. If you have had a few profitable trades and feel you’re on a role not finding a good indicator to get into the market can be frustrating, and can often lead to losing discipline.

Overconfidence emanating from a good trading session can be dangerous, as it may lead to overtrading if the market is not immediately conducive to your system. This invariably means taking lower quality or marginal trades, which could quickly eradicate those profits you’ve just banked.

This lack of patience can also be a factor when it comes to chasing losses. Experienced traders appreciate that sometimes you cannot make back the cost of a losing trade immediately, you have to keep to your system and wait for opportunities. Novice traders will dive back into the markets regardless of whether there is a good trading opportunity available or not in an attempt to claw losses back, but taking lower quality or riskier trades can make a bad situation worse, or at the extreme even put your entire account in jeopardy.

4.       Putting Yourself Under too Much Pressure

With every commentator or forex analyst reaffirming just how much money is traded daily (somewhere between $3 trillion and $4 trillion depending in who you ask) and how financially successful retail traders can be, it’s understandable when inexperienced currency dealers develop an inflated sense of expectation when it comes to being profitable.

This can of course be dangerous, as its puts pressure on the novice to meet an unattainable level of success. In the current market climate a 10% return should be considered a success, but this is often seen as pedestrian by those seeking higher immediate profits.

The consequence of this is that greedy traders leave trades open for too long, targeting much larger numbers of pips per day than should be expected, or risking too much of their account at one time. Keeping trades open for too long may damage the amount of profit you can achieve from your trades, and will also lower your percentage of profitable trades. Lack of appreciation for correct risk/reward ratios will also mean that your losing trades will be more costly.

5.       Poor Account Management Skills

It may come as a surprise that most trades retail traders make are profitable trades (according to a number of Forex platforms we have surveyed). According to our sources approximately 55% of trades are profitable, yet 80% of traders lose money. How can these facts both be true?

The answer is that traders have a poor understanding of risk/reward ratios. If losses are allowed to run further than targeted profits then every losing trade with have more of an impact on an account than a successful one (i.e. if you target a 20 pip profit on each trade but don’t put a stop loss in until you reach a 100 pip loss, one losing trade will eradicate the profit of five winning trades. At this rate an almost unattainable 84% of your trades would have to be correct to avoid making losses).

Poor risk/reward management is a sure-fire way to making consistent and significant losses, meaning an understanding of this concept will have an instant impact on your trading account. By always having a stop loss at the point of your targeted profit, only 51% of your trades would have to be profitable to make a profit overall.

The other fatal money management mistake novice traders will make is to place a far larger percentage of their account at risk in a single trade than is advisable.

Professional traders traditionally risk between 1-5% of their portfolio on any given position, but for novice traders with smaller account sizes there is a tendency for this to be much higher.

At the extreme, inexperienced market operators may think that waging their entire account on one trade is the quickest way to making significant profits. This is not true. Your aim should always be to be in the market for the long term, as this will present you with the most opportunities to be profitable. You can never be certain of what will happen in the markets, constantly risking it all is the best way to guarantee that you’ll empty your trading account in no time.