5 Big Forex Mistakes Small Investors Make

Originally published on TheStreet, June 16, 2016.

Some $5 trillion daily move in foreign currency trading (aka forex), and that is a number that dwarfs the amount of money traded on stocks (said by some experts to be under $100 billion daily counting all exchanges). That is a huge pot of dough and here's the reality: small investors are very much welcome and rewards can be huge.

That's because most trades involve leverage - a lot of it. A trader may control $10,000 worth of assets with as little as $100 on the table, or $100,000 of assets with $1,000 in the game. Fairly commonly are 100 to 1 leverage plays, and that means small money can produce big payoffs. It also means there's a potential for wipe-out, absolute devastation.

The Forex market has great financial opportunities for the educated trader.

Is there a place - really - for small investors in forex? "There is fantastic opportunity for the little guy who knows what he is doing," said Sam Seiden, a forex expert at the Online Trading Academy. "It's a disaster for the guy who doesn't."

Andrew Marshall, a financial planner in San Diego, added that because forex trading is 24/7, it's a good place to get good at trading.

Talk to experts and what they say is that small investors need to know what mistakes they do not want to make, and that is because a handful of key mistakes are common. Ignore basic forex trading advice and, said Gonçalo Moreira, research analyst at FXStreet, a news and advice portal,"the markets will continue to be a slaughterhouse for most aspiring traders."

Here are five mistakes that are forex portfolio killers.

Over-using leverage. "Brokers will give you much more leverage than you should be using," said Marshall. That's right. Leverage is part of the forex appeal - but it also brings real dangers.

"Biggest mistake you can make is using too much leverage," added Marc Prosser, managing partner at Fit Small Business and formerly CMO at FXCM, a forex broker. He added: "Many firms may give you a 100 to 1 or 50 to 1 leverage but experienced traders know that even trading on a 5 to 1 leverage can be extremely risky. While it's tempting to score a 100 times return on a small move, it's also a double edge sword. One or more bad trades at a high leverage can wipe you out."

The smart investors who survive swiftly learn how to use leverage, and when to ignore it.

Buying and selling on news. That's a sucker's move, suggested Seiden, who indicated that forex markets are adept at pushing out news and small investors in particular generally buy on good news and sell on bad. That, said Seiden, is exactly wrong, because buying on good news means buying high and selling on bad news means selling low. Profits, he said, lie in doing the exact opposite.

Whatever you do, said multiple experts, don't trade right after news breaks. Exactly which direction the market will head is unknown but what is known is that big news triggers volatility and that means unpredictability. Make investments with a cooler head, not in the heat of the moment.

Thinking time is on your side. "Most aspiring traders bet on single positions as if they knew the time to enter and exit the market is right. Yet, oftentimes their timing is wrong," said Moreira. That's fact. Timing the forex market is not for the less experienced.

Maybe not even for the highly experienced.

Invest on fundamentals, not on predictions of market directions.

Ignoring currencies with big spreads. There are no commissions in forex but what there are spreads, the difference between what a broker buys at and what he sells at. And for many investors, said Seiden, a big spread is a turnoff, and they instead prefer currencies with small spreads. That, he said, is wrongheaded. Sometimes a broker sets a big spread because he knows it's a tasty trade. And a small spread may be associated on one with less appeal.

Don't necessarily buy every currency with a big spread, but do look carefully at them, because there may be treasure to be had.

Thinking like a retail investor. Teach yourself to think like a banker, said Seiden, who indicated that in forex money is made at what he called "key turning points" and that is when big banks and other large players are in motion.

Learn to think like a big bank even if your trading portfolio is only $10,000, not $10 billion. It will pay off.

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