SOMETIMES it can feel like foreign exchange trading is a game of luck, and indeed sometimes the movements mapped on the charts are just plain unpredictable. But fear not, there are strategies that traders can adopt to minimise their losses and maximise their gains.
Here we have highlighted three major mistakes that the currency expert Kathy Lien says are some of the most common. So sit up and pay attention, Lien has near super-human credentials: she graduated from university at 18 – when most people leave secondary school – and has worked some of the world’s biggest foreign exchange companies including DailyFX and GFT.
1 BOREDOM TRADING
Traders love the adrenaline rush they get from taking a position on forex. It doesn’t matter how long they’ve been doing it for, they will always get a buzz. You must be careful with this though: if you’re feeling bored or angry, don’t turn to trading to pick you up.
Lien says: “Professional traders wait for a currency pair to set up according to their plan and do not create a plan based upon the desire to trade.”
2 HIGHLY CORRELATED TRADES
Many traders fail to realise that some currencies always move in tandem. For example, the Australian dollar tends to move with the New Zealand dollar and vice versa. Many traders see Aussie dollar-dollar and New Zealand dollar-dollar rallying at the same and naively go long on both.
Lien says: “The trader is basically doubling up on the same position. This redundant exposure could be intentional, but for most new traders it probably isn’t, which can be a big mistake because if one comes crashing down, there is a good chance the other will follow.” The reason, she explains, is the US dollar: “On most days, the US dollar will be either up against all of the major currencies or down.”
3 BEING A POSSUM
If you’ve ever had a losing trade and decided to turn off your computer or walk away in the hope that if you stop watching it, somehow it will turn around and become profitable -- think again.
Lien brands this as “possum trading.” Crossing your fingers and leaving it alone, she explains, hardly ever works: “Trading is a game of survival and closing your eyes, hoping that the fire will put itself out, is not the right decision. If it is a small fire, it is smarter to put it out before it even comes close to burning down your house; if it is a large one, it is better to abandon your home and call in the fire-fighters. In trading, if the reason for the trade is no longer valid, then get out before the losses grow.”
Based on Kathy Lien’s The Little Book of Currency Trading, How to Make Big Profits in the World of Forex published by Wiley.