Trading on the foreign exchange market can be very rewarding, as it is the largest and most liquid of all the financial markets. However, it can be extremely volatile, which means the risk potential is great if you don't know what you're doing.
While there is no single formula for successful forex trading, there are nevertheless a number of attitudes and attributes that together can add up to decent profits.
Similarly, there are several mistakes that inexperienced traders can make that, if they go unchecked, can very quickly cause them to lose money. Here we list five of the most common.
1) Reacting to the news and deviating from your trading plan
It's true that global news events have a massive impact on exchange rates and currency values, from political and economic announcements to natural disasters and conflict.
However, successful forex trading is as much about creating and following a sensible long-term trading plan as it is reacting to or anticipating the news.
As an inexperienced trader you can't just take a reactionary approach and rely on major announcements to dictate your trades, nor should you predict what is likely to happen and pre-position for news, especially if you don't truly understand the impact that news could have.
2) Letting your emotions sway your trading decisions
We are all human, which means we all experience emotions such as fear, greed and desperation. However, to successfully trade on the forex markets, or indeed any financial markets, you cannot let these emotions cloud your judgement.
You need to be able to think logically and not let your feelings get in the way, because once you do it can be difficult to regain any rationality in your trading.
The impact that emotions can have on trading success is evidenced by the fact that many new traders do quite well on demo accounts, but this changes once they start trading for real. This is because they become emotionally involved as soon as there is real money at stake.
3) Having unrealistic expectations
As a forex trader you should be looking to generate positive return on your investment over a sensible time period. This is not a way to make a quick fortune, although unfortunately many people view it that way. Some are even attracted to trading because they think it will solve some kind of problem in their life.
However, having these expectations from the outset can be very dangerous. If you go into it thinking you will make a vast amount of money in a week or two, you will only set yourself up for disappointment and will more than likely resort to emotional trading, resulting in even bigger losses.
Never trade with money you can't afford to lose and always exercise patience. If you approach trading as a money-making venture that must work out for the sake of your financial future, you could end up in a much worse position.
4) Trading without stop loss or take profit orders
Trading without stop loss orders leaves you 100 per cent exposed. You are essentially letting your losses run indefinitely, which is a very risky move. No matter how well you have been doing in your trading journey so far, things can always go drastically wrong.
You should see stop loss orders as safety barriers or insurance policies against uncertainty and volatility, of which there is plenty in the forex market. They are particularly important for traders who are unable to monitor the market on a daily basis.
Similarly, trading without take profit orders means you could very quickly see a winning trade turn into a losing one. Holding on in the hope of making bigger profits can result in you giving up what you've earned, putting you right back to square one and possibly even incurring a loss.
5) Trading without experience
As with any kind of market trading, you can't go into forex trading with your eyes closed. You need some level of experience or training in order to enjoy success. You wouldn't expect to walk blindly into a new profession, and forex trading is no different.
Of course you have to start somewhere, which is why demo accounts have been created. You can use these to practice and perfect your trading strategy. However, you'll never know what it's like to trade for real until you do it. This is where many people go wrong, as they do not spend enough time in demo mode.
There is another option, however, for those who want to get into forex trading but are worried about their lack of knowledge. Social trading allows you to enjoy the benefits of trading the forex markets by following those with proven experience and learning as you go so that one day, you too may be confident enough to go it alone.
Image credit: iStock