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The following guest post is courtesy of Walter Akolo, Senior Financial Analyst at realisticloans.com, a lender’s & borrower’s portal.
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Most new traders start off with the hope of making tons of money on the market. While this is an excellent way to get motivated, the most appropriate approach is learning how not to lose money rather than trying to make quick cash.
It is a widely known fact that a huge number of new traders fail and quit within two years. However, there are those who succeed after enduring the learning curve as well as starting off on the right footing. In this article, you will find out why most fresh traders fail and how you can navigate the pitfalls.
Unfounded beliefs and ideas about the Forex Market
When most novice traders discover about the forex market, they are over excited because it seems so simple and full of direct hits. The only thing they can envision is big money and they signup expecting to make a kill in a few days. Well, you can’t blame them too much when they are exposed to multitudes of disinformation. Some will even fool you into thinking that you have discovered a hidden treasure that you can switch on and make millions in your sleep.
While it is true that there is real money in forex, you must understand that it’s not a get rich quick trade. If it was, everyone would be succeeding. The truth is this is a serious profession for serious individuals willing to invest time in developing their skills to accomplish realistic goals.
As a result of wrong beliefs, the newbie traders jump into the market without any preparation. All they have is an expectation to make money. They don’t have a plan, strategy, or a risk management system and this makes it hard for success to pick you up.
Fear of failure and poverty
After a few losses, fear kicks in. This is a basic emotion that is deeply seated in the human mind. Although it’s disguised as loss aversion, the fear of poverty influences the decisions made in trades. Most failing traders will decide based on fearing to lose out in a profitable opportunity as well as uncertainty.
There are a few traders who acknowledge the usefulness of fear in trades especially as a guide to exit. While fear can be very useful when managed, it can lead to huge losses when allowed to take over.
Fear can jeopardize the effectiveness of a great system. When you are afraid of taking advantage of unfolding opportunities, the stagnation can be disheartening. It can also push you in stopping a profitable trade before the climax point which erodes your confidence.
The best antidote to fear is learning to stick to your trading system without fail. It’s the best way fear can be kept at bay.
Limited capital and backup funds
Loss of money is one of the main reasons why new traders quit early. To all traders, losing is part of the game. To maintain losses that outweigh the profits, you need sufficient money.
To make matters worse, new traders tend to compensate losses through high leverage which can lead to severe losses. Instead, having more capital can help you trade with minimum leverage and have a backup amount just in case things get worse.
Sometimes you’ll come across traders who finance their accounts through credit. While this can be a great idea for funding the trades, the risk involved is too high. Realistic loans are perfectly suited for other investments and expenses, but for new traders in the forex market, loans should be left out of the equation.
A shoestring budget on forex trading is a disaster in waiting. When starting put away at least $1000 for your trades if you can get more than this the better. Otherwise, a small budget makes it hard to keep emotional trading at bay.
Discipline and consistency
Indiscipline in forex trading leads to emotional decisions that lead to failure. While there can be some lucky undisciplined traders who make money, the success is short-lived and if they keep continuing same practice that would cost them loss of lot of money and they can get traps in debt traps if they tried to borrow money from high interest rates lenders.
The main objective of having a plan and a trading system is ensuring that you make the best trades. If the system is ignored, then it is rendered obsolete and you become no better than traders without a plan. The trading system you have created is supposed to inform all trading decisions just like a good businessman would rely on a business strategy. But when it’s put aside, forex becomes gambling and nothing is guaranteed.
As human beings, emotions are deeply engraved into the system and sometimes it is very hard to lay them aside. However, you can breach the protocol by getting sufficient education about forex trading and developing a trading plan that works perfectly in building your confidence.
When a trading strategy is working, it is imperative that you follow it strictly and make sure it’s regularly updated. Needless to say, the strategy must include a foolproof risk management component.