The chances for significant profits in a relatively small amount of time because of leverage attracts many people to forex trading. But they must overlook the fact that potential gains come with a significant chance of losses.
To protect the account, traders must look at the bigger picture, eyeing the possible profits, and looking for ways to trade with a lower risk. The rewards might be lower in the short term.
However, with low risk, the forex trading strategy will hopefully show more success in the long term.
Risk is Inevitable
There is no business people can get into that doesn’t have a specific amount of risk. For instance, if a person decided to start a convenience store, there is also a chance that it might not make enough money to keep its doors open.
But with the right research and decisions, there would be an increase in the possibility of building a successful business.
With that, the trading business is similar. Traders must do proper market research to make solid trading decisions. There would still be a few risks while trading, but the risk diminishes as traders understand more of the markets and how they move.
The great thing about forex trading is that people can be in and out of the market at their chosen time. For instance, when markets become very erratic and volatile to be comfortable, traders can simply stay out of it.
Unfortunately, many new forex traders don’t know that it’s okay not to trade when necessary.
But if they want to manage their risk, they must not be afraid to sit out. Though they might miss some winning trades, they will likely skip the losing trades too.
Also, traders can control their position size and time their trades to have a lower risk. It will only take a few minutes a day to look for setups and place stop losses.
This kind of strategy will let traders go on about normal life while the money works for them. If they have time to sit at the computer for hours on end, then short-term trading can be a possibility as well.
Psychology might be the most underrated tool that forex traders have. Let’s say a market will either go up or down over the longer-term. With that, in theory, traders will have about 50% chances of success on all trade.
So, what will they do with the odds? Traders decided to short, for example, the USD/CHF pair.
As traders sell the press button, the market turns around and goes higher immediately. Then, they have 50 pips stop loss that is in danger of being hit quickly.
And sadly, too many traders will move their stop loss even higher with hopes of the market turning back in their favor. But they must remember that they set the stop loss for a reason, and it must remain no matter how the market moves.
Still, the worst part is that the most painful mistakes come right after the initial loss. Most of the time, most people are seeking to gain their money back from the market.
So, they will reverse the trade and double the size to make money back as soon as possible. According to Murphy’s Law, nearly 100% of the time, the trade won’t work out. As a result, traders increased their losses instead of minimizing them.