I am hardly surprised when friends and clients tell me that they are not consistent in their winning trades in trading forex. Many times, friends relate their stories of making a giant win in the markets at one time, and then will continue to tell a sad story of losing it all in the next few trades. Worst, some have even lost their capital. It is when they are at the verge of abandoning the entire idea of making a career of being a professional trader and when their financial losses are really hurting them, that they seek for help.
I have identified 5 of the most common flaws of forex traders, and have helped many of them to rectify their trading problems. Let me share them with you.
1. The Most Common Flaw
I have often been presented with rather sophisticated trading systems by traders who come to seek help. Most of them have been attracted by the promise of multi indicators and sophistication in the use of these trading systems. Many of them appear to be a rehash of the principle of confluence. What this simply means is that if a multitude of technical indicators show the same signal to buy, sell or hold, then the pure sense of synergy occurring suggests that the signal generated is correct. This sounds good in theory, but in practise, not all the indicators agree at the same time.
For example, a trading system might have a moving average indicator with a positive crossover occuring when its Relative Strength Index or RSI is at the lower boundary or is oversold at the 30% band. These two indicators occurring together at the same time is a good enough indication that the correct signal is to buy. But what happens in real life is that the deriving the decision is not that simple.
Why is that so?
Many of these "confluence" systems throw in other indicators that depict the price movement and do not add any value in helping you to trade. As a result, you get a pot-purri of technical indicators comprising oversold and overbought indicators such as stochastics, stochastics-RSI, momentum indicators, bollinger band breakouts and candlestick chart pattern recognition, and even artificial intelligence systems such as neural networks.
The end result is that many of these losing traders are unable to make a decision as to the true direction of the market and either get into the market too late or too early or just remained paralysed from making a decision at all. It is therefore no wonder that they are losing money by the buckets.
So the most common flaw among forex traders is the use of an unsuitable trading system which does not serve its purpose as a tool to help them trade profitably but rather confusing and complicating forex trading until they become perpetual losers.
2. The Most Dangerous Flaw
An other flaw that I would classify as the most dangerous flaw of them all is that of greed and fear.
This is an emotional issue interwoven into the entire process of trading.
Giving friends and clients a listening ear, I have often heard how a profitable trade can lead to euphoria, and exuberance, and greed comes in and over-ride all aspects of risk management. The trader who is profitable at that stage will over-ride all his stop loss positions when prices fall back, believing without substance that the price will continue to go up many pips for a longer period of time. Risk-reward ratios are thrown to the wind. These traders see their winning trades ride up into huge profits, only to see them correct, pullback and crash down to earth. Worst, they are then paralysed by greed which tells them to wait a little longer for prices to recover, which they normally don't, but continue to pullback and consolidate and they have to take a loss at the worst possible time.
The trader is then struck by fear as he realises his position. When the next buying signal comes, he is paralysed by fear and unable to open any position. That is why when you override the emotional side of trading, the psychology of trading and the discipline of trading, you commit the most dangerous flaw in forex trading, with financial ruin facing the door.
3. The Flaw of The "Unconcerned Man"
The third important flaw I often encounter in my business of coaching and consulting with traders is what I call the flaw of the "Unconcerned Man." I know the term of being called unconcerned, or even lazy is anathema to many traders, but the truth is that many traders enter into trading without a driving need to become successful and profitable. They are into trading just because they have heard it is easy game - that making a killing from the markets is easy. They do not treat trading as a business that involves skill, preparation, trade management and re-investment. To them, it is a trading game of fun, where they can afford to lose. They become unconcerned about their trades which are still in an open position. They start off with the wrong footing or with the wrong purpose, and do not have that burning desire to be successful.
4. The Flaw of the "Inadequate Man"
Now, some of them start off with the best of purposes. Some of these losing traders were all fired up from the start. They did put some effort to learn to trade. Many of them do go for free introductory courses to learn "here a little, there a little", picking out some trading tips from chat rooms or forums. But the measly tips they obtain from these sites are insufficient to see them through the practical difficulties of trading the markets. Their knowledge could not see them through their desires, their direction, and they failed to attract the wealth that was possible through their trades. Inadequacies become their most potent flaw.
5. The Dogmatic Man and His Fatal Flaw
Trading signals you obtain are not engraved in stone. Trading is dynamic, as prices move and are affected by circumstances. The inability to accept losses, and profits as they present themselves have led to many a ruin in forex traders. When a trader becomes dogmatic, and inflexible, sticking to his own personal perception of a trading signal, despite all the factors telling him that the trade has gone wrong, he is going to lose more. This is particularly so in forex trading. In stocks, the buy and hold policy is more relevant if the stocks are fundamentally sound, as they can be cyclical and can rebound in prices. But in forex where the leverage is very high, your capital can be wiped off if you do not react to your signals promptly, and stubbornly maintain an unchanging personal opinion of "correctness".
In trading, you can be wrong in the market and still emerge a winner if you take prompt action to correct your position, but the dogmatic man continues in defiance of the true factors affecting his trade, and then loses a big part of his capital. When he loses all his capital, he is unable to trade another day and that is the fatal flaw.
Understanding these flaws, we will continue to discuss effective ways of overcoming them in Part #2 of this Article series, so that you can become a profitable and successful forex trader quickly.
By : Peter Lim - http://forex-trading.cashflowpc.biz/
