eToro – Forex Trading Forum

[Tropezienne]

Using too much leverage

One of the most common mistakes in trading on the forex market relates to the use of leverage. Leverage is one of the benefits of trading on the Forex but misuse of this tool can make it work against you. It is common for novice traders to use too much leverage at first in order to enhance their trading capital. The problem with using an excessively high leverage is that if the market moves against your position it only has to move a small amount for you to suffer very substantial losses. Thus, a large leverage can increase your vulnerability to risk on the forex market. Moreover, in such a situation, a novice trader, quickly swept away by emotion, will panic and close the trade rapidly, suffering considerable losses and having a very negative experience. You need to learn about the effects of leverage and margins.

[Tropezienne]

Over Trading

Some novice traders often fall into the trap of over trading in order to seize opportunities that probably do not exist. What happens is this: in seeking not to miss the possibility of a trade, they often excessively multiply the number of trades, which ultimately fail to achieve significant gains or, worse, lead to losses. Novice traders who seek to make a trade at all costs are simply blundering around. The purpose of forex is not to make a trade, but to make a wise trade. The aim is not to make loads of money – but to protect and to gradually enhance your trading capital. It is imperative to consider the fundamental and technical analyses before trading. Messy trading practices lead to losses – often substantial.

[Tropezienne]

Anticipating trend reversals

Obviously, one of the objectives of trading on the Forex market is to anticipate movements in the currency on which you have – or plan to have - open positions. However, some novice traders fixate on wanting to identify with great precision exactly when the trend will reverse on a currency pair. This is an error which quite often leads to losses. Even highly experienced and long-term professional traders find it particularly difficult to determine the precise moment that a trend will change and thus act accordingly. It is important to develop your technical and fundamental analyzing skills by using your practice account and by observation. You will find over time that rather than trying to identify the reversal of a trend it is much more useful to be able to identify momentum.

[davidex]

Dear Tropizienne,

I've been trading on the practice account for a couple of weeks now and couldn't understand how I was experiencing losses although making profits. I assumed that this was because of "Spread".

But the training page shows an example where the trader starts with an opening balance of $1963.55, opens three positions at $50 each and is then shown as having a balance of $1786 , a difference of $80 to what I would have expected to be $1836.

Does Etoro levy unseen charges on accounts other than the spread? In fact why can't the "profit/loss" column show the position net of all costs from the outset?

I've enjoyed reading your previous posts.

Best wishes,

Davidex

[Tropezienne]

If you do not have enough trading capital to start with the high leverages that are a feature of forex trading can lead you into all sorts of problems. Simply put: small capital + high leverage = loss. The usual recommendation of what proportion of your capital you should place in a trade is 1% - 2%, some people says as high as 5%. You need to understand lot sizes and to be able to calculate what you can afford to trade. Let’s say that you have a trading account of 10000 USD - 1% is $100, 2% is $200, 5% is $500. If you practice Risk Management (which you do !) and want to set a Stop Loss Order of 100 pips; and if you want to risk, say, 2% of your capital – that means that you can only trade two mini lots for each $10000 in your trading account. Think about your trading capital. Learn how to calculate lots. Practice on you demo account as though it is your real money that you are risking –this can be a great reality check.

[Tropezienne]

Often those same inexperienced traders who trade with a small amount of capital and an incomplete understanding of leverage and trading lots also have a mindset that leads them to overtrade. This means that they are too keen to open trades and usually trade too many currency pairs. This kind of trading spreads your trading knowledge, experience and capital too far for their range and is full of potential problems. The biggest problem is that you will lose focus by giving yourself too much to think about – you should be sticking to one or two currency pairs so that you become familiar with them and you should keep to one small lot at a time. Don’t try to be clever and hedge your trades. A bigger problem is the risk of getting a margin call – this is when there is not enough capital left in your account to fund the open positions. Overtrading is a recipe for disaster.

[Tropezienne]

Gaining confidence as a forex trader is all very well, but if you are not careful it can cause problems. The over confident trader can easily fall into the trap of predicting instead of which he should be reacting. This trap often looms very large and welcoming when a trader has had three or four consecutive positive trades. For an inexperienced trader this is heady stuff and can lead him into the mistaken belief that if he enters a trade sooner he will earn more pips. He deludes himself into believing that he can detect a strong trend reversal before the charts actually show a reversal. This self-delusionary prediction of what the market will do encourages him to enter a trade. The market continues with its movement – which goes against his trade. If he had waited, given himself time to react to what is actually happening, he would not have entered into a negative trade.

[Tropezienne]

If you have an open position which is going badly – it is vital that you accept that the market is going against you. The market is telling you quite clearly that you are wrong. The market is telling you quite clearly to close the position. Get out. Cut your losses. Do not add to a negative position. If you do so you are guilty of two basic forex trading mistakes: you are predicting the forex market will turn around and you are hoping that the market will prove you right. Prediction and hope will get you nowhere on the forex. As a trader you need to develop a thick skin – thick enough to admit when you have opened a losing position. Even experienced traders have negative positions – they are a fact of life in the forex market. There is nothing wrong in having a negative position as long as you close it as soon as you see that it is going wrong.

[Tropezienne]

This is a huge mistake. It is rare that the decision not to use a Stop Loss order is the right decision. Maybe if you are scalping small amounts of pips and are watching the screen ready to close a position in an instant – then you might decide not to use a Stop Loss order. Otherwise not to use a Stop Loss order is just plain wrong. Use a Stop Loss on every open position as to protect your trading capital that you can utilize. It is basic to responsible Risk Management practice.

[Tropezienne]

If you want to make money as a forex trader you need to treat your trading activities as a business not as a hobby. Businesses exist to make money – hobbies exist to entertain and they cost money. You pay to play golf, or to sail, or to paint water colours. Your forex trading is a business – you need a written business plan in which you have set yourself reasonable goals. You need to keep records and a trading journal. Your trading capital is an investment and should be treated as such – with careful planning, consideration and the application of business acumen.

[Tropezienne]

It is a huge mistake not to have a trading plan when you start in the forex. This is different to your business plan. Your business plan sets the goals of your business. Your trading plan outlines how you are going to achieve those goals. It may include simple things like your chosen daily trading hours. For example, you may decide to trade only during the first 3 hours of the London session – no more, no less. Then you stick to that. A trading plan will help you to avoid a lot of the common mistakes and pitfalls. Write out your trading plan – stick to it – relate it o your business plan. This way you have a chance of making a decent, regular living as a trader. As with any successful business, over time and with care you profits will grow.

[trahav]

How can I set the amount traded for less? I don't want to trade too much at once untill I get more experience. I tried to change the amount in the box and the amount increased..