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The Pitfalls of Trading the Currency Market

The Pitfalls of Trading the Currency Market

February 03, 2019

Perhaps the most important thing ever invented, money rules our lives. Many people tend to disagree with this statement, arguing that money is evil and we’re better off without.

That’s a shallow statement made by ignorant people. Think of everything surrounding us and our lives and see how it is possible only because of money’s existence.

For instance, your car gets broken. Unless you know how to repair cars, you need to go to a repair shop.

Why would anyone fix your car? Money is the answer.

Think of a health problem, and you need to go to the doctor. Why would the doctor see you? Money is the answer.

Naturally, the examples continue with every aspect of our lives. Money brings people together, like it or not.

Trading Money

The life of a currency trader is often misunderstood. Starting with family and friends asking you what you are doing for a living and ending with yourself questioning it, the concept relates more to speculation than to investing.

Investing has a far longer time horizon than trading, as investors are willing to wait years for a play to come to fruition. Currency traders do have a large time horizon, but they do not invest. They merely speculate.

Trading money means buying and selling currencies in the hope/expectation of being right on the direction. If yes, you make money, if not, you lose. As simple as that.

However, the winning/losing ratio is not everything. One may lose nine times and be right one time and still make money overall. How come?

Money management is the answer. From the moment a trader opens and funds a live trading account, he/she becomes a money manager.

Managing money comes with a huge responsibility. When it's your own money, it's one thing. The moment your money affects other people, that's another.

By other people, we talk here mostly about family. Even though the money may be literally yours, the loss of it will ultimately affect the entire family.

Hence, the responsibility of trading the money in your trading account is more significant than initially thought.

Trading for a living comes with a full list of frustrations. As incredible as it sounds, the currency market spends most of the time in consolidation rather than in strong trends.

Yet, even consolidation areas offer plenty of opportunities to succeed. The way to successfully speculate depends on the personality, available funds, the broker, the personal knowledge, time availability, but also on understanding market psychology and what drives prices.

What Drives Prices?

Prices move for a reason. And we’re not talking here only about prices of different currency pairs but in general.

Think of the housing market. If you want to buy a house, the price of it today differs than the price a year ago. And, the price one year from now differs too. It can be higher, lower, or even the same.

In other words, in our everyday life, we’re all traders of some sorts. When your favorite coffee brand has a huge promotion, you rush to take advantage of the low price and buy some. You know it brings value, so you trade your money for the much-needed coffee.

The same is valid when trading the currency market. When the price of a currency pair dips to a level worthy of your attention, you buy (trade in your money) on the expectation that the price will rise and you’ll make a profit.

Prices, therefore, of both currency pairs and everyday goods or services, move based on supply and demand. The more people on the buying side, the higher the prices. The more wanting to sell, the lower the prices.

In the currency market, two factors move prices: fundamental and technical factors.

The first ones give the reason why the overall market moves. They come in the form of economic data, geopolitical events, natural phenomena, and so on.

In other words, everything that isn’t technical belongs to fundamental analysis. If there’s a move on the market, there must be a reason behind it.

The second ones are technical. Traders look at a chart (or more) and interpret it in a bullish (price must move to the upside) or bearish (prices will fall) way.

While fundamental factors give the reason why the market will move, technical ones give the direction. Getting them both right is key to long-term success. But, not enough.

Challenges of a Day-To-Day Trader

Here’s a list with some of the pitfalls of the one that trades for a living. I’m sure that by the time you come to the bottom of this list, you’ll recognize at least some of them. If not all!

There you go:

Trading algorithms

Over eighty percent of trading today is done by robots, as they are the reason why markets move so fast (almost instantly) on crucial economic news.

Available capital

People trading with $100 accounts dreaming of making millions aren’t realistic ones – think of investing more to make something reasonable, but real capital to trade is a problem for many.

Availability

Most traders speculate on their spare time, but that doesn’t necessarily coincide with the best time to trade – make sure you’re available during the moments the market is most likely to move (e.g., central banks meetings, NFP releases, CPI releases, and so on).

Yourself

You as a trader are your worse enemy – just think of how many times you closed a trade in profit only to see the price exploding higher.

Conclusion

Money connects us all; speculation is a challenge. Successful trading means mastering the art of speculation, and that comes at the end of a complicated process.

Retail traders face numerous challenges, some of them mentioned in this article. On top of that, think of the fact that all central banks have their trading department to implement their decisions.

Other market players also have more significant resources and time available on their hands to make the right call (e.g., institutional investors, quant firms).

In the end, what matters is to realize that the likelihood for things to go wrong is high. Accounting for everything that might go wrong brings you one step closer to successful trading.


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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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