The Top Six (6) Reasons Forex Traders Fail
Forex currencies don’t reward gambling, on the contrary, the Forex market tends to punish gamblers without mercy. At least the casino will offer a free drink. Trading success requires many years of endeavors and sacrifices in order to build several skills, but most importantly to build an independent and fearless personality which is based on discipline, patience, and self-awareness. Despite the prevailing public perception, Forex is not the palace of gambling.
Although the significant advantages the currency market has to offer, most Forex traders fail. Many of the reasons that Forex traders fail are similar to those that many people fail in their life. Greed, fear, lack of discipline, not following their own rules, and inability to do what is right when the time comes.
These are the top six (6) reasons Forex traders fail:
(1) Lack of a Trading Plan
The existence of a detailed trading plan is at the core of long-term trading success. The importance of a trading plan will be highlighted in the worst trading days.
A trading plan must include:
Risk Management Rules
Expected ROI (Return on Investment)
Keeping Detailed Records
(2) False Money Management
False money management is the most common reason Forex traders fail. The importance of effective money management will be seen when the market conditions change and volatility booms. The inability to cope with such market dynamics will prove a disaster for a trading account. Successful traders know exactly how much of their funds is at risk at any given time. Furthermore, they apply techniques to cope with any market conditions.
These are the key components of effective money management:
Here are some important terms when trading Forex:
A currency pair consists of two currencies that are traded one against the other. The first currency is called the Base Currency and the second is called the Quote Currency. Actually, a currency pair can show how much of the quote currency must be paid in order to buy a single unit of the base currency. Here are some important currency pairs and their nickname:
■ Euro against the US Dollar: Eurodollar
■ US dollar against the Japanese yen: Dollaryen
■ British Pound against the US dollar: Cable
■ Australian Dollar against the US Dollar: Aussie
■ US Dollar against the Swiss franc: Swissy
■ US Dollar against the Canadian Dollar: Loonie
The Forex Majors are currency pairs trading the US Dollar (USD) against another major currency. Forex majors are enjoying high liquidity and the tightest spreads. The most important Forex Majors are EURUSD, GBPUSD, USDJPY, and USDCHF.
The Forex Minors are currency pairs that are not traded so heavily as the majors and thus they are offered in wider spreads, for example, EURJPY. Even less popular Forex Currency pairs are called the Exotic pairs.
Spread is the distance between buyers and sellers (bid and ask) and it is measured in pips.
A pip means Price Interest Point and it measures the change in the price of a currency pair. A pip is usually the last number of the decimal of a currency pair (0.0001).
Lot is the standard unit size of any currency transaction. There are 3 main types of lot sizes (micro, mini, and standard lot). A micro lot worth $1,000, a mini lot $10,000, and a standard lot $100,000.
■ Forex Beginners → Micro Lot Accounts Recommended
■ Semi-Advanced Forex Traders → Mini Lot
■ Advanced and Pro Forex Traders → Standard Lot
Most Brokers do not charge trading commissions nowadays. Some Forex Brokers charge commissions by offering as an advantage minimal or even zero spreads. A good combination of spreads and commissions charged should, for example, include EURUSD spread less than 0.5 pips and commissions charged no more than $5 per standard lot ($100,000).
The trading leverage is s simple way of magnifying your trading capital and that means magnifying your gains but also your losses and your trading cost. Actually, leverage means opening a position by paying only a portion (margin) of its value. High leverage made Forex trading popular worldwide as you may increase your fund up to 500:1 or even more.
Here are all the important Forex Trading Order Types:
1) Market Order
A Market order means buying or selling a currency pair at the current market price.
2) Limit Order
A limit order means buying or selling a currency pair at a pre-determined (limited) price.
3) Stop-Loss and Target Profit Orders
It is explained below.
4) Limit Entry and Stop-Entry Orders
Buy or sell above and below the market at a pre-specified level.
5) OCO Order
OCO means One-Cancels-Other and according to this order if a trade is executed then another trade is automatically canceled.
6) GTC Order
GTC means Good-Till-Cancelled and it is an order that will stay in the market active until it is filled or canceled.
A stop-loss order is a trading order that limits your potential loss to the desired level. For example, if you sell EURUSD at 1.3700 and at 1.3715 there is an enormous resistance level, you may place a stop-loss at 1.3716. If EURUSD crosses that important resistance level of 1.3715 (with strength) and reaches 1.3716, then your position will be automatically closed and your loss will be limited to 160 pips (1.37160-1.3700). Always protect yourself with a stop-loss. A stop-loss is your trading shield. Important events and breaking news may lead the currency market to movements of 500-1,000 pips in a few minutes or even in a few seconds. Forex traders who forget to place stop-loss orders are burned in a matter of a few weeks or even days if they are intraday-traders.
A target-profit is an order that places a target price where your trading position will be automatically closed with a pre-determined profit. It is wise to place a target order before a major resistance level when you go long and before a major support level when you go short.
An ECN Forex Broker means a Forex Broker who provides access to its clients to the Electronic Communications Networks (ECNs). Based on the enormous liquidity of the ECN network, ECN brokers may provide the tightest spreads in the market.
An STP Forex Broker (Straight Through Processing) is a similar type of broker as the ECN, instead of the Electronic Communications Networks (ECN), an STP broker uses external liquidity providers to offer his clients tight spreads.
A market maker or an agent or a dealer is a Forex company that provides Forex Trading via a Dealing Desk (offering currency trading by instantly quoting buy and sell prices).
MetaTrader from MetaQuotes is the standard trading platform for most Forex Traders. The most commonly used and supported version of MetaTrader is the 4th (MetaTrader4). MetaTrader provides hundreds of indicators and it allows also automated trading.
The slippage on execution means the delay when executing a trading order (opening or closing a trading position). Slippage is the difference between the order price and the actual executed price, slippage is measured in pips.
Automated Forex Trading means opening and closing trading positions automatically using specialized software. This software is commonly called an Expert Advisor or a Forex Robot. In order to trade Forex automatically, you need a trading platform that supports this type of trading. Popular platforms to trade Forex automatically are MetaTrader4 and MirrorTrader.
Copy Trading or Social Trading means trading Forex using signals from other traders. That copying procedure happens instantly. ZuluTrade and eToro Openbook are today the most popular platforms for social trading.
The three types of Forex charts include bar charts, line charts, and Japanese candlestick charts.
A Japanese candlestick chart is an effective way of visualizing currency price movements over time. Most Forex traders are using this chart type as candlestick formations are able to provide trading signals in just a glance.
A Trend is a price movement continuation that may appear on a daily, weekly, monthly, or even longer basis. A Forex trend can be either bullish or bearish. The most common rule when trading Forex is follow-the-master-trend. You may use charting software in MetaTrader in order to quickly determine the master trend, Charting packages as the MTI 4.0 Tool.
Support levels are price levels where the demand is expected strong (buyers outweigh sellers) and Resistance levels are price levels where the supply is expected strong (sellers outweigh buyers).
Scalping means opening and closing positions lasting less than one minute and aiming for tiny profits (2-10 pips). In order to scalp Forex, there are many requirements, as for example the spreads charged must be extremely narrow, slippage on execution must be minimal and advanced technology should be available. Usually, traders use Expert Advisors (Forex Robots) to optimize their scalping performance. Be aware that many Forex Brokers strictly forbid scalping. Usually, ECN and STP brokers allow it.
The Fibonacci sequence of numbers is very important when trading Forex. Fluctuations in the currency market are highly affected but human psychology and there is no better way to measure human psychology than the Fibonacci numbers. The Fibonacci sequence follows a simple rule; every number in the sequence is the sum
of the two previous numbers:
Based on this sequence, the Fibonacci Retracement is maybe the most important technical analysis tool when trading Forex. The Fibonacci Retracement may help traders to easily define the perfect levels to place their stop-loss and target-profit orders. In addition here are the five ratio levels that are generated by the Fibonacci sequence of numbers:
■ Forex Trading Terms
Forex Brokers are usually regulated by various Regulatory Bodies. These are the major Regulatory Bodies around the world in alphabetical order.
ASIC is the Australian Securities & Investments Commission. ASIC is an independent Australian supervising authority found in 1991.
Forex Brokers Regulated by ASIC:
BaFin is the German Financial Regulatory body found in 2002. BaFin's responsibility includes supervising Stock Exchanges and similar financial markets, Commercial Banks, Financial Service providers, Pension Funds, and Asset management firms that are operating in Germany.
■ BVI -British Virgin Islands Financial Services Commission
The BVI Financial Services Commission is the single financial supervising body of the British Virginia Islands.
► BVI Web
The CFTC is the US Commodity Futures Trading Commission found in 1975. CFTC is responsible for ensuring the smooth operation of the US options and futures markets.
CySEC is the Cyprus Securities and Exchange Commission.
Financial Supervisory Authority (FIN-FSA) is the official financial supervising authority of Finland.
■ FINMA -Swiss Financial Market Supervisory Authority
FiNMA is the Swiss financial supervisory authority.
Forex Brokers Regulated by FiNMA:
Dukascopy » Dukascopy
FCA UK is the financial services authority of the United Kingdom. The FCA UK was found in 2000 and it is responsible for regulating the UK Financial Markets (firms, brokers, and exchanges).
HCMC is the Capital Market Commission of the Hellenic Republic (Greece).
Forex Brokers Regulated by HCMC:
MiFID is the European Union Financial Instruments Directive 2004/39/EC that was found in 2007
NFA is the US National Futures Association. NFA is an independent regulatory organization.
The RAFMM is the Russian Association of Financial Market Members.
Forex Brokers Regulated by RAFMM:
SFC (Securities and Futures Commission) is a non-governmental regulatory body.
► SFC Web
■ Foreign Exchange Market Regulation