The 3 Biggest Forex Mistakes

Even though the Forex market can be a great place to make a substantial profit very quickly for investors, there are some common mistakes that you need to be careful to understand. These pitfalls are all avoidable and knowing what to watch for is half the battle. By spending the time required to develop an investment plan for your Forex trades and avoiding these common mistakes, you can earn a nice income from your Forex investing.

Trade with Your Head and Not Your Heart

Any type of investing is an emotional experience that can cause many people to stay in a position too long. They are either chasing a profitable currency pair for longer than they should or hoping a bad trend will reverse and return their investment. Both of these scenarios will cost you profit and are purely emotional decisions that have little to do with the fundamentals of picking a good investment. Avoid this pitfall by always knowing what you are expecting from a particular investment and determine your profit and tolerable loss before ever making the trade. This way you can minimize the emotional component that can lead to losses in the Forex market.

Create a Plan and Stick To It

Most new Forex traders do a fair bit of research and preparation before they start trading with actual money. They january open an account that allows them to practice their trades to try out some of their investment strategies. In most cases they have read a few books on the market and january even have sought the advice of a friend that trades Forex. The one thing they almost always forget to do is putting together a plan for their investments. Making money in the Forex market requires much more than simply picking a currency pair and buying it. You have to clearly understand what your investment goals are for the week, month and year to be able to know when and how much to invest. By setting these goals out in a chart you can be sure you do your best to reach them and not make the mistake of chasing a loss.

Greed Is Never Good

One of the most common and expensive mistakes that new traders make is getting greedy. This can happen in a few different ways and all of them are dangerous. Chasing a profit in a trade well beyond your original goal january work for you occasionally but will get you into trouble over time. The odds of you making a little extra profit in any given trade by staying in a position a little longer is good. The downside of this strategy is that over time the chances of you losing most of your profit as these gains reverse themselves is almost certain. Another greedy trap that some investors fall into is putting too much of your capital into a single trade. You are always better to spread your equity out over several smaller trades than betting big on any one opportunity. This way if a few of your trades are losers, and they always are, you can still profit from the winners and increase your earnings slowly.

Is Leverage a Good Thing?

The Forex market is very different than most other types of investing and relies on the small incremental movements in the price of a currency to generate profits for investors. Because these changes can happen in tiny fractions, you’ll need to control a very large lot of a particular currency pair to realize any substantial profit from your trades. Maintaining an account with the equity to cover these investments is difficult and beyond the reach of most causal investors. To help expand your investment in the Forex market, most brokers extend differing levels of leverage to help amplify your profits. This leverage acts as an investment multiplier to enable you to control a larger portion of currency than your investment can support on its own. By amplifying your actual investment, leverage allows you to substantially improve your profits on small movements in the value of your position.

Leverage Can Vary Between Brokers

The amount of leverage a brokers offers you can depend on a few different factors. Initially most brokers are very conservative with the amount of leverage they extend to new accounts and will typically increase it over time as the equity in your account increases and you have established a consistent record of trading with the broker. They january also adjust the amount of leverage extended for your trades based on the lot sizes you are purchasing. Most standard accounts require you to buy currency in lot sizes of 100,000 or larger. Many brokers are now offering smaller accounts and january let you open a mini or micro account, which feature smaller lot sizes of 10,000 and 1,000 each. These smaller accounts allow new investors to enter the Forex market with a lower initial investment and develop a trading strategy they can use as their account sizes increase. Most brokers will offer different levels of leverage with these various accounts and january also increase the leverage they offer you over time.

The Hidden Danger of Leverage

While leverage is necessary to make a sizable profit from the tiny movements in value of the Forex currency pairs, it can have a downside as well since it magnifies your losses as well as your gains. This danger can be managed by placing a stop loss order at a price somewhere below your initial investment to backstop your losses. Many new traders january miss this critical step and a sweeping decline in the value of the pair they are trading can wipe out their investment. As long as you take precautions, the negative effects of leverage can be minimized.

Even with the slight concern with magnifying losses, leverage is an overwhelming positive thing in the Forex market and necessary for any serious profit. By having the ability to expand the amount of currency you control with your investment through leverage enables you to reap a larger profit with small movements in the price. This leverage helps to make the Forex market what it is today and without it the potential for profit would be hard if not impossible to find for the small investor.

Do Forex Trading and Stock Trading Mix?

With the dynamic and immediate access most investors have to the various financial markets around the world, the choice of where to put their money to work for them is greater than ever. While most conventional portfolios include a good mix of high-growth and stable investments, more traders everyday are looking at the Forex market as another way to increase their profits. Even though investing in the Forex market is very different than buying traditional stocks and bonds, it can help to round out a portfolio and provide additional income from your investments.

Stocks Are a Proven Investment Strategy for the Long Term

The stock market provides access to a wide range of companies for investment and allows an experienced trader to profit from these choices. These stocks are typically purchased and held for a period of time as their price increases with the success of the company they are tied to. Their rate of appreciation is usually measured in months or years and can provide a steady income stream if the right stock is chosen as an investment. Typically new investors in stocks will choose companies that have the potential for fast growth when they first enter the market. As they age, they are normally advised by their consultants or tax advisors to shift their investments into less risky positions with a lower rate of return to protect the gains they have made for retirement.

The Forex Market Is More Dynamic

The Forex market is very different than the stock market as the changes in the currency values that support this market are very dynamic. Sizable variations in the value of a currency can happen in minutes and traders need to be online and active when these changes take place to make their profits. Because of this, the Forex market offers a faster trading opportunity for investors looking to profit quickly. This volatility can also be a risk since picking the wrong currency pair can negatively affect your investments. It also means that you’ll have to stay closer to your investment choices in the Forex market to ensure you exit a position when it becomes profitable.

The contrast of the immediacy of the Forex market compared to the slow and steady earning potential of traditional stocks fits the profile that many investors are searching for. These traders are secure in the knowledge that their stocks provide a long-term growth portfolio and use the Forex market for riskier investing and short-term gains. As long as these traders apply careful money management, this strategy can reap incredible profits from both of these investment choices.

To help manage these two investment options, many brokers allow you to use specialized software to keep track of your portfolio and make your trades. These programs have become very sophisticated in recent years and can even automate your Forex trading through your broker. This eliminates the need for you to be online to make the trades yourself and enables you to simply enter some basic parameters into the program and have the trades made for you. This not only takes the stress out of Forex trading, it also ensures that your trades will be made at the exact right moment to generate the best profit.