Forex trading is a huge business worldwide, with turnovers reaching up to $10 trillion dollars per day in peak trading times.  Yes that is trillions per day, 12 figures, a staggering sum to consider.  In Australia alone the market is known to turnover up to $200 billion per day.  So it is not hard to understand why so many people are drawn to the forex market, with dreams of huge profits and a life of luxury.

Yet trading successfully on the forex markets takes a lot of skill, dedication and just plain hard work, which can mean newcomers to the markets who have not prepared themselves are in for a rude shock.  A very common scenario in Forex is that a new trader saves up his deposit, his seed money, gets himself a trading account and sets off on his path to forex riches.  A few weeks or months later he’s lost all his seed money with nothing to show for it.

So to help newcomers get over that hump, here are five of the more common things that new traders really need to be careful of when they’re starting out, otherwise they might lose their seed money before they really get a chance to improve at forex trading.

Don’t Trade with Your Heart

Emotional or even ‘gut feeling’ type trading is a fast way to end up broke.  Forex trading is a complex process involving recognising signals and patterns, and making educated guesses on how the currencies will move.  Emotional trading is literally no better than going and playing craps at the casino, sometimes you’ll win and sometimes you’ll lose but you will never be able to predict how you will perform.  That is no way to build a future in forex.

Learn Before You Earn

Spend a lot of time ‘paper’ trading before you put real money into it.  Opening a practice account is very easy these days and you can then practice with real market figures without risking your seed money before your skills are ready.

Forex trading office by Allan Ajifo, on Flickr.  This work is licensed under a Creative Commons Attribution 2.0 Generic License.

Leverage is a Fickle Mistress

When you’re starting out, often your seed money is quite small, so the temptation to use leverage to enhance your profits from each trade can be very strong.  Used correctly, leverage within the context of forex trading is a very useful tool but too often traders forget that the blade cuts both ways, only to be reminded of that when their leveraged account is suddenly empty from one trade gone wrong.  For instance, if a trade is leveraged at 50:1 then all that it would take is a 2% move in the wrong direction for a complete loss of seed money to occur.

Cut Your Losses Early

Be very quick to acknowledge that a trade is not working out, rather than trying to wait out the downward slide until the currency rises back up again.  Far too often beginner traders will get emotionally tied to a losing trade and just hold the position, telling themselves they’ll close the order once the trade at least reaches parity again.  This not only ties up capital for better trades, but also opens you up to a complete loss of capital, especially on highly leveraged trades.  One great way to avoid this is to have very tight stop loss orders on every trade.

Don’t Trade Too Frequently

Experienced traders may sometimes only make one trade a day or even less.  They know that the signals and markers pick when it is time to trade rather than the trader.  Beginner traders have not reached this level yet, and feel like they need to make a trade or trades every single time they log onto the market.

Forex trading can be a very profitable career, but it eats newcomers alive more often than not.  As a new trader you will be best served by acknowledging your inexperience and working to increase your skills and experience before you risk large sums of money.  Start slow, learn fast and above all learn from those who have come before.  Avoid making the same mistakes many new traders have made before you and you’ll have taken a big step in the right direction.