Monthly Archives: August 2015

Forex Trade Risks and Pitfalls: Part 3 (Poor Strategy)

This is a continuation of our free forex trade risks and pitfalls series. You can read the first and second part of this tutorial here and here.

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In today’s tutorial, I will not only show you how a poor trading strategy puts your account at risk but also give you some incredible tips on strengthening your forex trading strategy.

The fact that forex trading is a zero-sums game is clearly a liability. However, if you decide to look at your glass as half-full, this reality is actually a big plus. It means that you can make money regardless of the direction of the forex market (bearish or bullish). Failure to make money in the forex markets implies a poor strategy on your part.

One of the poorest trading strategies that I have seen is overtrading. The strategy brings to mind the image of an overzealous scalper who opens and closes multiple positions with careless abandon.

The other common mistake is trading too many positions at the same time.

If a friend asked me to name the ingredients to a disastrous trading strategy, the following 4 items would automatically go into the list:

  • Increasing your leverage
  • Increasing your lot size
  • Increasing the frequency of your trades
  • And diversifying your trades

While trading different currencies at the same time as part of a broad trading strategy is a show of savviness, it also implies a certain level of amateurish approach to forex trading.

When you first begin trading forex, stick to a handful of currency pairs and hold your positions till you meet your take profit or stop loss mark.

Second, there is no rule that states that you absolutely have to place a trade. As a forex trader, I understand the temptation to have a position open in the forex markets at all times. Try your level best not to fall for the temptation.

If the market is gyrating crazily or you cannot spot entry signals using your strategy, the best thing is to let the market be. Do not try to force your way into a position.

Trading with Someone Else’s Strategy

One of the biggest strategy blunders you can make when trading forex is relying on someone else’s trading signals. Forex beginners are especially prone to falling for advertised trading signals, forex robots and managed accounts. Trust me, all these are recipes for disaster.

The advertised systems promise hefty profits. However, you should view such promises with a skeptical attitude. Why would anyone with a clear winning strategy advertise it to the public instead of keeping the system to himself and continue reaping all the awesome profits.

In a nutshell, blindly using robots and software that trade for you or generate ideas is not a feasible approach to trading forex. To be a successful trader, you need to learn and practice how to trade.

The same goes for trading reports and technical analysis details published by major forex portals and forex brokers in an intraday basis. For novice forex traders, there is a risk of information overload. While most of these reports will contain a nugget or two of wisdom, they will also be mostly pampered with a lot of filler and blubber that is likely to steer you from your trading strategy.

Before you trade using ideas generated by anyone else, scrutinize them and backtest the strategies offered. To borrow from Albert Einstein, one of the world’s wisest men, “the clever thing is to never stop questioning.”

Market conditions are always changing and so should your strategy. I have followed and interviewed a lot of veteran forex traders. One common thing I got from all of them is the need to continuously educate yourself and practice with different strategies.

Key Takeways

Have a solid trading strategy. Avoid the temptation to overtrade. If there is no definite entry signal, do not force yourself into the market. Learn how to trade. Open a demo account today and keep practicing how to trade. It is the only way you get better and solidify your trading strategy.

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Forex Trade Risks and Pitfalls: Part 2 (Volatility)

This is the second part of our forex trade risks and pitfalls tutorials. You can read the first part of this series here. If you would like to continue receiving tips on how to trade forex in Kenya, consider joining our newsletter.

Understanding Volatility and How it Poses a Risk to Your Account

Just like human beings, the forex markets have certain traits and behaviors that can be observed and studied to better understand them.

Volatility is the measure of how much a currency fluctuates. If a currency shows high and erratic fluctuations, it is said to have a high volatility.

Volatility is one of the easiest ways to gauge exposure to risk. By looking at the recent volatility of a currency pair, you can gauge how much risk you will be exposed to if you decide to take a position.

However, volatility can also be a risk in and by itself.

Volatility spikes around news releases. If you understand that a major news release is due, and your account cannot afford a potential loss on the account, consider closing down your positions or scaling down the leverage.

Even if you are not a fundamental trade (i.e. you are not trading the news) it is important to be aware of the dates when major news releases come out and their potential impact on your portfolio.

How Does Volatility Affect your Account?

Swing forex traders view volatility as a negative as it represents risk and uncertainty. Contrariwise, high volatility makes the forex market more attractive to day traders.

Sudden and high volatility in a currency pair can make the price plummet below your stop-loss order. This leads to premature execution of stop loss orders.

For instance, if in a volatile market you placed your stop loss at 100 pips, and then the currency rebounds, it is possible that it will crash through your stop loss in no time at all.

Before you open a position in the forex markets, study the recent volatility history of the currency pair.