The 8 Hidden Dangers of Forex Trading Revealed

Posted: 22 Feb 2008 | Categories: Currency Trading

When I first got into forex trading 5 years ago, I was just like any other newbie. I had messed with stock market day trading a little and was attracted to the market because of its high yield potential. I had heard stories of many folks making 50% per month ROI and of course, like any other person looking to make money, I thought that this would be a perfect option to build cash quick. Of course, I was aware of the risks but I didn’t take into account all the hidden dangers of forex trading. I didn’t realize that forex trading has its own set of rules and that if you don’t understand them, then you could easily suffer a margin call.

The 8 Hidden Dangers of Forex Trading

Not Using a Stop/Loss Point for every trade- This sounds like it should be a no-brainer, especially if you are using high leverage. Just because you think that the market will do something doesn’t necessarily mean that it will. The market can swing very quickly in a direction and if you are on the losing side of the stick, you can quickly watch as your account gets wiped out. In some events, like trading the news, a stop/loss point can be extremely critical as alot of trading platforms will actually slow making it hard for you to cancel trades. A stop/loss point will help you buffer some of the losses, should you be wrong.

Not placing the stop/loss point in the right position- It is not enough to have a stop/loss point in place. You have to know about where to put it so that if the market whip saws, your position isn’t closed automatically. A lot of traders accuse the powers to be of messing with this and actually causing whip saws to happen to knock out these positions. The amount of leverage really comes into play here. If you can’t afford to place a stop/loss in the 25+ pips range, then you should reduce your leverage to make it happen. I can’t say how often I have seen my position get closed because my stop loss point was set too low only to watch it rise past the number and into the areas I thought it would rise.

Not readjusting the stop/loss point once profit is realized- It is great when you are in profit. It is not so great to watch as your profit starts to shift back down to its original point and you wind up losing pips to the spread. Once you realize profit, readjust your stop/loss points so you can make something.

Not understanding “trends”- If you have never read the dow theories, you should. Basically all good trader’s know that you should ride trends until there is evidence that the trend has changed directions. Going against trends is a lot like going against the current. If you are going against the trend, it is likely that you are fighting the momentum of the direction the market is headed.

Not closing out your position during the event of major forex news- I know a lot of traders that trade the news exclusively. This is good but you have to understand that news about forex can create major swings in the market and spark “minor trends”. In other words, the market may be going up and you may be in profit and then some major forex news comes out, essentially wiping out your profits. Worse yet, you don’t have a stop/loss in place and you really lose….

Not checking other time frames to accurately predict the market - I am not about to go into my spill as to how much I hate intra day trading and the shorter time frames. However, many beginner forex traders will naturally be inclined to trade in 5, 10 or 15 minute time frames. Why? Well, I guess because profits and losses can be realized more quickly and there is a sense of achievement and immediate fulfillment when you are trading within shorter time frames. However, most of these people don’t take into account the secondary trends happening with the daily and weekly charts. If you are not analyzing multiple time frames, then you will be left scratching your head when the market moves against you. Once again, it all boils down to understanding the dow theory and how it moves. If you get a clear understanding of trends then you won’t fall into this pitfall.

Not understanding how Trader’s Remorse works- You are analyzing the charts. You have your support and resistance numbers set and one of the currencies you are watching suddenly breaks the barrier of support. You immediately jump into the trade, betting that the market is going to go up. It does….for a second…only to fall back to it’s original support/resistance line. What just happened? You have just been bitten by something called trader’s remorse, a point where a breakout is tested and loses. I am not going to go into trader’s remorse other than to tell you that it happens and accounts for a ton of losses.

Not implementing a risk/reward plan- I am going to say this once. Not all trades are created equal. Some trades are better than others and if you can only make the trades that have a high chance of profitability, you would be better served betting in the casinos on the roulette wheel. You can easily develop a risk/reward plan by understanding that the market traditionally will pull back or rally to certain percentages, otherwise known as Fibonacci numbers.

Of course, there are more hidden dangers to forex trading but if you stay disciplined to these basic tenets, you have a better chance of making profit. Forex trading is not a game for those that think they can profit quickly although you can. It is all about understanding the fundamentals of trading and how to piece them together to make your trades more profitable. Understand certain forex fundamentals and you will be leap years ahead of most traders.

Leo Di Milo has been trading forex as a hobby for years and is especially intrigued with the psychology of trading. You can check out more of his rants and ravings at the address below…

Forex Trading

Article Author :Leo_Dimilo