The Hidden Dangers of Forex Trading

I am going to back track a bit and share with you a story on the hidden dangers of forex trading. I have been trading on and off now for roughly 5 years, and have my share of bumps and bruises along the way. Trading Forex has actually taught me alot about myself, including some of the not so pretty things that I am about to reveal to you. Forex trading is not a piece of cake that many would have you believe.  In fact, if you don't know much about forex trading, then perhaps you should investigate stocks first and learn how to buy stocks for beginners before you get into the volatile currency markets.

I was actually one of the lucky ones out there when I first started out. I was just like many other people out there just starting out. I didn't know a thing about trading and didn't see the importance of placing "stops" to prevent huge losses.

As you are probably aware, the forex markets are unkind to those who don't set up precautionary things like stop losses. Well, on this occasion, I was trading the Eur/USD currency pair and it was late. I was speculating that the USD was going to go up but it had just been hovering at the same place for around an hour or two, give or take a few pips. I didn't have a stop loss in place because I was monitoring it pretty closely.

Well, long story short, I ended up going to bed, and didn't bother to close my position. I can't remember exactly why I didn't do this but the point is that I didn't. I woke up the next morning and went in to check my position. The result? There was a 60 pip move in my favor.

Now while I know many of you would say that that was great and congratulate me for a job well done, understand that this swing could have easily wiped out my rather small account in the blink of an eye had it gone in the other direction at the time. And trust me, it could have easily done so.

So what caused the huge swing? It was an annual news report about the US housing market. Like I said, I had no idea that this report was coming out on this day and had the news been bad, this story would probably be vastly different and it could have forced me onto the forex sidelines with all the other losers for the day.

Needless to say, I could have made a decent return that day. But I didn't. Why? Because rather than closing my position, I fell into yet another newbie forex trader trap...GREED. That's right. My first inclination was to close my position. But then, I started thinking......

What if the market continues to move up? Would I be leaving money on the table? Maybe I should hold onto it a little longer.....

Of course, the market started to correct itself. I started to think that maybe it will rise again (I didn't understand what the market was doing at the time) so I stayed in the trade all the way back down.

The bottom line was I lost PIPs (the spread) instead of making the 60 PIPs. I had a windfall and didn't capitalize on it. I lost the opportunity due to my greed and when it was apparent that it was going back down, I remained in because I thought that maybe, it would rise again. And I DID NOT HAVE A STOP LOSS POINT IN PLACE TO PREVENT SLIPPAGE.

So what is the lesson in all this?

• Understand that you should always have a stop/loss point in place for any trade that you do, especially if you are stupid enough to use high leverage in a trade. If you luck out and actually make a windfall of PIPS, readjust your stop/loss point up to where you will make something.
  
• If you decide to do intra-day trades, take your profits and move on (especially in a correction)
  
• Also, always be aware of upcoming news and when it is coming out as news can make the market swing wildly (in your favor or not so much) and could cause a margin call, once again for those of you who are recklessly messing with high leverage. I don't mess with trading the news and try to close my short term positions during this time.

There are actually more "hidden dangers of forex trading" but those two are probably on the top of my list. If you are going to trade, be smart about it. If you don't use a stop/loss point, you are playing with fire. Couple that with an unmonitored account during some forex breaking news and that spells a recipe for disaster. I'm out.....