Resisting the allure of the foreign exchange market can be a challenging endeavor for many people. With a daily trading turnover of over $6.6 trillion, it makes sense that most traders and investors seethe foreign exchange market as a profitable venture. In addition, researchshows that foreign exchange markets are the most liquid and profitablefinancial markets globally, dwarfing stocks, derivatives, commodities, and anyother markets that you can name.
Today, the entire global forex market is worthapproximately $2.4 quadrillion. With over 170 currencies traded on the foreignexchange market, it doesn’t show any signs of slowing down. According to a forecast from the IMARCGroup, the forex market willcontinue growing at a compound annual growth rate (CAGR) of 6 percent over thenext five years.
Naturally, when you put all the puzzle piecestogether, you realize why people gravitate towards forex trading. Many peoplesee forex trading as a way to accumulate wealth. They harbor aspirations ofgrowing rich from trading currencies while speculating on their pricemovements. However, what they don’t consider is that forex trading is far morecomplex than it seems. The US Securities ExchangeCommission haspublished a detailed guide for new forex traders looking to make their firstforay into the forex world. The guide highlights all the risks that traders should consider before dipping their feet into the forex world.
Unfortunately, many new traders neglect these risksand push full steam ahead with their plans, believing they won’t suffer asimilar fate. Often, these traders end up making mistakes. Once traders committhese errors, they lose money because they overlooked several key factors thatreign supreme in the forex trading world. Let’s explore some of these indetail.
Factors Forex Traders Fail to Consider
Here are some of the factors that forex traders fail to consider. They include:
Many new forex traders often enter the forex trading world with unrealistic expectations. They think forex trading is a quick way to get rich. However, that’s not the case. Succeeding in the forex world requires time, practice, and commitment. For starters, you need to understand the markets and how they operate. In addition, you’ll need to cultivate knowledge about the various factors that can impact currency pairs and lead to price fluctuations.
If you don’t put in the time and effort, you’ll likely find yourself trying to force moves in exchange for abnormal returns. When traders follow this approach, they end up risking more capital than necessary. In addition, they usually find themselves attempting high-risk maneuvers that provide low rewards. Furthermore, if you don’t temper your expectations, you’ll likely ignore crucial risk management principles. Doing so can result in disastrous effects on your trading capital.
Therefore, having realistic expectations of the market is vital. If you have realistic expectations, you can set achievable goals. Once you’ve come up with your desired goals, you can create a trading strategy that helps you accomplish them.
Not Properly Managing Risk and Money
Often, traders will spend their time focusing on developing strategies without considering risk management. However, trading without any protection and consideration can lead to traders incurring significant losses. Ask any savvy trader, and they’ll tell you about the importance of using stop losses. Stop losses (and other similar tactics) play a pivotal role in preventing them from losing their entire trading capital. Unlike seasoned traders, new traders often don’t know how to preserve their capital or diversify it. On the flip side, successful traders know precisely how much of their investment capital is at risk. They’ll follow principles like the two-percent rule to ensure they’re not putting themselves at added risk when trading. Likewise, they’ll make sure to diversify by investing in several currency pairs to hedge their risks.
Many new forex traders also don’t understand the importance of risk-reward ratios. Risk-reward ratios, also known as risk-return ratios, are a measurement criterion that enables traders to plan how much profit or loss they’ll incur from a single trade.
You’ll often hear people say that sometimes, less is more. That rings particularly true for forex trading. Many new traders often think the best way to succeed in the forex world is by frequently trading substantial amounts. However, when your money’s on the line, that’s not the most feasible idea. Overtrading generally occurs because new traders set themselves unrealistic expectations. In some instances, insufficient capitalization can also lead to overtrading.
Traders realize they must invest capital before they can generate returns. Forex markets are highly favorable for traders because they often have highly leveraged accounts. These accounts make it possible for traders with limited capital to make significant profits. Therefore, your initial capital investment doesn’t play as significant a role as many would think.
However, whether you use leverage or invest sizably, you’ve got to make sure you have enough money for your trading operations. That entails having a goodinvestment base. Various advantages exist for traders who have enough capital in their accounts to make trades. They face less psychological pressure when trading. In addition, they risk smaller portions of their capital when making trades. Thereby, they reduce the total sum they’re investing per trade. As a result, they’re managing risk better with every trade they perform.
Sometimes, new traders can also get addicted to the thrill of chasing the price when forex trading. For instance, if they accurately predict a price movement, they get an adrenaline rush from making a profit. Since the forex world is fast-paced, this can pose many pitfalls. Traders can find themselves overtrading. Therefore, traders must ensure they’ve devised a clear-cut exit strategy for such situations. If you’re stuck in a loop where you can’t make profitable trades, you’ll need an exit strategy more than ever. Often, traders will continue to trade, hoping to reverse their fortunes and regain the money they’ve lost. However, doing so usually results in them incurring more losses instead of changing their luck.
Get Started in Forex Trading with Crystal Ball Markets
If you’re looking to get started in forex trading, you’ll need a forex trading broker. Crystal Ball Markets is an online forex broker and one of the best foreign exchange trading platforms. In addition, they’ve got several resources to help beginner traders get started. These resources include free guides about the most popular forex pairs to trade, or most popular currency pairs to trade, and more.
About The Author
Andy Lee is a former financial analyst who worked for some of the largest investment banks globally. Since then, Lee has retired to spend more time with his family. He still works as a consultant. Lee is currently in affiliation with Crystal Ball Markets. In his spare time, Lee enjoys birdwatching, stargazing, and reading The Economist.