Dangerous Problems In Forex Trading

When describing the most crucial problems in Forex trading I was trying to show you the worse obstacles that are between you and your success.

Every problem explained below is either putting your future profits at risk or preventing you from being a successful trader. Read the entire article very carefully – I made every effort to create a comprehensive (and easy to follow) article.

The tips given below are a result of researches made by people with extensive knowledge and experience with teaching and coaching new traders. This publication is aimed at helping you in maximizing your long-term profits and to become a successful and confident trader.

But please, be aware that just reading will do nothing… Put those tips into effect … and observe the effect. Only reading will not do the trick. So be patient when work on improving your trading habits.

Modern knowledge regarding the reasons of success and failures in Forex trading and the path that could lead you straight to your success is truly incomplete. Due to the lack of extensive research and analysis, there are a lot of misunderstandings, misjudgments and myths within Forex traders’ community.

Those are extremely dangerous as they lead to wrong decisions and confusion. Many traders are experiencing emotional problems, loose their deposits or even ruin their life and the lives of their relatives. For others, their path to success is unnecessary long and hard. It is worth remembering that usually this is not beginners’ fault.

In addition, many “renowned” institutions and people that are considered as gurus in this market are benefiting from those situations. They earn on your bad emotions and your losses. This market is difficult enough: it is dominated by large banks and brokers equipped with highly efficient marketing tools based on latest developments regarding mental aspects of trading. And you are wrong if you ever start thinking that they are on your side in this game.

So what's the real problems?

1. Overtrading

Many retail traders with little capital often exceed the risk limits and open too big orders hoping that they could live by trading. This is sometimes a part of their trading plan actually… This is what we call overtrading – it is the simplest way to losses and/or burning down your account even amongst the most experienced traders.

Therefore if you eliminate the possibility of overtrading (i.e. by a proper construction of your trading plan) – you will minimize the possibility of experiencing losses. This is applicable throughout your entire career as a trader!

Overtrading has two aspects:

• Unjustifiable large amount of opening orders.
• Large number of hours in front of the screen.

As the research show, most of the problems in trading comes from those two reasons. The third reason is opening too large trades compared to the capital trader has got. I will talk about that later on.

Too many hours in front of the screen can weaken you intellectually (so your ability of proper analysis of the market and consciousness gets lowered drastically) and emotionally (when there is nothing going on, there is a pressure to do anything, even if it makes no sense).

High number of entries, especially made by beginners, create highly stressful situations, that result in impairment of concentration and proper analysis. Overtrading leads to both mental and emotional exhaustion, and the worst case scenario – it leads to a trauma.

The belief that emotions are a main source of problems in trading is... myth.

The whole thing is the other way around: overtrading causes emotions, and those lead to wrong decisions. After some time trader is trapped: wrong decisions cause emotions and those cause other wrong decisions. Losses are inevitable then. Emotions are a consequence of faults in trading, not the reason. If you want to eliminate emotions, eliminate possibilities of overtrading and you will eliminate the reason.

The second myth is a quite common idea that only losses cause bad emotions. That’s not true – emotions caused by high profits are even more dangerous. This is because euphoria blinds us, it makes us feel that we are invincible. The feeling itself is quite pleasant, but it makes us forget about our market analysis (well, we know everything about the market, right?) and we start opening too large positions.

Good decisions are being made when we are fresh and after a good night sleep, and the level of our emotions is low or moderate.

Recommendations:

The best learning process is steady and systematic development with no grave trauma (heavy losses) or euphoria (big profits). This is possible when you start trading with a micro account – when you encounter real trading situations, but neither profits nor losses cause heavy emotions. So try to keep it balanced: avoid standard lots so both your profits and losses are acceptable.

We all love to win, but in order to getting to your steady profits fast you have to stay away from high stake and high profits. Winning trades are far more dangerous: they infatuate (so they take away your perception and analytic approach).

Separate your trading and your training. When you learn new stuff your mind should be eager and open. High level of stress blocks your ability to learn. Emotions caused by unreal profits (or losses) handicap your capacity of proper analysis.

When you are emotional, you cannot stick to your trading plan and you are not disciplined. Therefore lack of discipline is a consequence of grave emotions, not the cause. When you are emotional, you cannot use the advantage your system gives you and this chaos is a straight path to failure.

If you noticed those issues in your trading you can do at least those three things:

• Stop trading for some time (a few days minimum),
• Lower your stakes down to a level that does not cause grave emotions,
• Use therapeutic ‘tools’ – relaxation and/or meditation.

 The best way is to use all three the same time.

“After a whole day, you just do not know what you are looking at any more, and you make mistakes. It is better to carefully select trades and wait patiently for a trade that you know “has your name on it.” People try to take every trade that comes along because the greatest fear in the market is that of missing a trade. The fear of missing a trade is far more powerful that the fear of losing money. Aspiring traders think that each particular trade might make them wealthy. So they take every trade in case it is “the one,” instead of carefully selecting the trade. Sitting and trading all day long, or trying to take every trade that comes along is also an almost guaranteed way to failure. I have not met many traders who can sit all day in front of a screen and still remain focused. Those who have studied such things agree that the less you trade the more money you make.” - Joe Ross in „Conversations with Forex Market Masters”

“There is only one signal during off hours – stay out.” Jimmy Young, trader with over 20 years of experience.

2. Undercapitalization

“One of the biggest problems we see is trading undercapitalized. Too many traders are in a great hurry to get into the markets and to get rich quick. They have bought the lie that they can make a lot of money starting with a small account.

Although it is possible, it is not realistic. In a hurry to make money trading, most traders begin trading one contract. This is almost a sure way to losing what little capital they have. Everything is riding on a single contract, so the trader is forced to stay in too long or to scalp for only a few pips or ticks.” - Joe Ross in, Conversations with Forex Market Masters”

Most of traders who start their trading adventure hope for high profits, but do not have the equity to stick to a proper money management rules. SL of 30-40 pips even with an account where 1pip = 1 dollar requires the account to be a few thousand dollars least. Most of the beginners do not have that money so they will not be able to learn anything. Risking even 10% of their deposit is more likely to lead them to heavy losses than heavy profits.

To earn in ‘normal life’ we graduate colleges and universities – the whole process takes at least a dozen years or so. But many people think that Forex is different and they can make huge cash by using a first ‘magic’ system they can get on eBay and with their first account.

Too small equity causes bad risk management. By the way it is worth saying that the best money management plan is one that suits both trader’s personality and his system. Common 1% or 2% of the capital might be too much in one’s early days.

When opening too big positions you are like a driver who drives shiny muscle car over 100mph through crooked streets of a city centre (yeah, that is over 160kmph if you’re using metric system).

Amongst the group of traders who we interviewed only one person ended up their first year in plus. The following story is a great example how proper conclusions drawn from your initial losses lead to profits.

“My problem was that I opened my first account with $2000 in it and I started to trade standard lots right away... Boy, what a mistake this was... but nobody cared to tell me that $2000 is not that much if you want to trade standard lots. I had my share of stress because one bad trade that cost me 30 pips wiped out $300 from my account right of the bat. That was scary. I can not complain about the winning part. Each trade on a plus looked really good too…. But that was not the right way to trade. We can have the best system in the world but we have take into consideration that the market doesn’t care what we have, it does its own thing and we need to be prepared for some surprises. This means, we can not put half of our trading funds on one trade.

As soon as I realized how big of an issue money management is I switched to mini lots right away. That took away a lot of my fear from trading. After I “calmed down” and started to get the pips that I wanted I slowly increased my funds and my position size.” - Monika Korzec in „Conversations with Forex Market Masters”

Recommendations:

If you think seriously about trading, follow a ‘normal path’:

Gather your capital so that you can start serious trading. Think that you would have to earn 10% a month, so save one thousand a month for your trading capital.

First things you have to do is learn the basics, be familiar with market moves and know what causes them, and know your emotions in those new situations. You may not believe it, but mental aspects are responsible for 60 to 80% of your success in trading. Treat trading as a business that requires knowledge gathering and serious investments.

Treat trading as a business that requires knowledge gathering and serious investments (think about it twice because it is that much important). After getting familiar with the platform, open a micro account [1 pips = 1 cent, so $200-300 should be enough] and start trading.

If you cannot manage to get profits with a micro account, you will not be able to get anything with a standard account as well. Bigger lots are not a proper way to get motivated. If trading micro lots is boring – you should know that you should be feeling like that! But if it is too big of a burden – maybe you do not have what it takes to be a trader and the best way is trying to realize yourself somewhere else.

Get familiar with a few systems that are based on different timeframes. The simpler they are – the better. They should not use more than three indicators. You might be surprised, but here in Forex trading slower means faster and less means more.

“Most beginners nowadays are over-leveraging, emotional and always looking for the Holy Grail that never exists. A trader does not need to have a big capital investment, but rather, he needs to know that for 2,000 dollars as principal capital, he should not risk more than 3% on a single trade. It is usually by over leveraging oneself that leads to margin calls, thus became emotional and act irrationally. Therefore, a trader should look to change his mindset within, not looking outside for solutions.” - Wilson Neo in „Conversations with Forex Market Masters”

“Don’t trade with what you can’t afford to loose an old cliché but very important and make sure you have enough to trade with in the first place. No business starts with such low funding that they can’t pay employees or other bills and if they do they don’t last long. If you cant afford a starting capital paper trade. Get some practice in while you save enough to start realistically trading with.” - Phil Newton ibid.

3. Not understanding the emotional side of trading

“It is said that the markets are driven by fear and greed. And that certainly is true. Fear causes traders to make mistakes. The number 1 fear is that of missing a trade, when it is much better to be selective in the trades you take and be willing to miss those trade which do not perfectly meet your trading rules. Greed causes you to stay in a trade too long. The result is that instead of taking profits when they are there, you wait and hope for more and end up losing what you could have had. You want to be paid to trade. That means taking money as soon as it is available.” - Joe Ross in, Conversations with Forex Market Masters”

It is obvious that emotions impair your concentration and ability to make proper decisions. However most of the traders, especially beginners, neglect them totally.

Apart from fear and greed we can distinguish many more:

Boredom leads to impatience and (especially when it comes to people that are used to action) feeling of emptiness and necessity of doing anything, which might cause unnecessary trades.

• Euphoria and excitement: cause overconfidence – which is the shortest way to overtrading.
• Frustration: might cause necessity of doing ‘anything’ and irrational trades that are not based on our system.
• Depression: especially caused by losses – as above.
• Revenge: After a loss or a series of losses trading plan tends not to be used anymore and traders
• start typical ‘revenge trading’.

Low self-esteem, feeling that you are ‘not worth it’ - can cause revenge trading in order to show it to oneself and to the others. Result: irrational trading.

Every single one described above affects one’s ability to make rational decisions. It is said that we make over 80% of our choices basing to our emotions, and our mind just seeks justifications afterwards. If so, than the inability to understand one’s emotions is the reason of over 80% of failures.

It sometimes happen that emotions constantly affect traders’ decisions – then trading becomes a torture and the results are wore and worse. Shall this happen (and it could happen on every level) use techniques that lower or even totally erase your emotions.

Emotions are lowered by relaxation and meditation. Doing sports helps as well. You can always use techniques based on complete dissociation from emotions.

Emotions are raised in many different situations:

• Contact with brokers’ ads and ads of systems that promise you enormous profits,
• Trading with money that you cannot lose,
• Opening too big order compared to your capital,
• Too many unjustified entries,

Profits and losses

Emotions impair your ability to concentrate and focus but they are not the main cause of problems and losses. Contrary to what the trading society thinks, emotions are a result of three main issues:

• Breaking one’s trading rules (especially overtrading)
• System not matching trader’s personality and temper,
• Lack of knowledge of the system.

The first and last issue was covered above – I would like to just add that serious lowering the level of your emotions should happen when you start to understand and ‘feel’ your system. Usually this is the effect of hundreds if not thousands hours before your computer screen [„quality screen time”].

If you understand your system and the market you trade, the process becomes simple and bad emotions do not occur. There are number of systems out there and every trader should find his own – one that suits his personality, temper and risk tolerance.

Someone who is an action-loving type of person can fell horrible when using a long-term system, and a person who is more calm can feel tortured using a scalping system with TP of a few pips only.

It is quite common to describe emotions as a reason of losses, but – as it was covered above – it is the other way around. Fighting just the emotions is more like symptomatic treatment - not fighting the real cause. Working with your emotions will never replace a true experience in using a good and backtested system.

Recommendations:

Test your system very, very carefully. First back-test it on a demo account, then test it on a demo account, and then live on a micro account. Fear will disappear when you master your trading system – but it will come no sooner than after a few months. And if you are not willing to put that much effort in it, then you will become like those 95% retail traders that lose.

Be aware that your emotions will be affecting your trading – you have to know how they are created and how they affect you. Do not create situations that might cause bad emotions. They are often caused by too many opened positions, trading regardless of your system (because the market is moving), big profits and big losses.
Get accustomed to your emotions, starting with lowest orders possible and gradually making them bigger and bigger.

Get familiar with working-with-your-mind techniques. Half of the traders we interviewed meditate on a regular basis. If your trading is constantly affected by bad emotions (this can happen on any level of experience), use techniques that can ‘erase’ your emotions totally.

Lead a healthy life: your mind needs rest and your body needs sports! Fitness, gym or martial arts can help you maintain your psychical balance and get rid of adrenaline that is created during trading.

If your self-esteem depends on your trading results, it is like you signed a blank cheque in the name of the market! It is the worst-case scenario and should be avoided at any cost.

“Rule 5: Do not be impatient and force trades to happen.” - Cardinal rules of trading according to Dr. Jeff Wilde

“The toughest thing I learned in the Forex market was patience. Invariably, as soon as you think you have a good trade set up and execute the order the market unexpectedly goes against you almost immediately and without confidence I found myself closing many good positions in losses.

It literally took years to trust my decision-making and stick to the trade regardless of the volatility in the market that can shake your confidence watching her trade go against you.” - Don Steinitz

“I think the biggest mistakes that I have made over the years is “jumping” into trades trying to catch the ride. When we as traders see the markets start to rock n roll it is easy for us to say, “I WANT IN” when we should say, “CAUTION”.” - Steve DeWitt

4. Lack of a trading plan or not following one

“Before I get into any trade I know what I am going to risk, and I know what my profit targets are. That way I can determine a satisfying risk/reward ratio.” - Dr. Jeff Wilde

Why trading plan is important?

The reason is really simple: trading plan helps you in making decisions during moments of stress and uncertainty. That is why it is extremely important for beginners. Lack of trading plan means the necessity of analysis and making decisions when many things are happening at once. Beginners are not ready for those situations so it is obvious that they would make wrong moves that lead them to losses.

The purpose of a trading plan is to help a trader to identify a high probability entry points and then manage those opened trades until closure. So if you do not have a trading plan it is really hard (especially when you are a newbie to Forex trading) to stay disciplined enough to trade a certain system. Entries and exits tend to be chaotic then and they result in losing your deposit. Traders without a plan are hunted by fear, greed, hesitation, doubts, chaos and – in the end – losses.

A well-prepared plan helps you in getting rid of your doubts and hesitations and lets you daunt your impatience and greed. Most traders are not aware that in order to succeed we need two trading plans instead of one.

Those are:

Strategic trading plan, and Tactical trading plan [rules of opening positions and closing positions as well as money and risk management].

You can find description of those two trading plans below.

Strategic trading plan consists of:

What long term goals (within one, two and three years) do we want to achieve?
What financial results we want to have?
How can we do that?

Strategic trading plan can also include our learning plans and description of investments we want to make:

• Learning process (examples of possible goals):
• Finding a mentor to learn a certain system inside out,
• Buying a few eBooks and learning systems they describe,
• Taking part in seminars and/or conferences,
• Reading the most important books on currency trading.
• Investments (examples of possible investments):
• Initial capital,
• Computer,
• Internet connections (main and backup one),
• Indicators,
• Extra software,
• Seminars,
• eBooks,
• etc.

Now let's try to be realistic: When starting with a relatively small account we do not have big chances to become millionaires within a few months. If you managed to gather $2.000, and your annual target is $50.000, well, let's say it is not rational at all.

I truly understand that every single one of us traders wish to start earning as soon as possible... but a wish of earning millions with just $2K is as likely as winning Formula 1 twelve months after getting a driving license.

Tactical trading plan elements (examples):

• Money management techniques
• Reward to risk ratio
• Entry points according to your system
• Exceptions
• Exit points according to your system
• Rules of placing Stop Loss
• Position management
• Risk diversification methods 

 It is also worth keeping a trading journal:

Apart from having a trading plan it is really worth keeping a trading journal where we write down every opened positions (including those opened not according to one's plan). It is really useful to include what made you open your position and what was the effect.

“I kept a trading journal initially that went into detail regarding all the factors that went into why I took the trade and the end result. It was really helpful as it helped me uncover recurring mistakes I was making.

For example, I realized that about 25% of the time I was taking trades that I shouldn’t have and was basically jumping the gun due to impatience and forcing trades that hadn’t setup properly yet.” - Dr. Jeff Wilde

Recommendations:

Treat currency trading as a business – i.e. an activity that needs investment, learning and planning your success.

Think long-term. Try to establish what part will Forex play in your life in two or three years. Be extremely careful and thorough when writing down your trading plan.

Learn how to follow your plan automatically. Provided you have properly tested your system and covered position management – stop hesitating and focus on methodical and systematic following your plan.

You can strengthen your determination in sticking with your plan. Write down how much you lost because of not following your plan, write down how much more you can lose, and finally write down how your life might look like when you follow your MM rules (for example: I will become successful within three to four years and I will be able to provide for my family with my Forex trading).

Keep your trading journal and write down every single trade you make (entries and exits and all other activities, including moving SL and TP – and reasons why you make those changes).

“Write a plan. Simple solution but hard if you do not know what your going to do. Start small and pick a pattern that you are drawn to. For me it was patterns and look at how you are going to trade that pattern. Like any business plan you can make this as detailed or as simple as you like. I firmly believe you can use three basic questions. You will need to look at entry patterns exit pattern and money/trade management. Know where you are going to enter the market, exit the market and how you intend on managing the trade.” - Phil Newton

“But even if a trader has a system that he or she likes and knows the rules – there are a lot of the hours they are sitting in front of their computer and nothing is happening. They want to trade so much, that they would either ignore the rules of their system or they would start trading a little bit of this system and taking other pieces of that system. They are trying to make something happen even though their system tells them not to.

The bottom line is: they have to follow their system and if it is not telling them to place an order – they have to be really patient and do nothing.” - Dr. Jeff Wilde

5. Incorrect system and improper training

The key factor is to find a system that will give you serious advantage on the market and that you will feel good with. Both those factors are important.

It is quite typical that beginners tend to choose systems based on ads that focus on stunning profits those systems would make.

As you may assume, most of those systems are far from perfection. I do not want do cover the elements that a profitable system should have – you can find this information yourself with a little bit of effort. I want to describe here three less known but even more important factors that a success of a system you use depend on.

It could happen that a system that others use with great success would not be profitable when you are using it. Therefore:

• A system has to be adapted to your temper and risk tolerance,
• Training and testing a system should be a long process,
• You have to know that every system consists of a „discretionary part” that might not be included in description / manual you received. 

All three above are extremely important to all traders who decided to learn trading on their own. During your first period of time with trading your training process plays the most important part. However it will not help your learning curve when you focus on fast profits with yet another “brilliant system”.

System vs. your temper and risk tolerance

When you overstep your risk tolerance, emotions will arise and your learning process will get slower. Each and every one of us has his temper. Some like fast sport cars, others prefer steady family vans. It is just the same with systems.

Depending on your temper, resistance to stress and risk – some systems will be better and some will be worse for you.

Generally speaking, all the systems can be divided into four wide categories:

• longterm – position stays open longer than a week,
• mid term – position stays open up to a few days,
• short term [intraday] – opening and closing happens during one day,
• scalpers – positions stay open for a few minutes.

Please notice that scalpers often give a few dozens signals during one session. If you decide to use a scalping methods, you have to be able to make fast decisions during stressful situations. Some can do that, some can't.

On the other hand a long-term system would generate just a few entries during a month so you can spend a lot of time doing market analysis, entry analysis, determining proper lot size and finding a correct TP. In this time frame analysis is a slow process and people who like action might feel like tortured when trading this system. Those people prefer fast entries and even quicker exits and do not feel well with a system that forces you to wait for you signal for a up to a few days.

Duration of training

Let's start with driving a car. Do you remember how hard it was to coordinate your moves – to shift, use the clutch and accelerate while watching the road at the same time? On top of that you were not sure who has the right of way so your decisions were very careful. But after some time you made most of those moves automatically and you could even chat with your passengers.

What does this have to do with trading systems? A lot!

Please notice that you gain your experience over time. Your moves and reactions tend to be automatic, just because you have been in similar situations thousands times and you instinctively know how to asses those conditions.

So when a newbie comes, your answer to his questions would be simple: do this and that. But what is simple to you, might be difficult or even incomprehensible for him. In the beginning, trading with any system might cause you to feel anxious or uncomfortable. You cannot watch the market, indicators, make decisions regarding entries, exits, moving SL in profit in the same time. This would come but after some time.

Proper training takes patience and hours spent in front of your computer screen. But you should do it on demo or on a micro account!

“Discretionary part of a system” – they do not speak about it, but they should.

Please notice that when you start trading with a system created by someone else you have to learn everything from the beginning.

This also means that you cannot properly assess the market and evaluate what your indicators tell you. It takes a lot of practice, just as it is with driving. And of course people that create and describe systems would omit those parts that are “obvious”, “easy” or “simple” for them.

And here comes the first obstacle: some things are not simple for you at all! You still don't know how to react. It is surprising that when I was analyzing systems described as “100% mechanical” I would always find a part that was obvious for the creator but it was not for an inexperienced reader.

So to sum it all up: in order to know the system inside out you have to practice a lot and not to become discouraged by initial failures. You have the right to make them! It is also ok if some parts of the picture are missing – that will come in time.

You have also be aware that it is not reasonable to use a system that was not tested with a real account.