Foreign currency exchange is no easy feat, especially if you are a trader who is expecting to grow your capital on a consistent basis. The forces of leverage and volatility make the conditions in the markets choppy by definition, and it can be equally possible to lose money as gain it in the blink of an eye. Commonly, traders tend to be caught out by the same practices and trading behaviors, which puts them at a distinct disadvantage. Remember that any loss to your capital has a doubled effect in forex, because it also hinders your future prospects as well as eating into your past results. Traders who want to become profitable overall need to think about their trading style, and need to avoid the most common mistakes in attempting to trade their account.
It can be all too easy to make a damaging wrong call in forex. But what are the market conditions that lend themselves to dangerous trading, and what practices should you be looking to avoid when you trade in the financial currency markets?
Overleveraging In Foreign Currency Exchange
Forex trading operates on leverage, the force which amplifies the size of trading positions to allow for more substantial profits. Too much leverage in a forex transaction will make it too top heavy, and can make the costs of supporting these positions too great for traders. At best, this can be expensive, leading to large financing costs and a direct cost hit on the spread when you can’t afford to keep these positions open. At worst, it can dismantle your entire trading account, as your broker automatically liquidates positions to pay your debt. Avoid using too much leverage – it is not the answer to all your problems. Only moderate leverage use with a sensible trading approach to make you money on a sustainable basis.
Low Liquidity In Foreign Currency Exchange
Liquidity is the amount of trading volume in a market at any one time. More liquid markets are easier to trade in, because positions are filled much more quickly. By contrast, other markets that have less liquidity take longer to fill orders, which means traders are subject to increasing amounts of price slippage between their order and its execution. Low liquidity can lead to a more volatile price curve, and in many respects it is better to trade in a high liquidity environment. This allows for more stable growth, with the potential for larger bursts of momentum, thanks to the increased numbers and weight of participation in the market.
Excessive Volatility In Foreign Currency Exchange
Another common problem is too much volatility. Volatile markets can be highly profitable, but they can also easily be highly risky. Too much volatility can leave you facing significant risks over and above the average in forex, and this makes it a cause for concern for traders looking to safeguard their capital. While volatility can deliver you a profit, it can also be a force for bad, making it difficult for traders to find a retain profits from their trades.