There are some common pitfalls that forex traders need to beware of. As traders, we are all susceptible to natural pitfalls (just ask Shawn about his experience with quicksand). However, knowing what they are and how to recognize them makes them a lot easier to avoid. We asked Brian, one of our instructors here at the Apiary Fund, the top five pitfalls of a forex trader.
- Picking the Wrong Currencies.
It's a lot easier to trade when the market is moving in a direction! One of the most important things we do as traders is finding the right currency pair to trade. This means identifying "Positive price action," and staying away from rough neighborhoods--currency pairs that are currently choppy or consolidated. A directionless market is usually not a friendly market, so find something that is showing signs of direction and momentum in previous sessions.
- Trading the Tops and Bottoms of Markets.
Most novice traders can't see the potential move happening until it's already done, but they sure have a knack for getting in once it's over. Typically, it's easy to identify a large move from a visual perspective, and a lot of times a large candle can indicate an eminent pullback. When traders see the large candle it's almost irresistible to them.
- Predicting vs. Anticipating.
No one really knows where the next move is going. Good traders are adept at identifying "potential energy" in a setup, allowing it to move first and then entering the trade. While there is no fool-proof method, the probability for success is much greater if we identify potential in it's infancy rather than maturity point. Predicting means entering the trade before confirmation of the potential move, so if you've found yourself explaining your trades by "I thought it was going to..." then you're are most likely predicting not anticipating.
- Cutting Winners Short, but Letting Losers Run.
Traders are constantly getting this backwards. There’s this planted seed of unrestrained optimism within our mind. Somehow, we start believing that given enough room that trades will come back. Sometimes they do, but the reality is they often don't. Holding onto trades that have gone significantly against us means we are clinging to hope--not skill.
- General Trading, No Plan.
Developing any skill requires time, effort and training. Practice will never make perfect, but perfect practice with a trading plan can make for a very capable and profitable trader. Placing trades in a general way will result in inconsistent results. Trade analysis is the best way to make sure you are continually trading your plan and not getting off track, but few novice traders are willing to put in the time and effort to do it.
We encourage our traders to be aware of these pitfalls of a forex trader no matter how experienced they are. The more you practice good trading habits the better you will be able to avoid being stuck in trades that will sink your capital.