Top 5 Forex money traps
Dear Traders,
Managing your money and personal cash flow is vital to financial success, because most of us won't win the lottery or receive an absorbedent inheritance to cruise through life on. We work hard for our money and want to make the most of it. When it comes to handling money, most of us aren't as rational and logical as we think. Like losing weight, we know we need to eat less and exercise more, but often can't bring ourselves do it. Similar thing happens with money. We think we know what to do and where to invest, but fail to see all the hazards along the way. We simply need to understand the most typical financial/psychological traps, then shift the way we make certain investing and purchasing decisions.
The wealthy think and function differently regarding money and investing. So rather than looking for benchmark opportunities, the key to making better financial decisions starts with identifying the most common problems.
Overleveraging
Excessive leverage is one of the ways to turn winning situations into a loss over the long run. Risking anything greater than 5 % of your account on any one trade, is financial suicide. Leverage can be a wonderful drug when a trade moves in your direction, but it is a deadly poison when the market goes against you.
Becoming a perfect demo trader
Have you ever made huge amounts of money on a DEMO account? Perhaps you have become a virtual millionaire? After making consistent profits on the demo for 3-6 months, try opening a mini trading account with a small amount of money that you can afford to lose. You need to make sure you can handle the psychological pressure of trading real money, before you start thinking about trading large amounts of capital.
Dead cat bounce
Dead cat bounce is a common, short lived rally in the price after a large bearish move or downtrend, that is ultimately followed by another huge drop in price. It usually happens in volatile markets, when traders pick the wrong momentum move. They are caught by surprise and start to panic. When fear overwhelms a trader's mind, then it is usually too late for a reality check. It is important for you to identify this pattern before you opt for a trade.
Front-running
This is an unethical practice, where:
- a broker or advisor has a financial interest in a particular investment and fails to disclose that interest; and
- then advises others on a large scale to also purchase that investment through a recommendation; and
- with an underlying intention to profit by selling a portion or their entire interest in that investment.
This happens mostly with stock trading but it can happen to Forex traders too.
Usually HFT (High Frequency Traders) try to front-run their rival traders. By using a special software, a HFT trader is able to detect orders from other traders then jump in front of that trade. CNBC quotes front-running as, "...traders who use lightning-quick computer program - high-frequency trading - to detect orders from rival traders, then jump in front of that trade; with the effect that the rival has to buy at a higher cost and the value of the front-runner's purchase goes higher."
Choosing the wrong trading buddy
This mistake has cost me thousands of euros over the years. It also took a toll on different business relationships. If you assume that picking a trading buddy/business partner is similar to making an important hiring decision, then you are wrong. If you make a bad hire you can let that person go. However, if you build your business around the wrong person, then your finances, reputation and health can suffer significantly. Choosing a trading buddy is one of the biggest business decisions you can make and a common money trap.
I have been trying to successfully avoid all money traps for years now. In the video below I share my experience, by showing you how to recognize and avoid a money trap.
If you were caught in a money trap, what would you do? Let me know in the comments section below.
Cheers and safe trading,
Nenad
