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4 factors that indicate flaws in your forex strategy

Posted on 8th Dec 2017
4 factors that indicate flaws in your forex strategy

What separates successful traders from unsuccessful ones? Losing discipline over one's trading methods can adversely affect your account and force you out of the trading business regardless of your previous success or experience. The forex market is the largest financial market in the world with the highest liquidity and traders must equip themselves accordingly with adequate knowledge and experience. Forex trading requires a learning curve essential to conditioning yourself and adapt yourself to the changing markets. The majority of the market participants are human and no matter what the trading algorithms, your trading psychology cannot be discounted. If you are emotionally vulnerable, the market will stack the odds against you and deplete your funds too. Many traders consider forex trading to be a panacea to their financial problems or just think of it as a get-rich-quick scheme. Trading for the wrong reasons will make you susceptible to emotional weakness as you've got too much at stake. Let us discuss some common flaws that may prevent you from attaining your investment goals:

  1.  Not using stop-losses: One common blunder that traders commit is not using a stop-loss immediately after entering into a trading position. Investors who decide to trade without using a stop loss may end up demolishing their entire account with any sharp market movement. Not applying a stop-loss and holding on to a losing position maybe because the trader thinks that the market will recover if only they are patient, which may or may not be likely. Such a situation often occurs in the case of traders who lack trading discipline and those who do not follow a strict trading plan.
  2.  Excessive use of leverage: Leverage gives traders the opportunity to magnify returns. But leverage is a two-edged sword that increases your losses as well as gains. Forex brokerages allow traders leverage of up to 400:1, which can lead to monumental gains in some cases and amount to irrecoverable losses too by wreaking havoc in your portfolio. Thus, it is in a trader's best interest to limit the amount of leverage used. Moreover, to make matters worse economic and political uncertainty can add to your woes by increasing the volatility of your assets.
  3.  Trial and error approach: Deciding upon the best trading method after trying out all possibilities is not recommendable any day. The most efficient way to become a successful currency trader is to learn out of the experience of veteran traders. Learning the ins and outs of the market through forex education or under the apprenticeship of a tenured veteran is definitely worth it. You can perfect your strategies and add to your learning curve by copying the methodologies of a successful trader and with adequate practice.
  4.  Overtrading: Most retail traders with limited capital ignore the risk limits and hold on to big positions without thinking about the self-harm they maybe inflicting and totally disregarding the negative consequences if any. This is called overtrading. Overtrading has two aspects:1. Unjustifiable large amount of open positions.2. Unlimited hours spent tracking your trades. Overtrading takes a huge toll on your mental and emotional wellbeing. It always pays to cautiously choose your trades and wait patiently for the odds to stack up in your favour. People try not to miss any trade that comes along due to the fear psychosis that missing a single trade means missing the opportunity to become richer. Trading non-stop or at a stretch, trying to make the most of every trade that comes your way will definitely make you fail. Good trading decisions can be made only when we are calm, well-rested and our emotions are in check.
  • If you are investing, you are bound to face losses on some of your trades. You can minimise your mistakes by seeking the tutelage of other successful forex traders who can show you how to inculcate trading discipline and give you tips on risk management. While understanding technical or fundamental analysis is invaluable it is ultimately a trader's ability to manage a trading account that determines his success or failure. Good account management includes having sufficient capital, appropriate trade sizes and careful risk management by applying leverage intelligently. Also, having a realistic and well-tested trading plan counts.

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