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In FOREX trading, there are six major reasons traders lose money. If you can avoid these pitfalls then you can join the minority of winners that pile up the big profits consistently.

Here are the trading traps that will cause you to lose money:

1. The Contrarian’s Disease

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You should have a contrary opinion to the other Forex traders in the market – most traders lose money, so you want to trade in opposition to the herd.

Most traders lose because they lack discipline and money management – but they’re very often right about market direction. It’s the trader’s inability to maximise these opportunities when they’re trading the FOREX – and stay with the trend, that makes them lose money.

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Many traders are looking to pick tops and bottoms, and never focus on trend following. Picking tops and bottoms is impossible. You can’t predict the turning points in FOREX trading – so you need to change your focus to trend following, not prediction.

2. The Chartists Trap

In FOREX trading many traders fall into the trap of putting all their efforts into studying charts. Studying charts is important – but you must not be too subjective, or you will end up losing.

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Avoid methods that need too much subjective analysis, such as Elliot Wave and cycles – and gravitate towards indicators that define trends – such as moving averages and momentum oscillators.

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Be objective and not subjective in your FOREX trading.

3. Ego

FOREX trading attracts some of the cleverest people in the world, these traders are smart – but they also have big egos. An ego is a bad trait in FOREX trading – as it means you always want to see the market, as you want to see it – and not how it really is.

Traders need to ask themselves this question: Do you want to make money or feel smart? The market won’t accommodate both of these desires – if you want to make money, leave your ego behind.

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The humble trader who has an objective and disciplined FOREX trading plan, realizes the market can make him (and everyone else) look stupid. However, he’s only interested in making money, and he’ll generally out perform an ego filled trader, who wants to beat the market.

4. Guru Syndrome

When you’re trading in the FOREX market, it’s tempting to follow someone who’s made money – or says they have.

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It’s a fact that most traders want success given to them by someone else, and these traders can’t take responsibility for their own actions.

In the game of FOREX trading, the only way to succeed is on your own – if you can’t accept this, then do something else.

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5. Chasing your Tail

Many traders get impatient when FOREX trading – they start trading using one method, get frustrated with it when it’s not performing – they then switch to a different method, and so on.

Bad periods are normally followed by good trading results (if you’re using a soundly based system) – so patience and discipline are needed. By frequently chopping and changing systems, you’ll lose money.

If you have a trading plan that you believe in, then stick with it – and stop chasing your tail. Stay focused, and be patient with your system.

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6. Using Options Incorrectly

When you’re FOREX trading, using options gives you staying power – and limited risk, which makes options a great trading tool.

Many traders use options incorrectly – they focus on buying options with small time value, and that are way out of the money. This is a guaranteed way to lose money when options trading! What you need to do is focus on buying options, at or in the money – with lots of time value – also use spreads to increase your chances of success.

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In conclusion – Don’t try and be too smart – the above pitfalls are made by some of the brightest traders around. In most cases these mistakes come from thinking you have to be clever, or use complicated methods to succeed – however the reverse is true.

Keep your method simple, keep your focus, accept responsibility for your actions, and accept that the market will make you look stupid at times – it does it to everyone!

If you watch out for the six pitfalls outlined above, you’ll be able to make big long-term profits – and that’s the ONLY goal in FOREX trading.

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Are you a contender? Have you got what it takes to hack it in the fast moving, sometimes ultra high glorious, other times ocean trench depression low world of Forex Trading? This may sound like a standard motivational talk, but having the right frame of mind DOES influence your trading results – So before you risk your well earned money read this and ask yourself – Have I got the edge? – Or should I stay with regular shares?There are many aspects of Forex trading that are outside the investor’s control.Forex market players number in the millions – traders from the world’s banks, governments and private people – just like you. Unlike shares, even the biggest traders have a minute effect on exchange rates.Even when setting interest rates and other actions that influence inflation, the largest governments can have no immediate impact on exchanges. The Forex markets are simply too large – $2 trillion daily – for any one player to dominate the action.Trading strategies, which are essential, can increase the odds of making profits and help minimize or avoid losses. They give the knowledgeable trader that tiny edge that can make the difference between winning and losing on a given trade, or over time.But before looking at market influences, and even before developing a set of technical strategies that help guide trading choices, the novice Forex investor has to honestly and objectively examine his or her own attitudes.Currency trading is very fast, complex and needs a well considered strategy. That game plan has to be executed with nerve and skill. Trading well in a dummy account for a few weeks is a “must do” but can lead to over confidence. Traders who invest Monopoly money will often take chances, leading to successful trades, that they wouldn’t dream of taking with real money.Real trading requires answering honestly a number of questions that can be difficult to answer objectively when the subject is the self-same trader asking them. What are your financial trading goals? Looking for a quick buck? Seek elsewhere. You will have losses that wipe them out. Looking for secure, low-risk capital accumulation? Try AAA bonds instead.Forex trading can be simultaneously a stimulating intellectual game and an exciting adventure. The thrill of victory! The despair of (temporary) defeat! The mastery of the intricacies of Fibonacci, Parabolic SAR, Stochastic Oscillators and Doji Stars. All this, and much more, is part of Forex investing.As a result, you have to be very honest with yourself and decide how (and whether) you are prepared to deal with the fear and pressure. Even professional traders do not have any certain system of ensuring profits and avoiding losses.The pressure of deciding when to buy and when to sell is many times larger than in stock trading. The fear of loss is greater, in part because of the amplification provided by 100:1 or larger leverage.Even winning can be problematic. With practice and persistence, provided you don’t quit too soon or run out of money too quickly, you will have periods when it all seems laughingly easy. That can lead to euphoria, which is great. But it can also lead to cockiness, which is fatal. Nothing will wipe out a trader quicker than arrogance. Confidence is essential, vanity is suicidal.The other side of the coin to be avoided is too much second guessing. Successful trading requires bold moves based on sound judgment and confidence. Every decision is a small leap of faith, since no one can know in advance for certain what the outcome will be. Probability of one degree or another is the best that can be hoped for.All this will be accompanied by the fear of loss of capital, which often leads to panic selling in the face of what would have been a temporary price movement. From such panics are depressions made, both psychological and economic.Forex is a roller coaster ride. But if you have a good inner ear and a strong stomach, bolstered by the brain of a statistician and the nerves of a pro billiards player, you will be well suited to end the ride with full pockets.—From London, Nick now lives in Stockholm with wife Lena and Gunnar a Border Terrier. He likes long forest and lakes walks, is learning Swedish and loves making money from investments that are as cunning as a fox and go up even when the markets go down! He runs The Commodity Broker Net which promotes a system called Forex Trend Trader and offers a free Forex for Beginners email course.

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What are *PIPS* ?

Currencies are traded on a price/ point (pip) system. Each currency pair has its own pip value.

When you see a FOREX price quote, you’ll see something listed like this:

EUR/USD 1.2210/13

Explanation:

a) If you want to BUY the EUR/USD ( meaning you BUY EUROS and SELL US$ ) you buy 100,000 EUROS and you SELL 122,130 US$, or in other words you receive 122,130 US$ for 100,000 EUROS.

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B) If you want to SELL the EUR/USD ( meaning you SELL EUROS and BUY US$ ) you buy 122,100 US$ and sell 100,000 EUROS, or in other words you receive 100,000 EUROS for 122,100 US$.

The difference between the bid and the ask price is referred to as the spread. In the example above, the spread is 3 or 3 pips.

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Since the US dollar is the centerpiece of the FOREX market, it is normally considered the ‘base’ currency for quotes. In the “Majors”, this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair.

For example a quote of USD/CHF 1.3000 means that fore one U.S. dollar you receive 1.30 Swiss Francs. or in other words, you receive 1.30 Swiss Franc for each 1 US$.

When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/CHF quote above increases to 1.3050 the dollar is stronger because it will now buy more Swiss Franc than before.

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The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as EUR/USD 1.2080, meaning that for EURO you receive 1.2080 U.S. Dollars.

In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one Euro, British pound or an Australian dollar.

In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.

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Currency pairs that do not involve the U.S. dollar are called cross currencies, but the calculation is the same. For example, a quote of EUR/JPY 134.50 signifies that one Euro is equal to 134.50 Japanese yen.

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HOW TO BUY ( going ” LONG “)and SELL ( going ” SHORT “) in the FOREX Market?

Keep in mind 2 very important rules:

RULE # 1) Cut your LOOSING trades and let your WINNING trades RUN

YOU WILL HAVE LOSING TRADES. Every FOREX trader has. The secret is, that a consistent, disciplined trader, at the end of the day, adds up more winning trades than losing trades.

When you and see on your charts, without any doubt, that you are in a losing trade, don’t keep losing money. Most of the novice traders are lowering their stop loss just to “prove they are right” or “hoping that the market will reverse”. 99% of these trades, are ending up with more losses. Most of the profitable trades are usually “right” immediately.

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Remember, smart traders know there are many other opportunities. CUT your losses short and compound those winning positions.

RULE 2) NEVER EVER trade FOREX without placing a Stop Loss Order.

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Before initiating any trade, you have to calculate at what point ( price) you would be wrong, because the market changed direction, and would want to cut your losses.

To make profits, in the FOREX, a trader can enter the market with a *buy position* (known as going “long”) or a *sell position* (known as going “short”).

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As an example let’s assume you’ve been studying the EURO. The EURO is paired first with the U.S. dollar or USD.

Your trading methods, rules, strategies, etc., tell you that the EURO will rice in the next 2 weeks, So you buy the EUR/USD pair meaning you will simultaneously buy EUROS, and SELL dollars).

You open up your excellent trading station software and you see that the EUR/USD pair is trading at:

EUR/USD: 1.2010/1.2013

As you you believe that the market price for the EUR/USD pair will go higher, you will enter a *buy position* in the market.

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As an example, lets say you bought one lot EUR/USD at 1.2013. As long as you sell back the pair at a higher price, then you make money.

To illustrate a typical FX SELL trade, consider this scenario involving the USD/JPY currency pair:

REMEMBER Selling (“going short”) the currency pair implies selling the first, base currency, and buying the second, quote currency. You sell the currency pair if you believe the base currency (USD) will go down relative to the quote currency (JPY), or equivalently, that the quote currency (JPY) will go up relative to the base currency (USD).

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HOW TO CALCULATE PROFIT OR LOSS?

The Profit Calculations, on the Short-sell trade scenario below, may seem somewhat complicated if you’ve never been in the FOREX market before, but this process is continually calculated through your broker trade station (software). I show you this process below so you can SEE how a PROFIT might occur.

The current bid/ask price for USD/JPY is 107.50/107.54, meaning you can buy $1 US for 107.54 YEN, or sell $1 US for 107.50 YEN.

Suppose you think that the US Dollar (USD) is overvalued against the YEN (JPY). To execute this strategy, you would sell Dollars (simultaneously buying YEN), and then wait for the exchange rate to rise.

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Your trade would be the following: you sell 1 lot USD (US $100,000) and you buy 1 lot JPY (10,754.000 YEN). (Remember, at 0.25 % margin, your initial margin deposit for this trade would be $ 250.)

As you expected, USD/JPY falls to 106.50/106.54, meaning you can now buy $1 US for $106.54 Japanese YEN or sell $1 US for 106.50.

Since you’re short dollars (and are long YEN), you must now buy dollars and sell back the YEN to realize any profit.

You buy US $100,000 at the current USD/JPY rate of 106.54, and receive 10,654,000 YEN. Since you originally bought (paid for) 10,754,000 YEN, your profit is 100,000 YEN.

To calculate your P&L in terms of US dollars, divide 100,000 by the current USD/JPY rate of 106.54

Total profit = US $938.61

About The Author
Veteran Trader Martin Maier is the Founder of http://www.fenixcapitalmanagement.com. He is the developer of various futures and commodities trading programs and his systems have been ranked and rated by various large American Investment Profile Rating Companies such as STAR and MAR.