How to identify common challenges and potential risks traders encounter, as well as ways to avoid them.
About USD 6.5 trillion is being traded every day in foreign exchange markets in 2021, up from USD 4 trillion in 2010, and the number is continuously growing. With that tremendous value, we are surely expected to hear about traders slipping and losing their money. Each trade has the potential to be a loss, and traders make mistakes, especially those who are at the beginning of their trading journey.
There are multiple facets of the market that the average trader may not be aware of when putting money in. These include:
A lot of first-time Forex traders dive into markets with the impression that it will get them instantaneously rich, and that is often why a lot of them lose their money during their first few weeks of trading. Some emotions play into that, like the feeling of being lucky after a good trade and the desire to keep gaining more, which lead to adopting a riskier approach.
The allure of more profits will always be present, and traders can experience a lucky strike and squeeze out a profit every once in a while, but relying on the strike of luck without having a well-studied approach can ruin any trading strategy. It is advisable within the first few months to avoid taking big risks and keep your emotions in check.
Another psychological element opposing illogical risk-taking is fear. With every trade, there will be some capacity of risk, and that should not hinder the trader’s goal of expanding his experience in markets and growing and diversifying their portfolio of Forex trading strategies. The risk of loss is always there, and the only way to control that risk is to confront it and come up with ways to mitigate it. These psychological roadblocks must be overcome to maintain money sustenance and success.
We mentioned earlier how big the Forex market can be, and to understand the complexity and huge size of it is not a simple matter. Do not underestimate the power of such a market and the volatility that comes with it. With its sheer size, a drop in sentiment around a currency could trigger a selloff that will liquidate a lot of small-time trading accounts. Traders must be aware of the volatility of the market they are entering and how much impact – in pips – does a sudden change in sentiment has on that market.
The next thing traders should have in mind, and one of the best pieces of advice everyone should consider, is budgeting. Different traders have different disposable incomes, which determine how much money they are planning to invest and reinvest. Traders without budgeting and planning could face some problems while trading. There are trading opportunities almost every day in the market, and they have to take into consideration the different processes that go into trading, from deposits and withdrawals to market liquidity.
Trading in financial markets is not a very complicated venture, but it does require some commitment for it to be profitable. A crucial aspect of successful trading is how much time are they willing to give it. Before you start trading, you should ask yourself, how much time do you have per day that can be allotted to trading? Will it be a full-time thing? How are you going to handle work commitments? Another factor to consider is called “recency bias”. This is when traders become largely focused on recent price trends and results while overlooking the complete picture of the market. Traders can get caught in the moment so to speak, and this could throw their trading strategies into disarray.
In the previous section, we covered some of the challenges that traders can face when venturing into trading and the Forex market. With that in mind, we will now take a look at the main drivers behind unsuccessful trades and lesser profits.
This is a fairly common issue across all traders and could be very problematic as it creates unreasonable profit goals and trading fatigue. Overtrading is when a person trades unnecessarily or too often. Since trading is an extremely quick process, sometimes that creates an emotional pull that makes it very hard for some traders to stop executing orders.
Also, a bias towards a specific currency pair or instrument may lead to trading it over and over again without much consideration to the market. Any trading strategy is likely to get obliterated by overtrading. This is why it is crucial to rescind these emotions and pull away from markets, and trade in a methodical manner. Commit to set goals, budget, and strategy.
While we insist that a trading strategy is key to successful trading, it is just a foundation, and to ensure continued success, the trader must adjust to changing market conditions. It is almost impossible to come up with a trading strategy that considers budget, risk management, and every market condition. The trader must be constantly informed and above major shifts in markets.
Monetary Policy guidance and financial news, for instance, might keep the trader ahead of major changes and give an indicator to how markets can act so that they adjust accordingly. Having an inflexible trading strategy will lead to inconsistent returns.
This is a term that is thrown around more than any other in the Forex world, and yet, many of the market population do not grasp how important it is. Risk management is probably the most important tool a trader can use and is something that should be built into every trading strategy. Not a single trader can win all their trades, and as we addressed before, some losses can be catastrophic. Risk management aims to minimize the losses in case a losing trade occurs.
Next time you are trading, remember these challenges and try to avoid them!