This article tells you about the unpredictable behavior of the currency and ways to avoid the biggest mistakes in trading. Follow the tips of our experts on how to build the confidence and earn money instead of blowing up your trading account.
Any FOREX trader will be aware of the fact that the currency market is one of the most unpredictable and violent of all market systems. In fact, exchange rates can be influenced by a lot of outside factors including loss in market confidence and government fiscal policy. The market is active twenty four hours a day, so it is safe to say that transactions and trades are fixed and handled every minute of every working day. The FOREX market also reacts quickly to external forces, as a result making violent fluctuations. It is in these ups and downs that traders, both experienced and novice end up losing a lot of money.
Here are three ways to not blow up your account in an unpredictable market:
1. Use stop losses/ guaranteed stops
Stop losses are a mechanism by which traders can reduce their loss if the prices dip against their favored trades. If a decline is seen, a stop loss will make sure that no trades go through beyond that point. The problem with stop losses is that it is susceptible to slippage, which means when there are sudden drops and the price does not go through the stop loss price, but jumps that particular point, it will not execute. A guaranteed stop, on the other hand is something that will stop all trades and get executed even if the point gets jumped, this service, however comes at a premium and will have to be paid for, but will be worth it on a stormy trading day.
2. Research and Review the market well
The statement seems like an obvious one, yet a lot of players in the market step blindly into it and blow off their accounts, suffering heavy losses. In the FOREX market, it is never enough to just be aware of the past fluctuations and historical data, rather you should anticipate currency movements. The rise of the Swiss Franc was one such example where it rose dramatically in the beginning of the year, only to drop by the end of February and it is now seeing a healthy up-swing. Between Q4 2014 and Q1 2015, it gained so much, so quickly that it caused the Swiss National Bank making an announcement about abandoning its caps. Very few traders and brokers even expected that kind of a surge, even looking back, not many felt that it could be predicted.
3. Check Your Emotions at the Door
If you have been trading, you will gradually notice how important it is to keep your emotions in check. Trading with emotions is the biggest recipe for disaster. Let’s look at a case:
Imagine that you are holding 200 shares of AAPL and it gaps down 20 points. So you’re down 4,000 – is that loss too big for you to lock in? For most people it is and let me tell you that most people won’t book such a loss but wait for the stock to recover! Eventually that loss becomes wider and one has to take a much bigger hit in few weeks after waiting for the stock to recover.
4. Reduce risk through leverage
The topic is split in the middle with a number of traders and brokers staying as far from it as they can, while an equal number swear by it. It is a risk, yes, but only if you use it irresponsibly and be rash about it. How can it be used, then to reduce risk? By defining your risk profile, you can have an amount that you are willing to risk on each trade set and by keeping it low, you will know when to stop and will last longer in the market. A risk tolerance of 2%, for example, will keep you trading comfortably, and if they are positioned well with your stop loss, it can be very useful in making use of a rebound in case of a fall.
5. Analyze Your Performance
Figure out what is working for you. Are you more of a short trader or long. Do stocks work out better for you vs. options? What kind of holding period works best for you? All these questions and many others can only be answered by analyzing your trades regularly and learn from the findings. Following are some interesting stats to monitor:
- Position Size vs % PnL
- Long / Short vs. % PnL
- Stocks / Options vs. % PnL
- Month by Month PnL % (to figure if seasonality plays a role in your bottom line)
- Day of Week % PnL
- Win Ratio
- Average Gain Size vs. Average Loss Size
- Holding Period for Gains vs. Loss
Implement these pointers
There are wild currencies and there are stable currencies. While using all of the above methods, all the time is impractical, you can concentrate them on a few trades while keeping the relatively stable currencies with just a stop loss, while being a little more careful with ones that are unstable.