45 WAYS TO AVOID LOSING MONEY TRADING FOREX

45 WAYS TO AVOID LOSING MONEY TRADING FOREX
by Jimmy Young, CTA

1) Knowledge Deficiency – Most new FOREX traders don’t take the time to learn what drives
currency rates (primarily fundamentals).
2) Overtrading - Trading often with tight stops and tiny profit targets will only make the
broker rich. The desire to “just” make a few hundred dollars a day by locking in tiny profits
whenever possible is a losing strategy.
3) Over leveraged - Leverage is a two way street. The brokers want you to use high leverage
because that means more spread income because your position size determines the amount of
spread income; the bigger the position the more spread income the broker earns.
4) Relying on Others – Real traders play a lone hand; they make their own decisions and
don’t rely on others to make their trading decisions for them; there is no halfway; either trade
for yourself or have someone else trade for you.
5) Stop Losses – Putting tight stop losses with retail brokers is a recipe for disaster. When
you put on a trade commit to a reasonable stop loss limit that allows your trade a fair chance
to develop.
6) Demo Accounts – Broker demo accounts are a shill game of sorts; they’re not as time
sensitive as real accounts and therefore give the impression that time sensitive trading
systems, such as short-term moving average crossovers can be consistently profitably traded;
once you start dealing with real money, reality is quick to set in.
7) Trading During Off Hours – Bank FX traders, option traders, and hedge funds have a
huge advantage during off hours; they can push the currencies around when no volume is
going through and the end game is new traders get fleeced trying to trade signals. There is
only one signal during off hours – stay out.
8) Trading a Currency, Not a Pair – Being right about a currency is half a trade; success or
failure depends upon being right about the second currency that makes up the pair.
9) No Trading Plan - ‘Make money’ is not a trading plan. A trading plan is a blueprint for
trading success; it spells out what you see your edge as being; if you don’t have an edge, you
don’t have a plan, and likely you’ll wind up a statistic (part of the 95% of new traders that lose
and quit).
10) Trading Against Prevailing Trend – There is a huge difference between buying cheaply
on the way down and buying cheaply. What was a low price quickly becomes a high price when
you’re trading against the trend.
11) Exiting Trades Poorly – If you put on a trade and it’s not working make sure you exit
properly; don’t compound the damage. If you’re in a winning trade, don’t talk yourself out of
the position because you’re bored or want to relieve stress; stress is a natural part of trading;
get used to it.
12) Trading Too Short-term – If your profit target is less than 20 points don’t do the trade;
the spread you pay to enter the trade makes the odds way against you when you go for these
tiny profits.
13) Picking Tops and Bottoms - Looking for bargains works well at the supermarket but not
trading foreign exchange; try to trade in the direction the price is going and your results will
improve.
14) Being Too Smart – The most successful traders I know are high school graduates. They
keep it simple and don’t look beyond the obvious; their results are excellent.
15) Not Trading Around News Time – Most of the big moves occur around news time. The
volume is high and the moves are real; there is no better time to trade fundamentally or
technically than when news is released; this is when the real money adjusts their positions and
as a result the price changes reflect serious currency flow (compared to quiet times when Bank
traders rule the market with their customer order flow).
16) Ignore Technical Condition – Determining whether the market is over-extended long or
over-extended short is a key determinant of near time price action. Spike moves often occur
when the market is all one way.
17) Emotional Trading – When you don’t pre-plan your trades essentially it’s a thought and
not an idea; thoughts are emotions and a very poor basis for doing trades. Do people generally
say intelligent things when they are upset and emotional? I don’t think so.
18) Lack of Confidence – Confidence only comes from successful trading. If you lose money
early in your trading career it’s very difficult to gain true confidence. The trick is don’t go off
half-cocked. Learn the business before you trade.
19) Lack of Courage to Take a Loss – There is nothing macho or gutsy about riding a loss,
just stupidity and cowardice. It takes guts to accept your loss and wait for tomorrow to try
again. Getting married to a bad position ruins lots of traders. The thing to remember is the
market does crazy things often, so don’t get married to any one trade. It’s just a trade. One
good trade will not make you a trading success; rather it’s monthly and annual performance
that defines a good trader.
20) Not Focusing on the Trade at Hand– There is no room for fantasizing in successful
trading. Counting up and mentally spending profits you haven’t made yet is mental
masturbation and does you no good. Same with worrying about a loss that hasn’t happened
yet. Focus on your position and have a reasonable stop loss in place at the time you do the
trade. Then be like an astronaut – sit back and enjoy the ride. No sense worrying because you
have no real control. The market will do what it wants to do.
21) Interpreting FOREX News Incorrectly – Fact is the press only has a very superficial
understanding of the news they are reporting and tend to focus on one element and miss the
point. Learn to read the source documents and understand it for real.
22) Lucky or Good – Your account balance changes don’t tell you the whole story about your
trading. Fact is if you are taking a lot of risk and making money you will eventually crash and
burn. Look at the individual trade details. Focus on your big loses and losing streaks. Ask
yourself this, “If I had a couple of consecutive losing streaks or a couple of consecutive big
losses, how would my account balance look?” Generally, traders making money without big
daily losses have the best chance of sustaining positive performance. The others are accidents
waiting to happen.
23) Too Many Charity Trades – When you make money on a well thought out trade don’t
give back half on a whim. Invest your profits from good trades on the next good trade.
24) Courage Under Fire – When a policeman breaks down the door to a drug dealer’s
apartment he is scared but he does it anyway. When a fireman climbs onto the roof of a
burning building he is scared but does it anyway, and gets the job done. Same with trading.
It’s ok to be scared but you have to pull the trigger. No trigger – no trades – no profits – no
trader.
25) Quality Trading Time – I suggest 3 hours a day of quality, focused trading time. That’s
about all your brain allows. When you are trading, be 100% focused. Half way is bullshit - it
doesn’t work. Don’t even think that time spent in front of the computer watching the rates has
any correlation to profitability - it doesn’t. Spend less time but when you’re trading, be 100%
focused on trading.
26) Rationalizing – Killer. Absolute Killer. Put your trade on and let it run. If it hits your
reasonable pre-determined stop, you’re out. Think of yourself as a prizefighter. You just got
knocked out. Moving your stop is like getting up after being crushed with a knockout blow. It’s
pointless. Things will only get worse. Don’t ignore the obvious. You’re wrong – get out. Come
back the next day and try again. A small loss will not hurt you - a catastrophic loss will.
27) Mixing Apples and Oranges – Have you ever done this? You see the EURUSD trading
higher so you buy GBPUSD because it “hasn’t moved yet”. That’s a mistake. Most of the time
the reason the GBPUSD hasn’t moved yet is because it’s already overbought or some 4:30am
UK news was bearish. Don’t mix apples and oranges. If EURUSD looks bid, buy EURUSD.
28) Avoiding the Hard Trades – Bank FX traders have an axiom “the harder the trade is to
do the better the trade”. This I learned from experience. When I needed to buy EURUSD and it
was hard to get them, that’s when it’s necessary to pay up and get the business done. When
it’s easy to get them, then sit back and wait for better levels. So if you are trying to get into a
trade, or more importantly get out of a trade, don’t putz around for a few points - get your
business done.
29) Too Much Detail – If your trading more than 2 indicators then you need to clean house.
Having many indicators stifles trading and finds reasons not to trade. A setup and a trigger is
all you need.
30) Giving Up Too Easy – Your first trade of the day may not be your best but certainly it’s
no reason to quit. I have a preset daily trading limit and I use it. You can’t make money by
making excuses. Getting trades wrong is natural and should be expected.
31) Jumping the Gun – Don’t be penny wise and dollar foolish. Wait for your trade signal to
be clear. Put on your trade and give it a decent size stop loss so that you don’t get knocked out
by random noise.
32) Afraid to Take a Loss - trading is not personal, it’s business. Don’t think that a poor
trade is a reflection on you. It could be you’re just ahead of your time or a commercial order
hits the market and temporarily creates a small unexpected move. Again, place your stop
beforehand and NEVER increase your pre-determined risk. If it’s going bad, it will probably get
worse. I think that’s Newton’s “body in motion tends to stay in motion…”
33) Over-Relying on Risk Reward – There is zero advantage in risk reward. If you put a 20
point stop and a 60 point profit your chances are probably 3-1 that you will lose. Actually with
the spread its more like 4 to 1 (from entry point if it goes down 17 points you lose, or up 63 -
you win; 17/63 is close to 4-1).
34) Trading for Wrong Reasons – Because the EURUSD is going up is not in itself a reason
to buy. Buying EURUSD because it’s not moving much is even worse. You’re paying the toll
(spread) without even a hint that you will get a directional move. If you are bored, don’t trade;
the reason you’re bored is there is no trade to do in the first place.
35) Rumors – Rumors are rumors almost 100% of the time. Think about where in the motion
you heard the rumor. If EURUSD is up 50 points in last 15 minutes and the rumor is dollar
negative, well - then you missed it. Whenever you in motion with the trade, determine where
you are entering.
36) Trading Short-term Moving Average Crossovers – This is the money sucker of the
century. When the shorter term moving average cross the longer term moving average, it only
means that the average price in the short run is equal to the average price in the longer run.
For the life of me, I cannot understand why this is bullish or bearish. Easy to set up on
software, complete with lights, bells and whistles, and good for the seller getting thousands for
the software but in terms of creating profit - it’s a zero.
37) Stochastic – Another money sucker. Personally I think this indicator is used backwards.
When it first signals an overdone condition, that’s when I think the big spike in the “overdone”
currency pair occurs. To be overbought means strong and oversold means weak. Try buying on
the first sign of overbought and selling on the first sign of oversold. You’ll be with the trend
and likely have identified a move with plenty of juice left.
38) Wrong Broker – A lot of FOREX brokers are horrible. Get a good one. Read forums and
chats in several different places to get an unbiased opinion.
39) Simulated Results – Watch out for “black box” systems. These are trading systems that
don’t divulge how the trade signals are generated. Great majority of them are absolute
garbage. They show you a track record of extraordinary results but think about it. If you could
build a trading system with half a dozen filters using the benefit of hindsight, couldn’t you too
come up with a great system. Of course going forward is an entirely different story. High-speed
number crunching capabilities allows for building great hindsight trading systems, so BEWARE.
40) Inconsistency – Every business (FOREX trading included) requires a business plan
(trading plan). Unless you have taken the time to write down a set of rules that you can and
will follow, it’s likely your trading will remain unfocused and directionless. Make a plan, have
rules, follow them. Set goals that are realistic and you will achieve them.
41) Master of None – Focus on one currency for technical trading. Each currency has a
unique way of trading and unless you get intimate with it, you will never truly understand its
underlying idiosyncrasies. Don’t spread yourself too thin – focus, master one currency at a
time.
42) Thinking Long Term – Don’t do it. Stay in the moment. Especially if you’re a day trader.
It doesn’t matter what happens next week or next month. If you are trading with 30 to 50
point stops, restrict your thought process to what’s happening right now. That is not to stay
the long-term trend is not important. It is to say the long-term trend will not always help you
when your trading a significantly shorter time frame.
43) Overconfidence – Trading is simple but not easy. Statistics show 95% failure rate of
those attempting to become traders. If you’re doing well, don’t take your success for granted.
Always be on the lookout for ways to improve what you are already doing.
44) Getting Pumped Up – The trick is to maintain an even keel. When you are in a trade,
you want to think exactly as you would if you didn’t have a trade on. To do this requires a
relaxed disposition. This is not a football game. Don’t get psyched up. Relax and try to enjoy it.
45) Staying in the Game– I don’t recommend demo trading because traders learn bad habits
when trading with play money. I also don’t think “letting it all hang out” right away is wise
either. Start off doing trades and taking risk that is relatively small but still makes a difference
to you if you win or lose. About a quarter to a third of what you expect to reach as your trading
matures is reasonable.