A sober companion to FOREX trading

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FOREX Pitfalls Overview

Disinformation, Deceptions, and Fallacies

FOREX trading is no easy money. It is very rare to be consistently profitable over a long time. The wild, largely random character of price action in the FOREX market requires a great deal of sofistication and experience to be able to predict its likely next development. Strategies based on simple chart patterns or technical indicator signals lack any sofistication, are downright naïve and do not work! The vast majority of books, lectures, courses, webinars, etc. going to teach you some "successful" trading strategy will eventually turn out to offer exactly this kind of crap. Instead of wasting your time and money with leeches that can only make money by FOREX training, but not FOREX trading, invest the effort into studying the fundamental background of currencies. Only proper understanding of the forces and events that move the exchange rates of currencies can give you an edge (every now and then) over the most of the time unpredictable FOREX market. If you still want to use technical analysis for trading signal definition, it is absolutely essential to be able to formulate strategies as expert advisors/automated trading algorithms. It is the only way to effectively backtest any strategy to find out if there is even a chance for profit! It may appear too geeky at the first glance, but it is pretty easy and even enjoyable at the second and the time and effort will definitely pay out. See "Intro to Algo" for more about this.

Money Management

Trading on margin with a high leverage allows retail traders to make profit on relatively small changes in exchange rates of currencies. At the same time, however, the same small changes when in unfavorable direction can cause large and rapid losses. As the amount of risk capital available to a retail trader usually does not exceed a few thousands USD and the smallest position volume on a standard account (one mini-lot) can still bring about significant losses (e.g. 200 USD on a 2000 USD account, i.e. 10% of the capital in one trade), it is important to control the extent of possible losses in advance by selecting appropriate trading strategy and properly setting the parameters of each position (position volume and stop-loss level). Learn more about money management in the dedicated chapter.

Demo Account Practice

Practicing trading or testing strategies (both manually and automatically traded) on a live demo account is the only way to verify the possible profit-generating potential of a trader or strategy. It is important to realize that a couple of trades will verify nothing. To be able to make any conclusion it is necessary to perform at least many tens (a few hundreds is better) of trades. Strategies giving only a few tens or even less of entry signals in the course of a year are thus unverifiable (in reasonable time) and should be avoided. Practicing fundamental analysis-based trading (other than announcements) in real time is more difficult as the high-impact events and crises are rare and each unique. In this case a detailed study of the time course and associated exchange rates development in past crises and events like the Greek government-debt crisis or Brexit might be more beneficial.

Broker Selection

FOREX market is the least regulated financial market so the chance of depositing money with a dishonest broker is very real. When browsing the Internet for FOREX-related information one will face a profusion of FOREX broker ads. It would be ridiculous to deposit money with a broker just because of an advertisment found on every other web page and attractive presentation. Be suspicious every time you see extreme leverage (>200:1) and account deposit bonus being offered. Do extensive research and comparisons before taking the decision. See the chapter "Choosing a FOREX Broker" for important details.

High Impact Events

Scheduled high impact announcements and events sometimes shake the FOREX market vigorously. While eagerly awaited by event-oriented traders they may also catch the event-unaware newbie trader by surprise and cause him or her devastating losses. It is very important to check an economic calendar and market news before starting any trading and every day if the position is to be held for more than one day.


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