Common Trader Pitfalls by Michael Bai

Everyone makes mistakes. Some mistakes catastrophic and some calculated and controlled. In Forex trading, the difference in these two mistakes can mean the difference between losing all the money in your account, and having a profitable trading strategy. From my experiences working in a Retail Forex Broker

1) Education - Before you invest your first penny into any investment, before you begin any career, before you begin any task, you should be educated on what you are doing. It doesn't matter if you are a police officer or an airplane pilot, a student or a professor, you MUST know what you are doing so you can calculate your risks appropriately and also so your actions are not mere luck based guesses. This can not be more true in the Forex industry. All too often traders hop in and have no clue what's going on, then get upset when they lose money and blame everyone from the person who introduced them to forex to the broker to their country's currency, and so on! If you're thinking to enter the Forex industry for the first time please, don't do it until you have an understanding of the industry, the market, trading, sentiments, and so on. One example is most people feel its enough to say "market makers are bad, I only want non market maker," but guess what...you need to understand why ALL BROKERS, LPs, and BANKS are essentially Market Makers. Its not enough to trade with a top regulated authority, maybe they don't cover your country! What hot topics are going on in the market that I should watch for?

2) Account Settings - The first thing many people, especially those new in the industry, use to set their account is the spread debate. Some brokers advertise low, no, or even negative spreads, but have prices market up, manipulate accounts, have high amounts of negative slippage, don't execute TP and SL levels properly, and so on. So don't fall into this folly. Spreads are just one part of your account that your broker sets up for you. Some accounts might be non-scalping accounts, meaning you need to hold orders open for a certain period of time before closing them or the broker might prevent you from making a withdrawal. Some brokers might be opening your account offshore in an unregulated environment (Check Youtube: BBC IronFX Documentary for an example).

In retail Forex the most overlooked setting is LEVERAGE. This is the double edged sword of Forex trading. While it allows traders to trade with less than 100k of a currency invested and can even help open more trades, leverage can also damage your account and cause a profitable strategy to be less profitable. Leverage effects all aspects of a traders trading from order size, number of consecutive trades, stop loss and take profit levels, as well as entry and exit targets! Many traders request high leverage in order to allow for lower deposits, but are oblivious to the increased risk they are asking for! Make sure you understand leverage fully!

3) Funding - For this I see 2 key points. The first is the amount. With Forex being leveraged, it might not be a good idea to fund your account with 1:50000 leverage with $10, even though you TECHNICALLY can trade with it. My personal trading requires me to have $1000 minimum deposit. While I have traded smaller accounts, and I've seen smaller accounts traded to profit, I personally find it overly stressful and difficult trading below this amount. Everyone is different, but never trade with more money than you are willing to risk as market, broker, and system conditions can literally cause you to lose all your funds in a heartbeat!

The second funding consideration is the source of these funds. Never under any circumstances should a new trader take out a bank loan, credit card loan, or a loan from friends or family in order to fund their forex account, PERIOD! This means you are using borrowed money, and borrowed money is not money you should risk! In addition, when borrowing from banks or credit cards, their is a certain minimum you need to pay for that loan, which means that is also a certain minimum you must earn in the market before you actually realize any profit. Add in money transfer fees, you are only setting yourself up for failure followed by a bill you need to pay back! Borrowing from friends and family is also a "no no" as you are putting their funds at risk along with your relationships! Value your relationships more than profits as they will be the ones to cheer you on through profits and console you through losses!

4) Naked Trading - First and foremost, ts totally unacceptable to stop out your account. What stopping out your account literally means is you were trading without a plan, ie: Gambling. You were betting with the full balance of your account that the market would change. This is the equivalent of going "all in" at the casino. While this form of gambling can bring in huge rewards for those risking it all, it also comes with total catastrophe when not on the winning side. Set a stop loss within an acceptable range and in this way you can live to fight another trade should the market not go in your favor! Your stop loss is your safety net, use it! Otherwise when you place a trade and proudly put that TP without a SL first, understand what you are signaling to the broker and anyone you show those trades to, is that you are a gambler, not an investor. When your account is stopped out, look in the mirror and with equal amount of humility acknowledge you are gambling and not investing. Not to say those who put a SL are investing, but for sure if you are trading without a safetynet, you are in fact only gambling and taking on unnecessary additional risks!

5) Trading a Prototype - Finally, nobody plans to fail they simply fail to plan. Part of every successful trading plan is that it has been tested BEFORE being used with a real funded accounts. How many products goto market with millions of dollars in testing behind them, yet they still fail or offer unexpected results? In recent years Samsung has had exploding phones, e cigarette manufacturers have had sparking and exploding devices, even NASA's scientists experienced failure of rockets, spacecrafts, and drones...what makes you think you are better than proven case after proven case that prototypes are not fit for the market, when some products that passed the prototype phase have still experienced failures? No Matter the source of your new strategy or strategy adjustments, make sure to thoroughly test them before putting them to action. This isn't to say positive results from testing will have positive results when going to real money, just as with the example above products that have been tested still failed, but nobody can argue a tested strategy with positive result has a higher chance of success than an untested strategy going straight to market. Spend this testing period fully understanding your trading plan and understand its strengths and weaknesses, make adjustments, and test some more, and keep doing so until you feel comfortable this will work for you, and not a moment sooner!

These 5 mistakes are not a complete list by far but are some of the top reasons i've noticed new and beginning traders don't reach the success they are looking for. I want to encourage everyone to better educate themselves, especially if you are considering investing in Forex, and to manage all aspects of risk. This industry is governed by 2 rules, Knowledge is power and risk management is profit!