The short answer to that burning question is: ‘Yes, you certainly can make money trading Forex’. But you didn’t come here just for the short answer, did you?
A more comprehensive answer would be: ‘Yes, it simply wouldn’t exist if people didn’t make money from it. That said, the percentage of people who make money is small and there are a number of reasons why’.
Better still, do you want to know what those reasons are? Well, lucky you, because we’ve summarised the most common traps beginners fall into that and how they can avoid them.
Plus, at the end of this article, you’ll have the chance to sign up to The Ultimate Guide To Forex Trading, our Free Trading Course, which would normally cost you £2,500. Getting an online Forex education is truly your best chance of making money trading Forex.
Starting with an insufficient amount of knowledge
A lot of beginners are interested in Forex trading for the wrong reasons. They falsely perceive Forex trading as a get rich scheme. An easy way to make money that requires minimal effort. Quite frankly, this a myth.
If this is your perception of what Forex trading is, you are certainly not ready to start trading. (Now would be a good time to close the other tab you have open which is right now begging you to sign up now and make millions!)
Trading at this point will likely lead you down one of two roads. Either you’ll lose a considerable amount of money on bad trades or you’ll end up very disappointed by your lack of success and likely quit trading altogether.
The first and most logical thing you should do is get a currency trading education. That old phrase ‘knowledge is power’ is very true when it comes to Forex. The more you know about how Forex works, the less likely you are to make a loss.
But just reading this one article is not enough. Just reading a handful of Forex trading articles is not enough. Just reading the financial column in the morning paper is not enough. Without an education in Forex, how do you suppose to utilise any of that information?
The mentality a beginner needs to adopt is to look at Forex trading as a business. And any business needs a well-thought-out growth strategy.
As a beginner, it is highly likely you will not make a sizable profit for quite some time, maybe even years depending on how much time you can dedicate to learning.
Beginners should ideally focus on small gradual gains over time. Instead of thinking of quick short-term gains, think of the potential profits you could make over a specific period of time.
Don’t immediately quit your day job, take up part-time trading first.
Not understanding risk management
As we mentioned in the introduction, only a small portion of retail Forex traders actually make a profit. Depending on where you look, a lot of retail traders lose money. Some even claim as many as 96% of retail traders do, though the exact number is highly debatable.
Why does this happen? Well, this mostly boils down to a poor understanding of the risks of trading Forex.
Traders should know how much they are willing to lose on a trade. They need to set goals: when they should enter a trade; when to take profit; when to get out before things get worse.
They should stick to these goals and shouldn’t change their plans at the last minute on the possibility of making more money if the market moves quicker than expected.
Of course, the market may shoot up immediately after you take profit and you may miss out on a higher gain. But you need to accept this and move on.
Traders can also take measures to balance out any potential losses. Here are two great ways you can do this:
- Diversify your portfolio. This is where you start investing in various different instruments in different areas. This is a wise idea because if you invest solely in one instrument and that instrument loses a lot of its value, you risk losing your entire investment. Think of it like not putting all your eggs into one basket.
- Hedge your investment. This is where you trade on two different instruments that typically conflict with one another. Usually, when one goes up in value, the other goes down and vice versa. This way you can attempt to reduce your losses if one of the instruments loses a lot of value.
These goals should also change with the market as well. You should be constantly adapting them as situations change, taking into consideration the different factors that affect the market.
However, in order to do this properly, analytical skills are essential. By closely examining the market, traders are able to spot trends and highlight the highs and lows. Armed with this information, they can set realistic goals.
Whether the market appears to be on the rise, on the decline, stagnating or highly volatile, your goals should reflect this.
Risk management, of course, becomes a lot more complicated when we take into consideration leverage and other trading tools offered by brokers. Understanding how to use them is vital.
There are a number of ways to get around risky trades. Here are two of the most well-known:
- Stop-Loss orders. Often abbreviated to ‘SL’, Stop-Losses are orders you can place on most broker platforms that allow you to close your position if the value of a currency pair decreases to a certain point.
- Take Profit orders. This order is where you set a certain price to sell your currency pair. This is useful because if the market suddenly starts to lose its value after reaching this point, you would have already profited before this happens.
While the above two are highly useful to have, the best way to mitigate risky trades is to understand what you are risking in the first place.
Chasing losses is originally a gambling term. It is what emotional traders do and is a surefire way to lose more and more money.
This is when a trader makes a loss and then tries to make the money back by making further trades, sometimes increasing in size.
Why is this a horribly bad idea? Because these trades are motivated by a desperate feeling to regain what you lost instead of any insight into where the market might be going.
Of course, it is very natural to react in this way. But the thing about trading is that it shouldn’t be reactive, it should be orchestrated with set goals, goals based on good research.
While it is very possible that the market could shoot up, it also very possible it could plummet to a new low or just stagnate. And all the while this is happening - if you are just staring at one currency pair - you could be missing great opportunities to trade elsewhere.
On top of that, your next trade could be just as bad as your first one or worse and you may try to make back that money with another trade, and then another.
What you have done is stopped trading and started gambling. You may as well be in a casino. It can become a vicious cycle that ends with you completely out of pocket.
The most successful Forex traders won’t waste their time in this way. Instead, they need to be able to accept their losses, learn from their mistakes, move on and then look to the next opportunity to make a profit.
Forex trading, when done well, can reap handsome rewards. When done badly can be like sitting at a roulette table.
Not having a plan
Having a plan is the number one thing all traders should have to make their trades effective.
Traders who are highly organised and able to plan out their day and even their week tend to be more capable of avoiding risks and putting their emotions to one side.
Having a plan also allows you to try new things and develop an effective strategy. Devising a strategy that works for your trading style is one of the most important things you can do.
But a plan doesn’t just involve setting up your goals, as we mentioned above. It also means saving time to learn new things.
Learning Forex is not like going to school or university and leaving with a piece of paper that makes you a qualified trader for life. And, likewise, trading Forex is not like a standard 9 to 5 job.
It should be looked upon as a never-ending process. The minute you stop teaching yourself new things about the Forex market you are leaving yourself exposed to making mistakes.
And when we say learning, we don’t just mean picking up new skills, we mean understanding new developments, ways of thinking and technology.
Overtime economies and industries change. While these changes can often be slow, if you don’t pay attention to them, they can sneak up on you.
It is also important to realise that people are forgetful. You’ll never remember all of the things you have learned and you should be open to refreshing yourself every so often by going over topics to be sure you still understand them.
Someone who doesn’t regularly keep up to date with financial developments will likely make some big mistakes.
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If there’s anything you should remember from this article it’s these key points:
- Have the right attitude towards trading Forex. It’s not a get rich scheme!
- Never stop learning. Knowledge most certainly is power!
- Understand the risks involved. We implore you, this is absolutely vital!
- Plan your approach to Forex trading. Be meticulous in your learning and think out every trade.
How can I make sure I don’t make the same mistakes?
Do you want to avoid these pitfalls and stand a better chance of making money with trading Forex? Here’s your chance.
Why are you giving it away for free might you ask?
Well, that’s because our Forex education course is being paid for by our partners who seek to educate beginners and to prevent them from making losses when they start trading.
What can you learn from our free trading Forex course?
Our free Forex trading course covers all the major areas related to Forex trading and is broken down into 4 chapters. Topics include the following:
- Foundations of Forex
- Setting up charting software
- The mechanics of Forex trading
- Advanced analysis
- Strategy in Forex
You can find out more about our free Forex trading course here.
With our Forex education course, you can benefit from a personalised approach that you will not see anywhere else.