The foreign exchange market is attractive to many investors. Buying and selling on the Forex market might seem like a great way to earn money. However, I’m here to tell you that it’s not quite that simple!
In this article, I’m going to outline some of the most important reasons that novice traders struggle to find a profitable strategy while trading currencies. One of the main reasons why most traders fail in the Forex market is because they end up trapped in what I refer to as the “cycle of doom”.
The Cycle of Doom, is it really that scary?
To explain the cycle of doom, it helps to first look at an example of it.
Let’s say you have recently started trading in the Forex markets. You have a strategy in place (maybe you thought of it yourself, or took some professional advice). You have this strategy and you start to invest real money into Forex. Off the bat, it’s going pretty well, you are making some money, and your strategy seems to be effective.
Then, the inevitable occurs, you start to see losses. The strategy, which once seemed effective, now seems to be causing you to lose money instead.
The most common thing that people do at this point is to doubt their own strategy. These doubts result in little tweaks and changes to the strategy. Some minor changes in the strategy occur until you start to make a little bit of money back.
Then, the inevitable happens again! You are losing money.
The fact is, it is basically inevitable for a strategy to experience loss at some point. But, for many people, this loss causes them to doubt their strategy again, which results in more tweaks, until they start making money again.
At this point, you can probably see this cycle start to repeat. Eventually, after a few of these cycles, you probably won’t trust this strategy at all. You will probably throw out the strategy entirely, and search for a new strategy.
Then, a new strategy is adopted entirely, and the cycle begins anew! It might look something like this:
New Strategy > Losses > Tweaks > Losses > Dump strategy > Find New Strategy
Many people keep repeating this cycle, in hopes that they are going to find that Holy Grail of strategies that gives them consistent profits time after time.
But here’s the thing, it doesn’t exist!
At this point, it all sounds pretty discouraging. So how can you make sure you don’t get caught in that cycle of doom?
Here are a few ways you can avoid this cycle and start to work with a reliable strategy. Keep these things in mind if you want to have success as an investor going forward:
Key Considerations for Trading in the Forex Market
You NEED to Have Confidence in Your Strategy
In order to have a strategy that works, it has to be something you are confident in. If you are not confident in something, you are more than likely to not follow through on it and not even give it an initial chance to succeed!
How Do You Gain Confidence in Your Strategy?
So we can see why confidence in a strategy is important. But then, the question becomes, how do I gain this confidence in this strategy? There is one thing that will make you confident in a Forex trading strategy, and that is the knowledge that it is an effective strategy.
You can gain this knowledge through back-testing your strategy. You need to put your strategy through all the historical data you can. This way, you will know the characteristics of that strategy. You know how it will perform in winning periods, and you know how it will perform in losing periods.
In short, knowledge is power!
With this back-testing, you know that, even in losing periods, you will not lose faith in your strategy because you will have some idea of what the losing periods will look like.
Have the Right Expectations
Another reason why so many traders come into this market and fail is that they have the complete wrong expectations. They’ve read the books and bought into the hype of that trader lifestyle where you can quit your job and work from the beach.
This is not realistic at all. You aren’t going to become a trader overnight. It takes extensive research, analysis, and the patience to learn the skills necessary for success.
Many new traders also believe that they are going to start off with a small amount of money and turn it into a million bucks overnight!
Once again, not a realistic goal.
Successful trading requires time, patience, and a lot of work. For success in this field, you need to have these expectations going into it. If you are not prepared for the time, learning, and investment necessary to succeed in this field, then you are setting yourself up for failure.
Be Realistic About the Forex Market
The fact is, most traders would love a 25% return in one year. So if you’re coming into this market with $500 thinking you will strike it rich, you simply have to readjust those expectations. A 25% return on $500 is $125, and that’s a good return.
Often, as a result of their high and unrealistic expectations, novice traders will chase very risky investments in the hopes of getting that big payday that they think is necessary to succeed in trading.
Their high expectations have already doomed them to chase after risky, volatile investments. This extra level of risk in their portfolio makes it much more likely that they will fail.
So, let’s wrap this up.
As you can see, there are many pitfalls that you want to avoid with investing, and they are not just limited to the Forex market. This “cycle of doom” can really apply to any investor. The key is to choose a strategy that you have tested and know to be reliable.
In this article, we give you several considerations to avoid novice investor pitfalls. But you will notice that they are all centered around similar themes. You need to be smart, do your research, and set realistic expectations.
These things alone will have you entering the Forex market with an attitude for success!
Come and join me inside the Forex Signals trading room so we can discuss just what it takes to become a professional trader and make a living from day trading.
I stream live each day, midway through the London trading session.
Learn more about how to get started trading Forex, here.