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Lack of Forex Education a Major Cause of Failure

By Michael A. Jones - May 15, 2007

Lack of thorough Forex education can be costly. Some new traders open a mini-account and immediately throw $5,000 at it, jump in and get their feet wet. Within 3 months or less the account is finished. What happened?
There is a lot of hype surrounding the Forex! The internet is full of claims that you can turn a few hundred dollars into tens of thousands within months or 1 or 2 years. With the most rudimentary information, new traders are sometimes encouraged to begin trading long before they are qualified. Regretfully, some get-rich-quick merchants merely teach a little technical analysis and basic concepts in the Forex education they offer and miss what amounts to the most crucial part of Forex education: Mental and emotional discipline.

Aspects of Forex Education
So in brief, here is how the various aspects of a thorough Forex education could be prioritized in increasing order of importance:
1. Forex terminology and trading mechanics
2. Learning how to read charts
3. Learning how to use the online trading software
4. Learning a variety of technical indicators
5. Learning a handful of proven strategies employing those technical indicators
6. Practicing in a demo account
7. Opening a mini account (still viewed as a practice account)
8. Strict risk management
9. Developing mental discipline and control of emotions through experience
Let’s take a look at this list a little more closely. Notice the items of lesser importance have to do with the mechanics of trading. Most Forex education packages spend ample time on the mechanics. But the most crucial aspects, the factors that can make or break a Forex trader are the last two, items 8 and 9.

Risk Management
Forex education must include a detailed explanation of risk management rules to be of any value. You need to know how to calculate risk reward ratios and which trades your equity will allow and which ones you need to avoid. Estimates vary as to what is the optimal risk percentage on any one trade. Some very conservative traders may suggest no more than 1%. As a general rule, 2% seems to be a reasonable figure allowing for a series of losing trades without putting the account in jeopardy. More liberal traders even suggest 5% but in my view that is dangerous. Imagine the hit on your mental energies if you get 5 or 6 losing trades in a row if you trade with that kind of risk. An effective Forex education will devote a serious amount of time to discussing risk management.

Mental Discipline
There is a reason why this is the most crucial factor of all. Most traders fail, not because they don’t have a good trading strategy, but because they lack the mental discipline to follow it. The Forex can take an undisciplined trader on an emotional merry-go-round and empty the account at the same time. That is why any Forex educational package of value will spend considerable time offering strategies and guidelines on how to keep mental focus and emotions in check.
Go With Professionals
Some Forex education package are put together by individuals associated with online brokers who don’t actually trade themselves. Avoid them. If you are going to invest in Forex education, go to the professionals. Do a little research and make sure the people teaching you are seasoned traders themselves, preferably with years of experience.
So when contemplating the Forex, don’t be in a rush. Take your time, research, identify a good mentor, and be thorough in your Forex education. Eventually, you may be in the small percentage of traders who make a substantial income from currency trading.