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Disastrous Trading Mistakes


While making mistakes is normal when you are learning a skill or trade for the first time, forex trading is an arena where mistakes can turn out to be very costly. There are a number of mistakes that novice forex traders often make that can have disastrous consequences on their finances if they are not avoided.

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Two of these mistake are

  • Having more than the necessary margin,
  • Trading with large tips.

When investors are first introduced to the concept of trading currencies, they sometimes jump in the lake without taking the time to test the waters. However, trading in ignorance can cause one to lose a substantial amount of money. Just like any skill, to be an effective currency trader, one must learn the terminology and skills which are necessary for success.

Using too much margin, which is also known as having too much leverage, is a mistake that skilled traders sometimes make, but it is even more prevalent among new traders. To understand this error, you must first learn a bit about margin.

Margin is the money that the broker will loan out to the trader. In most cases, it will have a very high interest rate, which makes this type of investment very risky. While the usage of margin calls may allow you to make a lot of money, it can also produce a substantial amount of debt if you lose. In some cases, the debt you get from a loss may be more than you can handle.

Different Forex brokers will have differing requirements when it comes to the debt which is gained from margins, but the total amount will generally be about half of the value of the account. Depending on the circumstances, the trader may require you to increase your own level of collateral.

Though you may be tempted to use a large amount of margin when you start trading currencies for the first time, it is wise to avoid doing this until you have a good idea of how the system works. The next common mistake that many novices make is making investment decisions based on "tips" given to them by others.

Making Trades Based on "Tips"

When you are performing Forex trading for the first time, you may be tempted to make your trading decisions based on a "tip" that you received from someone close to you, or even a highly skilled trader. History has shown that "tips" most often do not lead to large returns on your investment, and in many cases, following tips can be financially dangerous.

By following a tip which is given to you by someone else, you are essentially allowing them to make your financial decision, and it is easy to see why this is foolish. It is always better to do your own research as opposed to listening to others. People tend to have ulterior motives in regards to the information they release, so the tips you are receiving may be designed to fatten their pockets at the expense of yours.

A truly great investor is an individual who always makes their own investment decisions. Do you think George Soros or Warren Buffet relies on "tips" for others to make their own investment decisions? Of course not. They probably spend a great deal of time reading and studying markets, and while many people may try to give them tips, they will ultimately decide whether or not to invest in something based on their own analysis and findings, as opposed to the findings of others. The concept of making investment decisions based on tips is foolish, and will more than likely lead to you losing your shirt sooner or later.

Also, avoid paying for products sold by so called "Forex trading experts" who supposedly have already made a huge amount of money in the market. More often than not, these individuals are charlatans who are capitalizing on the ignorance of others in order to make money. When you confront such individuals, one question to ask yourself is this: if they are so rich, why are they in such a rush to give out their secrets to you?

Another thing to be wary of is currency rates which are lower than usual. While many new investors assume that these will lead to great profits in the future, this is not always the case. There are times when buying the currency for cheap can actually lead to a loss as opposed to a gain.

For example, if the cost of a particular currency is unusually low, there is often a good reason for this. Before purchasing a currency which is cheap, it is best to research it in order to find out why the rate is so low. When you are dealing with online Forex trading, conducting research can be done within a short period of times.

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Overall, Forex trading is a sophistical method of investing, and many Forex traders have made substantial amounts of money. But there are a large number of pitfalls that you will want to avoid, for walking into them can cause you to lose an enormous amount of money.

Read Next: Forex Trading Basic Mistakes




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