4 common pitfalls

Distractions

Focus on what you are doing. Having a multitude of tabs open, watching a movie in the background, playing poker, cooking, tending to the kids and chatting with a friend will take concentration away from your FX trading. Many people are lured into FX trading because it is something they can do from home, but they fail to take into account all the distractions typically present in a home environment. If you have a lot of obligations to juggle, stay away from FX day trading and similar ventures where one distracted minute can spell disaster. Stick to FX longer term investing instead. Also, when you are doing your FX long term trading, be focused on that. It might just be a few hours a week, but be focused during those hours. This also includes being focused when you do your FX research.

Anchoring

Anchoring is a tendency to anchor our thoughts to a reference point even when that reference point isn’t the most rational reference point to use for the situation at hand.

banana peelExample: The value of GBP is increasing steadily against the USD. Eventually, 1 GBP is worth 1.2 USD. For the novice currency trader, this becomes a reference point in his mind. Later, when the GBP starts to fall, he just sees this as a great opportunity to pick up some “cheap” GBP. When 1 GBP costs 0.9 USD he makes a major purchase of GBP, assuming that the GBP is undervalued and that it must soon go up and even surpass the 1.2 USD reference point in his mind. He never bothers to look at the underlying reasons – why is the GBP dropping in price? He is fixated on his anchoring point. To his dismay, the GBP continues to drop, and he eventually sells his GBP at a loss.

To avoid anchoring, critical thinking is imperative. Also, don’t just listen to people and sources that confirm your world view.

Overconfidence and underconfidence

Overconfidence can arise from focusing on positive outcomes and neglecting negative ones. We like to pat our self on the back and congratulate our self on being such superior forex traders. We are smarter than the rest, better informed, etc.

pitfalls to avoidUnderconfidence can make us give up on forex trading even though we are actually quite successful at it. We focus on a few losses and forget about all the gains. This is especially likely if we have a few major set backs, while our gains come in the form of many small gains rather than a few big ones. We start saying to ourself that we are bad forex traders, that this is too complicated, or that the whole system is rigged and impossible to utilize for our profit.

When it comes to forex trading, overconfidence and underconfidence are both deviations from reality that can lead us astray and make us enter into bad situations financially.

The best way of combating overconfidence and underconfidence is to look at the world as it actually is. You need a way of tracking your forex trading: daily, monthly and yearly. A detailed trading journal will make it possible for you to see what you’ve actually accomplished. You might also be able to spot a few strengths and weaknesses, e.g. “I have a tendency to get overly excited about the CAD, overestimate my ability to predict that market and allocate way too much of my bankroll into buying CAD. I need a plan for how I can diversify more.”

Chasing the easy buck

Sometimes forex trading is marketed in a way that makes it look more like a “get rich quick”-scheme than actual work. People attracted to this idea enter into the FX trade thinking they are destined to get rich quick with a minimal amount of effort. In reality, long-term successful FX traders tend to put quite a lot of effort into it. You don’t have to be a full-time day trader, steering at your computer screen for hours and hours every day, but you do need to be willing and able to learn about the FX market and how to evaluate the various tools that can help you in your trading.