Some traders are without doubt, their own worst enemy. There really are not that many reasons why forex traders fail. However, one of the main reasons that forex traders fail is overtrading. Overtrading can be understood as trading either too often, or with positions which are too large for the trader or the trading account. Here I will briefly cover the first.
Trading too frequently –
The reasons behind this could be unrealistic trading goals, a simple addiction to the market, or the psychological mindset that “the next one will be the winner”.
Let’s consider unrealistic expectations. Setting yourself attainable, realistic goals in trading, will go a huge way to relieving the psychological pressure that you can otherwise place on yourself and which can result in poor decision making. Never view trading as a way to get rich quick, because it most certainly isn’t! A patient and consistent approach, whereby controlled losses and profits are expected can avoid desperation and anxiety taking hold, which can then lead to chasing the market. This concept of chasing the market, is something that institutional traders will never do and is something that can run your trading account to 0 very quickly.
When you trade too frequently, the chances are you aren’t looking at the trade set up properly, you are not doing sufficient analysis and you are not following your strategy. In these circumstances it could be a good idea to reset your mindset. Returning to a demo account for a period of time to reset your mindset could be very useful in these circumstances.
Trading positions that are too large –
One of the main advantages of trading forex is that it is traded on leverage. This means that you can trade much larger positions with just a fraction of the value of the trade in your account. However, what you don’t want to do, is over leverage yourself. This could result in your positions being closed out for you on a lack of funds to support the trade. The key is to have sufficient funds in your account and then not too risk all of these on one large trade. Having smaller trades, which risk a smaller portion of the total amount available on your account, will go a long way towards improving the chances of running a profitable account, whilst also easing in a big the psychological pressures of trading.
Think about this scenario. You have one big trade on your account. If this trade moves against you will lose a substantial proportion of the funds in your account. The chances are your will behave in a very emotional way towards this trade. On the other hand, you are running a trade, which if goes against you the losses account for just a small portion of what you have a available in the account. Should this trade go against you, the chances are you will be relaxed enough to still stick to your trading plan.
So, this brings us to the million-dollar question of what size should my trade be? A general rule of thumb is that beginners should look to risk no more than 1% of the capital in the account per trade. But just keep in mind that trade size is not the only way to limit risk – stop loss orders can also be used, but the same rule applies – risk just 1% of the capital in the account. Risking more than this when you are new to trading makes you much more likely to run heavy losses. Having sufficient funds in your account actually makes you much more likely to have a winning account.
When you are choosing a forex broker, it is useful choose a broker that offers you a demo account in addition to a live account and a comprehensive educational programme so that you understand concepts and calculations needed to trade. Vantage FX is an award winning Australian broker which offers its clients an unlimited demo trading account. This means that you can return to the same demo time and time again, should you need to tweak your mindset or your strategy. Furthermore, they over their clients an excellent educational package including free webinars, so you have all the knowledge necessary to start trading.