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Part 1: Smart Ways for FX Traders to Avoid Losing Money

This is the first part in a 4 part series of smart ways for FX traders to avoid losing money. None of the following will be earth shattering to traders that have been around for any length of time. This is simply some ideas that I have seen to be particularly true from training people from all walks of life to trade. Hopefully more 'would be' traders start embracing simplicity. Knowledge Deficiency Most new FOREX traders don’t take the time to learn what drives currency rates (fundamentals and sentiment). When high impact market news is due out new traders must close out their positions and sit out some of the best trading opportunities. They are taught to only trade after the market calms down. Essentially they miss the whole move and then trade the random noise that follows a fundamental price move. For more information you can refer to a previous article I wrote on how I trade FX with upcoming economic news releases. Retail traders also make the mistake of focusing 100% on technical analysis. In reality technicals are a rather small component of a professional trading plan. For FOREX traders particular attention should be paid to:

  1. The big picture fundamentals.

  2. The sentiment driving the current sessions price action.

  3. Risk management.

  4. Trading psychology.

  5. and a pinch of technical analysis to assist with timing (maybe 10%).

Relying on Others Real FOREX traders rely on fundamental/sentiment information from accurate news sources. They make their own decisions and don’t rely on others to make their trading decisions for them. There is no halfway, either trade for yourself or have someone else trade for you. Having a successful mentor to offer insights and bounce ideas off of is always a great idea. However, mindlessly copying trades from some guru will not make you a better trader. It may work for a while but in the end you really have no idea how to trade and have gained no quality experience with the markets. Trading a Currency, Not a Pair Being right about a currency is only half the trade. Success or failure depends upon being right about the second currency that makes up the pair as well. The easiest trades will be the ones where you buy fundamentally strong currencies against fundamentally weak currencies and vice versa. Buying a strong currency against a strong currency will typically lead to much more difficult trades and lower probability of working out in your favor. For example, if the FED reserve of the USA and RBNZ of New Zealand are both hawkish and in rate hiking cycles then buying the AUDUSD currency pair is going to a difficult ride. However, if the Bank of Japan is very dovish and in a rate cutting cycle then a much better trade would be to look for opportunities to buy USDJPY or NZDJPY. In this case you are buying a strong currency and selling the weak currency which will make your overall trading much simpler and effective.

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