Frequently Mistakes in the Forex Market

Here below a list of some oversights (of course not all mistakes possibly done by traders) that are often made by traders whether intentional or not.

  • High Volume Operations: Leveraged transactions require a different risk perception than in the spot markets. The proportional difference (leverage) between your transaction size and your master is a factor you must consider. Taking positions using the whole or the majority of the capital in the Forex market may cause you to lose your capital in a short time.
  • Determining Levels of Profit and Loss Stop: As it should be, if we are moving within a strategy, we have a target price when we are in position, and in case the risk is realized, we determine the price at which our position will be closed, how much loss we will incur, and profit and loss stop orders.
  • Carrying the Position in the Loss for a Long Time: If we do not determine the level of loss in advance and we are carrying our losses for a long time with the expectation that the market will return to our favor, our capital can dissolve to a great extent.
  • Getting out of the profitable position in a short time: As an investor, the reason for our loss is the profit expectation and we want to maximize our profits. Otherwise, we cannot finance our losses and we will have to witness that our portfolio is shrinking. If we don’t want this to happen, what we have to do is to wait as long as we can in our profitable positions, to move our stop orders into the appropriate level, and to use the loss stopper on the trail (trailing stop).
  • Making Emotional Decisions: All traders are expected to be free of emotions without exception for a forex trader and the hardest part is always to make isolated decisions from emotions. We will be successful to the extent that we can maximize it.
  • Making Transactions to Be Done: Trading in financial markets is a serious business that requires attention. Rational investors are aware that non-serious transactions will not offer regular earnings.
  • Makingvery short- term transactions: It is not difficult to build a system with very short-term forecasts, but it is a very difficult and stressful task that requires follow-up for any investor.
  • Making an action without gaining experience: Starting a process without creating a profitable strategy with trial accounts can be the most costly way to learn how to trade.
  • Transacting Based on Single Indicator Reference: Only single indicators are not sufficient references for buy-sell. Indicators are used for confirmation purposes when entering the position after the line-up analysis.
  • Unplanned Action: All movements in the market are assumed to be irrational. In such an environment, one of the important requirements of not losing is to have a plan.
  • Not Stopping the Stop Level: If we change the stop level because we are afraid to face a growing loss, this may be a harbinger of greater damage.
  • Acting independently of the strategy : The most important part of a strategy is a loyal practitioner.
  • Very Frequent Processing: High transaction costs means high risk. However, frequent transactions can be exhausting and stressful for the investor.
  • Moving with sensations : If we are just entering the position with sensations we are very likely to be wrong. Rational decisions need to enter the position.
  • Opening a position within sufficient informatioIf we think that we have insufficient knowledge, we should practice until we feel sufficient and we should get support from others for our deficiencies.
  • Excessive self-confidence: It is desirable for the investor to trust him / herself, but it causes us to not be able to analyze our overconfidence errors and not to accept that we can be wrong.

 

Money Management – What is to be considered?

Under Money Management (MM), the correct classification and investment of your own money is considered. It is often not just the appropriate and necessary strategy to think about. Rather, the successful traders have come to success due to their MM strategy. Mostly not the big fund or investment is made, which is put on a single share. Rather, the right division of capital must be considered to deal wisely with losses. A good money management strategy deals well with individual losses. The loss is limited in order to have enough capital after numerous failed attempts to carry out further experiments. This type of action also gives rise to risk management. Basically, every dealer has the goal to increase his money. However, this is only possible if the losses are compared to the profit. The goal of MM is maximizing profits and minimizing losses. Of course, the two sides influence each other, which means, however, that a smart need for action exists. To pursue a good money management strategy entails a higher total income.

As mentioned before, there are different strategies to start with money management. There are three types of capital management, which are worth mentioning:

  1. Core Equity Method
  2. Total Equity Method
  3. Adaptive Core Equity Method

In the first method, the Core Equity Method, it is an approach that assigns an amount to each position opened that is subtracted from the total fund balance. If a balance of 100,000 euros is available, only 5,000 euros should be added to a selected position. This means that 95,000 euros would be available for other positions. If another position is to be opened, a capital allocation of 3,000 euros can be made. This amount must be deducted from the capital in order to use a remaining amount of 92,000 euros. This core capital method, also known as net balance, is widely used in the market.

In this type of variant, the Total Capital Method, all available capital is added to the speculative capital. Everything is lumped together, including profits and losses. With a starting capital of 100,000 euros, a profit of a share of 2,500 euros is added to the balance. If losses are made, they will again be deducted from the total balance. Due to the waiver of the net amount as in the first method, the whole 5000 euros more would be available for trading.

The last method, the Adaptive Core Equity Method, is a combination of the last two methods presented. This combination requires a MM of capital allocation in the core equity method. Subsequently, this allocation is adjusted to the increased or decreased risk. If you start again with a capital of 100,000 euros and invest in a position with 5000 euros, the residual speculation amount of 95,000 euros can be used. If the price moves in the direction of your own position, the risk on the entry price can be reduced. In addition, if a stop loss is introduced, the risk of losses can also be reduced.

 

Money Management – Protecting Your Fund at the Very Start

Thing that sit comfortably in the first list amongst the most significant errands of money management (MM) is the use of the available fund in a targeted and planned manner. This prevents traders from using their money because of emotions, which in many leads to losses. For this, traders without MM often forget the formation of reserves , which are of great importance in certain situations. If trading is just out of the feeling, Forex are more likely to be a game of chance, which they are not.

Scatter capital and use it purposefully
One of the biggest mistakes in Forex is putting all the money on an option (capital protection). MM plans to distribute bets across multiple options. If possible, this should have different terms and different underlying types. Furthermore, only a certain proportion of the existing capital should be put on a single option. Experts advise beginners to invest a maximum of between 5 and 10 percent of the credit in the purchase of an option. Even with several lossy trades there is still enough money left to trade.

Stay realistic and do not act out of boredom
To have a good MM, it also needs to be realistic. Although returns of up to 500 percent can be achieved with a single option, the rule is not. So it is much more promising to trade with smaller amounts and thus to achieve continuous profits. With this strategy, potential losses are not so high.

If there are no trends over a period of time, traders sometimes become impatient and speculate on some underlying asset. However, this only rarely succeeds. The same applies to acting out of boredom. After all, this is about the use of real money, so play, fun and excitement should not be in the foreground. In any case, the MMstrategy is one of the most important stock market strategies , which you can do for your success with a simple formula that aims to minimize the risk.

Always follow your own strategy and comply with rules
The basis for successful trading with Forex is the right strategy. This should be carefully selected and strictly adhered to. If uncertainty exists as to how well an order fits the chosen strategy, it is better to wait. As soon as there is a risk that a rule will be broken, it is advisable to take a break. Then it can then enter the market with a clearer head again.

There are many strategies when trading stocks, which can be taken into account and used. At the same time, however, it is important to ensure that your own budget is not overburdened so that you can continue to act actively. While most experienced traders are already experienced with money management, beginners who tackle a trading platform are often overwhelmed. They do not know exactly how they should proceed and what special features they have to observe. For this reason, not only are technical indicators to be considered, but at the same time, MM is an important factor to analyze in order to keep a budget permanently stable. MM has some basic rules to keep in mind. In addition, analysis methods must be combined with the MM in order to be able to benefit from the best results.

Basic 7 Tips for Dummies in Trading Currency and Cryptocurrency

Since and then, brokers have been offering us access to the foreign exchange by their trading platforms. It could be a specific platform of them or a more common platform like metatrader. They allow retail investors to trade currencies. Later, some online brokers also offer crypto-currency trading as well. Here, you will discover seven tips to successfully trade real and virtual currencies.

  1. TRAIN YOURSELF AND FIND OUT
    Be aware that trading currencies and crypto-currency requires some solid knowledge not only in financial and economic culture, but also many techniques related to trading. That consists of technical analysis and its mathematical indicators, graphical analysis and different figures and in some case the difference between the booking order and market orders.
  2. DO NOT GO AGAINST THE TREND AS IT IS YOUR FRIEND
    This means that in a bullish market you should buy while in a bearish market you need to sell rebounds.
    It is unconscious in terms of currency trading to think that the market is wrong. You need to avoid this.
    For encrypted currencies, if you expect to anticipate a trend before the introduction of an encrypted currency, you can participate in its ICO or Initial Coin Offering that will allow you to invest at a preferential price in cryptocurrency—in which you believe before its launch.
  3. LET THE PROFITS RUN AND CUT THE LOSSES QUICKLY
    If you are advised not to take your winnings too quickly on a winning trade, do not delay too much. It’s the best way to lose everything! Use target profit (TP) orders and for limiting losses, use stop orders. Better, use trailing stop orders to protect your profits or reduce a potential loss.
  4. OBEY STRICT RULES OF MONEY MANAGEMENT
    It is essential to set goals for profit and loss. And to respect them!
    Keep some distance from your trading and especially your earnings. Do not think that you are gifted because the market is always right.
  5. ALWAYS KEEP A FOOT IN THE REAL
    Although testing your strategy with a virtual account is recommended, do not consider that your performance on this account will necessarily be representative of your performance with a real account.
    Do not lose the meaning of the value of your money either. Do not take the game at the expense of your private or professional life. Do not spend 12 hours staring at your screen to follow the courses by chaining orders.
    And be careful, keep a foot in the real world, it is not necessarily obvious if the motto you trade is virtual! But it is possible. Rely on tangible elements and concrete information on which crypto-currency to invest in. Please, stay informed on crypto-currency websites review, developer training and skills, etc.
  6. PREPARE A STRATEGY BEFORE ENTERING THE MARKET AND DO NOT TREAT IMPULSIVELY
    They will prevent you from going astray and giving way to euphoria or panic. This is much more reliable in the crypto-currency market where volatility is such. Thus, that without a well-defined trading plan, you are sure to run for your loss.
    In addition, invest only money that you’re willing to lose and never ever, ever, ever, your savings precaution. Always bare in your mind why I strenghtened this part. Some of my colleagues really got bancrupt because of this bussiness.
  7. STAY SIMPLE IN YOUR STRATEGY
    Whether it is foreign currency (forex) or stock, or even trading encrypted currencies, an effective strategy remains a simple strategy, which you can explain in a few sentences, which is based on concrete, specific and factual and not on beliefs or fanciful anticipations.

Forex Basic : Develop Provitable Trading System

Almost all major investors make their transactions within a certain system. It is the first technical analysis which comes to mind in the financial markets. Principles and rules are determined and the system is developed for basic analysis. As the investments in the Forex market are generally short-term, the system is mostly developed for intra-day transactions.

Systems based on only one indicator are generally unsuccessful. Errors of systems created with a single indicator should be reduced by using other indicators. This is called filtering process.

The relationship between the formations in the charts and the indicators and even the general system should be tested.

TESTING THE SYSTEM

A system without a bunch of testing phases cannot be considered as robust. The improved system must be tested on past prices. This is called a backtesting process. It will be appropriate to cover the test period as long as possible. For example, it would be useful to test the system on an average of five years. It is useful to test the system practically in the demo account after the correct test. Because it is very common for many systems that are successful on paper to be unsuccessful in a real situation. In the demo account also test the system as long as possible. This phase is called forward-test.

The system can also be applied to the actual account if successfully tested the demo account. However, it should not be forgotten that one should not discontinue the process of back and forth testing in order to develop a successful system in the real account.

When developing the system, it should be kept in mind that not all prescriptions apply to each patient. Each pair has its own characteristic of movements. The performance of the systems might give different result in the pairs with higher volatility whilst the less volatility.

Other criteria are used for an objective testing process:

  • Total Net Earnings: The total net gain from the total gain in the test process is the total net gain. It is useful in terms of reliability.
  • Total number of transactions: The number of procedures in the testing process is also an important criterion. For the success of the system, it is beneficial that profitable positions are more than harmful positions. However, even more, risky systems that are not waiting for losses but waiting in the snow are being developed. The high number of operations means that the system is affected even by small fluctuations. Too much processing increases the expenses of the investor with commissions and spreads.
  • Percentage of Earnings / Loss: The percentage of profit or loss in the test process according to the initial capital.
  • Annual Earnings / Loss Percentage: The annual percentage of profit obtained during the testing process calculation is important in order to make a comparison with interest, inflation and return on other investment instruments. In case the test period exceeds one year, the value obtained by dividing the number of days in the test period by 365 is the year-to-date value of the profit obtained during the test period. The annual gain is calculated by dividing the total net profit by this value.
  • Drawdown: In the Forex market, the loss is a significant risk factor due to the leverage factor. Systems that can jeopardize the margin level and cause a heavy loss must be optimized.
  • Total Net Earnings / Risk Ratio: Each investment has a potential risk. The potential risk is the percentage of the maximum reduction in the balance during the testing process. The fact that the total net gain is less than 3 in terms of the gain/risk ratio divided by the potential risk ratio indicates that the system is useless.
  • Total Gain: It is the gain or loss that will be obtained if the parity is kept from the beginning of the test period until the end of the test period. When calculating this ratio, it should be taken into account whether the margin problem occurs in the test process due to the leverage factor, unlike other financial markets. At the end of the test period, the system should be questioned if a lower return than the buy-in value is achieved.
  • Percentage of Total Earnings: It is the rate obtained by dividing the total earnings by the starting capital.
  • Annual Percentage of Total Earnings: The one-year yield of total earnings is the percentage ratio of the initial capital. The system should be questioned if the percentage of return obtained during the testing process is lower than this rate.
  • Percentage of Earnings: Percentage of the number of positions closed by the gain in the test process, divided by the number of positions. The longer the duration of the test, the greater the importance of this ratio.
  • Total Earnings in Profitable Operations: It is obtained by collecting the yields obtained in the transactions which result in gains in the test process.
  • Average earnings per transaction: It is the rate obtained by dividing the total earnings by the number of transactions. The high rate is an important criterion for the success of the system.
  • Number of Losses: Number of positions closed during the test period.
  • Total Loss in Damage Resulted Processes: The sum of the losses incurred in the loss-closing positions during the testing process. Despite the small number of transactions, the high rate of loss strategy should be reviewed.
  • Average Loss in Harmful Processes: The total loss in the resulting transactions is calculated by dividing the total loss by the number of transactions.
  • Average Earnings / Average Loss Rate: Average profit in profitable transactions is calculated by dividing the average loss in harmful transactions.
  • Earnings / Loss Index: The success rate of the system can be measured by dividing the win ratios in the test phase by the loss rate. However, the profit or loss obtained during the testing process is not real. In terms of opportunity cost, it should be compared with the country’s interest rate. It is taken into account in the open positions. The index value varies between +100 and -100. Since this index expresses the gain or loss in the most accurate way, it is recommended to calculate each test period.
  • Yield-Risk Index: As we have already mentioned, the risk must also be calculated when calculating the return in the test process. Yield-risk index is used to measure the risk assumed for the gain in the test process.

 

OPTIMIZATION OF THE SYSTEM

Applied systems can be optimized to reduce the error rate and adapt to different pairs. For example, a 22-day moving average can be used in a system that produces an early receive signal as a result of the 20-day moving average. Parameters can be tried until the errors are minimized. Optimization should be implemented strictly for every system developed. However, it should be kept in mind that each system can produce false signals. Therefore, it is more useful to try to increase the success of the stop loss strategy instead of trying to optimize the system to give a 0 percent error.

Reducing the parameters applied in the system leads to an increase in the number of signals. The risk is increased in systems where the number of signals is too high. The growth of risk means the potential for growth in earnings, but in the case of such systems, if the stop loss strategy cannot be established, very serious losses may occur. Changing the parameters of all indicators while optimization is not a correct approach. Changing the parameter of a single indicator while optimizing (according to the science of economics, ceteris paribus, ie nothing else) is a more accurate approach. For the Forex trading platforms and other technical analysis software, it is possible to easily change the parameters of the indicators.