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Not Starting Out With a Paper Trading Account
The most important thing a beginning currency trader can do is trade with a paper account before putting real money at risk. A paper trading account allows beginners to become acquainted with the trading platform and develop a feel for the many nuances of the strategies they follow. Trading naturally follows a series of ebbs and flows, and each strategy necessarily has its own limitations. The trader must learn to react to each new development objectively and rationally. This process is much easier without the added emotional strain of having money on the line, and the lessons learned are much less expensive.
Becoming Emotionally Attached to a Position
Once a beginning trader has decided to move forward on a position, it is only natural that psychological ownership comes along with financial ownership. After developing the rationale behind the position and investing both the time and the money, the trader wants to see it succeed. Good news is overvalued, and bad news is ignored. This emotional attachment can cloud judgment and prevent the trader from reacting properly to changing market conditions.
Not Using Stop Losses
A stop loss is one of the most important risk management tools a trader can use. By definition a stop loss limits the downside of each position. It also creates a cushion in the event that the trader misses a relevant piece of news. Perhaps more importantly, however, a stop loss establishes a psychological baseline for a position. If the specified price is reached, there is no gray area; the position is simply vacated without any question. The decision is easy.
Buying the Peaks, Selling the Valleys
Buying the hot pair is seldom a good idea. By the time a currency has made its way to the center of attention, it has likely made an impressive run. No matter how impressive the run, however, a correction is likely. Once traders realize that these recent highs may simply be caused by the attention the currency has received rather than more substantive reasons, a sell off will occur. To make the situation worse, beginners are likely to hang on to the pair with hopes that it will rebound. By the time they finally join the crowd and sell, the pair may be near its low point. Currency traders cannot follow the crowd. Within the framework of long term trends, each pair inevitably displays both peaks and valleys. Buying high and selling low is a sure recipe for disaster.