|Currency Trading - A Major Mistake Made By Novice Traders|
Currency Trading - A Major Mistake Made By Novice Traders
There is one major error that novice traders make and continue to make.
Its not they lack a sound method, or they lack discipline, or even they can't pick trade direction correctly it is:
They fail to deal with market volatility and the placing their stops correctly.
How often does this happen.
A trader sees a potential trade enters and then gets stopped out only to see the trade they had picked go the way they thought and pile up thousands of dollars and their not in!
It happens all the time - and the reason many novice traders lose is they have no understanding of how to correctly place and trail stops.
Let's look at this in more detail.
We all know currencies exhibit long term trends but there are constant and frequent pullbacks within major trends and your aim is to stay with the longer term trend without being stopped out.
Let's look at some ways to do this when engaging in online FOREX trading.
1. Forget FOREX day trading
All volatility is random in daily time frames so you have no chance of winning, so don't try.
Ever seen a day trader with a real time track record of profits?
Neither have I and random volatility is the main cause - don't even attempt it, unless you want to lose your money quickly.
2. Entering the trade and initial placement of stops
Quite simply the best way to enter a trader is to enter on valid breakouts and put the stop behind the breakout point.
Most major currency moves start from new market highs and buying breakouts tends to give good risk to reward and help you catch the biggest trends and profits.
3. Always look for confirmation
If you want to buy a dip don't predict and hope - wait for confirmation if a change in momentum, this will increase your odds of success dramatically.
Use stochastics to do this - their ultimate timing indicator.
4. Don't trail stops to quickly
Many traders try to avoid risk so much they create it.
If you start trailing your stop to quickly, you will simply be bumped out by volatility, so hold your stop back and have a target that has to be reached before you even consider trailing your stop.
5. You need courage
Many traders go on about discipline in relation to placing stops, but it's just as important, or more important when trying to follow a profit.
It takes courage and discipline to hold a long term trend, when pullbacks eat into your open equity, sometimes by thousands of dollars.
You need the courage to take short term pullbacks in open equity in order to catch the big trends that can make you big profits.
Yes you have to be disciplined in restricting losses, but don't forget this applies to making profits to!
Understand the following to increase profits and restrict losses
I am constantly amazed by traders who trade the market without any idea of volatility or an understanding of such concepts as standard deviation of price.
If you don't know what standard deviation is, make sure you educate yourself.
An understanding of volatility is essential to making big profits in FX Trading
Your FOREX education should also include trading breakouts (for spotting low risk high reward trading opportunities) You also need to know about momentum indicators ( check out [href="/?p=Technical-Analysis.Indicators-Oscillators&t=Stochastic+Oscillator"]stochastics[/HREF]) and targets ( study [href="/?p=Technical-Analysis.Overlays&t=Bollinger+Bands"]Bollinger bands[/HREF])
If you want to trade FOREX, then you need to spend as much time on placing and moving stops as you do on getting a method that catches profitable trade direction.
You can have a great method but it will fail if you keep getting stopped out by volatility.
Deal with it, or lose at currency trading.
Source: Tom Johanson