A frighteningly high percentage of foreign exchange traders lose their money in the markets.
It’s so easy to do!
Here are ten ways to lose your shirt while trading currencies.
1. Maintain Fundamental Ignorance! Or, to put it another way, ignorance of the fundamentals! If you maintain a complete lack of understanding as to what drives the markets, what news releases and government numbers affect the markets, then you will lose your shirt – guaranteed!
2. Learn on a Demo Account! Demo accounts are a great way to learn. They’re also a great way to build a nice, solid sense of false security. You trade $150,000 here, $150,000 there, some trades work, some trades fail, and all the time you’re improving your trading game, right? You suspect the data is not quite as real-time as it might be in the demo, but you don’t worry about it. And the emotions of trading virtual money, handed to you on a plate, and real money that it took you three months to pull together, are pretty much the same…aren’t they?
3. Get Over-Leveraged! You drop $5,000 into the market, and your broker offers to turn it into $100,000, just like that, with a few clicks of his mouse. How cool is that? Now, you can go crazy, trade in bigger lots, take bigger hits, because you’re in the $100,000 league! And hey, when your original $5,000 investment is gone in a day or two, don’t worry. Your broker will soon call you up with one of those nice margin calls! Then you’ll have to call your bank with one of those not-so-nice pleading-for-more-money calls.
4. Have No Trading Plan! You just want to lose money, right? And lose it as rapidly and as efficiently as you can. So the last thing you want to do is figure out where your strengths are, and set them down in a coherent way, matched in with a good trading methodology that suits you and that you’ve back-tested. Avoid those trading plans like the plague!
5. Over-Trade! You get in, you get out, you make five pips. You get back in a few minutes later, you get stopped out, you give your tiny profit away. You get in again, out, in, out, shake it all about, and before you know what happened, it’s 11.30 at night, your family have all gone up to bed, and you’re looking at another day of losing trades. You’re on track to being shirt-free!
6. Set Tight Stop Losses! You must use stop losses on all your trades, of course. But to be certain of a total wipe-out, make sure those stop losses are as tight as you can get them to your entry point. You want your profits made in a straight line, right? So if the market starts to go up and down just a little bit, your tights stops will stop you out ‘ at a loss, of course!
7. Trade a Single Currency! You’ve got a really, really clear picture of what is about to happen with the Japanese yen, right? You know it’s over-sold, and you’re going long! But will you go long against the dollar? Against the British pound? Against the euro? Details, schmeetails! The yen’s going up, and you don’t care against what! Bye-bye, shirt!
8. Trade Against the Trend! You’ve heard all that “trend is your friend” nonsense, but you’re the Contrary Trader! You boldly go against the trend at every opportunity, because all trends turn eventually, right? You also make a habit of catching falling knives, and sometimes you go down to the beach for a bit of tide-turning practice.
9. Ride Those Losses! Only losers quit, right? You decided against a stop loss of any kind, went to bed, woke up the next morning to find your position is 200 pips wrong and there are three missed calls from your broker on your cell phone. Whatever you do, don’t close that sucker down! It’ll come right. Eventually.
10. Cut Those Profits! Your trade is flying, it’s making you money (against all the odds!) and, quite frankly, it has the potential to completely ruin your shirt-losing plans! So just cut it short! Be brutal. There is no need to let a good trade run, any more than there is to cut out of a losing trade.
So there you have it – ten top ways to lose your shirt as a currency trader!