The foreign exchange market can be a pitfall, especially for beginners. Knowing when not to trade can help you avoid some of these pitfalls.
Here are some circumstances under which you must avoid trading at all costs.
1. The Missing Grand Plan
You must have a clear vision in order to succeed. A trading plan must include clearly defined goals and objectives and manageable timeframes.
You must be able to know how much risk you can manage and how much loss you can sustain during the learning period. You should also define your aim for this endeavor.
Is forex trading a source of extra income or is it your main source of money? This makes it easier to look for other options if the risks are greater than the intended income.
2. You Do Not Have a Strategy
Every successful business person will tell you the same thing; you should have a plan before you make that crucial deal. There are a variety of techniques that traders can use to develop a strategy.
These include technical analysis and fundamental analysis. Technical analysis is more popular as it uses past trends to predict future market activity.
Fundamental analysis generally follows what is on the news. You should check up on the effects of geopolitical, social, and economic events on forex trading.
3. Without Real Knowledge
A lot of traders have lost their life savings by trading on rumors and hearsays. Take the time to learn about currency rates and what affects them.
Do not ignore the effect today’s news and speeches by world economic giants will have on the foreign exchange market. Knowledge means that you also need to understand both currencies.
4. Off Hours
These include weekends and public holidays. Unless you are dealing with the futures market, holding trades over the weekend can easily lead to huge losses for a trader.
For example, a major bank could have crushed over the weekend, causing major unexpected changes in the market. Public holidays mean that it is a slow trading period since the major players in the market such as banks are not in the game.
Besides, option traders and hedge funds usually use this period to push currencies around causing huge losses to inexperienced traders who try to trade signals.
5. On A Losing Streak
Experienced forex traders do not hold on to a losing trade, hoping against hope that the trend will change. A losing streak can cause emotions to run high and wrong choices to be made.
Cut your losses, rethink your strategy, even overhaul your whole plan and then trade again.
Talking to your broker or other experienced traders can give you some insight on what you might have done wrong.
Restrain yourself and take a logical approach.
6. Too Many Open Trades
When you feel as if you have too many things going on such that you cannot follow the news, it is time to fold before you end up losing everything.
If your reaction time is too slow, you might miss out on fantastic trading opportunities. Trading on the noise that follows a major change in currency value has little or no profit potential.
Therefore, reducing the number of open trades to a manageable level is more rewarding.
7. When You Are Emotional
Trading on emotions is bad for any business. Emotional trading means that you lack objectivity and your reaction time is slower.
Since forex trading relies on regular analysis, emotional baggage can lead to missed opportunities and great losses. This is especially true for traders who lack a grand plan and knowledge on how the foreign exchange trade works.
8. You Do Not Understand Forex Spreads
This also comes down to lack of knowledge but is very important as it has a direct impact on trade profitability. Traders make money from this as it is the difference between the asking price and the bidding price.
Forex spreads change at a high rate during any trading period. They also widen at certain periods such as off hours when trade volumes are low ahead of relevant news that would greatly impact forex trading.
It is therefore important for any forex trader and broker to be able to calculate the spread differentials.
9. The Untrustworthy Broker
Many beginners have lost a lot by choosing unreliable and fake brokers. Once you have lost faith in your broker, stop trading. Find a reliable broker whose offer matches your trading goals.
Customer service must be professional, friendly, and efficient. Since online trading is the norm, the trading software used by the broker must be carefully assessed to match your expectations.
Click here to read more on how to find a reliable and competent broker.
10. The Unmanageable Leverage Ratio
A trader should be able to understand how a broker’s leverage ratio affects his or her profit margin. For example, a 5% leverage ratio means that you can trade 20 dollars for every dollar in your account.
This means that you can earn profits equivalent to a 20,000 dollar trade after investing only 1000 dollars. It also means that you are risking losses equivalent to a 20,000 dollar trade.
It is important to understand the benefits and risks associated with a higher or lower leverage ratio so as to avoid a margin closeout.
11. When the Deal Is Too Good
We trade ridiculously when we become greedy. We want to gamble, try out those forex robots that generate huge profits for their sellers, and generally become impatient to earn as much as those great billionaires.
That is when we gamble more than we can afford when a little patience would have guaranteed us financial independence.
12. The Erratic Currency
Do not trade when a currency is not moving at its normal pace. This happens when the market does not know how to react to some released or soon to be released news.
The news could be major financial difficulties facing financial institutions such as banks or war breaking out in some country.
Conclusion
Remember that forex trading relies mainly on analysis, predictions and probabilities. Factor this in when trading. Everything depends on your main purpose for engaging in this type of trading so follow through on your plan.
Knowing when not to trade is as important as knowing when to trade. It is important to avoid the financial pitfalls that most beginners fall into. Gaining knowledge on forex trading is always the first step.
