The thrill and rush of excitement caused by a few successful trades can be intoxicating and leave you wanting more—a lot more! Still, the heart of any investment strategy centers around putting the odds of success in your favor and overtrading in the Forex market can undermine even the best of strategies. Forex is a very volatile market and most investors would be wise to follow the advice of Jimmy Rogers, a famous and successful trader who is quoted as saying, “One of the best rules that anyone can learn…is to do nothing.”
One of the biggest mistakes that an investor can make is to allow fear or greed to govern the decision-making process. Fear causes investors to close positions too early or to stop opening positions altogether. While fear limits the potential for profit, greed opens up the door to huge and staggering losses. Chasing profits due to fear causes investors to keep a position longer than they should have or to spread themselves too thin. Inevitably, market volatility will swing in the wrong direction and an investor can lose everything!
Risk Management
Any time an investor opens a position there will be risk. The market is always right while even the best of investors are only right part of the time. Each and every position should have a stop/loss order attached to it. Stop orders will limit risk and protect the investor from riding a losing trend too long. Plus, when the order is in place and adhered to, there is no reason at all to trade unless the stop has been triggered so they will also help reduce the tendency to over trade.
Especially for investors new to the Forex, stops can be triggered often in the early going. Now while an investor wants the stop to be effective and limit loss, it is important that it not be triggered too early or profit opportunities will be lost. An effective investment strategy may take some time to “dial in” so don’t be surprised if the stops are initially set too tight (or close to the opening price) and are triggered prematurely.
It is very possible that a trading account will have a negative balance in the early going. However, with patience and better placement of stops, an effective investment strategy will begin to win out and be profitable. One of the worst mistakes that beginning investors make is to try and “make up for” a loss by getting out there and investing immediately. If your stops are not set properly, however, this additional investment may be little more than another chance to lose more money.
No Forex investment strategy will work every single time because the market is simply too big and too volatile for anyone to predict with 100% accuracy. Investing too often in the Forex, however, is almost certainly a recipe for disaster while being patient, setting effective stops, and continually testing your strategy will ultimately bring you the profits you seek.