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It is easy for any individual to enter the foreign exchange market as it has low entry barriers. All it requires is as low as a computer, a good internet connection, a broking account, and a few hundred dollars.
Though low entry barriers don’t mean that profitable trades too would be easy, there are many common forex mistakes that a trader needs to avoid. Some of these forex mistakes are as simple as trading without a stop loss or adding to a losing trade. Forex mistakes traders should avoid in day trading are blind following mechanical systems, testing systems only a few years in the past instead of several decades, enormous risk-taking, and overtrading.
Top forex mistakes are:
- Continuing to Trade After Consistent Losses: Monitoring your winning rate and risk-to-reward ratio is essential. A winning rate indicates the percentage of trades you’ve won, while the risk-to-reward ratio compares your average earnings against average losses. A balance between these two metrics is crucial.
- Trading Without a Stop Loss: A stop loss is essential for mitigating huge losses. It automatically sells your position if prices move unfavorably, limiting your downside risk.
- Averaging Down on Losing Trades: Adding positions to average down your trades can amplify losses, especially in the volatile forex market. Instead, use a proper trade size and set a stop loss.
- Risking More Than You Can Afford: Only risk a small percentage (1%) of your capital on a single trade. Set daily loss limits and adhere to them to prevent compounding losses.
- Emotionally Motivated Trading: Trading should be devoid of emotions. Trying to recover losses through more trades often leads to more significant losses.
- Predicting News Outcomes: The forex market is susceptible to global news, making predictions risky. Avoid trading based on anticipated news outcomes.
- Choosing the Wrong Broker: Ensure your broker is reliable and suits your trading needs. Poor choice of broker can lead to financial issues and scams.
- Taking Correlated Trades Simultaneously: Diversification is critical, but avoid taking multiple correlated trades simultaneously as it increases risk rather than spreading it.
- Misinterpreting Long-term Signals for Short-term Trading: Fundamental news often impacts long-term trades more than short-term ones. Avoid basing short-term trades on such news.
- Trading Without a Plan: A trading strategy outlines all aspects of your trade. Trading without a plan is akin to gambling and increases the likelihood of losses. Practice with a simulator account before actual trading.
Thus, it would help if you considered all the scenarios before you start trading. Below, we have listed the top 10 reasons forex trading goes wrong!
1. Do Not Trade If You Keep on Losing
The two main things to watch in trading are the winning rate and the risk-to-reward ratio.
The winning rate is the number of trades you have won, stated in a percentage. For example, if you have taken 100 trades in total and out of 70 have proved winning, the winning rate is 70 percent.
On the other hand, the reward-to-risk ratio is how much reward you get regarding the risk you take. It also means how much you lose on average. If you are losing an average of $50 and are winning $75, your reward-to-risk ratio is 1.5 ($75/$50). A reward-to-risk ratio of more than 1 is good as it means you are at least winning more than you are losing and can cover the commission or fees you must pay over your trades.
You can still have profitable trades if your winning rate is lower, but the risk-reward is higher. You can mix and match strategies and decide your preferred settings. Generally, a winning rate of 50% and a reward-to-risk ratio of at least 1.25 is good to go.
2. Mistake of Trading Without a Stop Loss
A stop-loss is a must! Note that a stop loss is necessary to save yourself from the misery of huge losses. If a price goes in the opposite direction, a stop loss helps you save yourself from the downside risk.
For example, if you buy a currency pair GBP/USD at 1.1110 and place a stop loss at 1.1100, if the prices go down from 1.1100, your order would automatically get sold and save you from the further slump.
3. Averaging Positions to Cover Your Losing Trades
Traders often keep adding positions to average their trades, which can be one of the biggest forex mistakes you can make. If the price moves in the opposite direction, you should sell your positions better. The forex market is volatile, and the currency pairs can go in many opposite directions than you can think of.
The best thing you can do here is to decide on a proper trade size and place a stop loss. A stop-loss would stop you from losing more.
4. Taking risk More Than You Can Afford
Deciding how much your existing forex account is worth and how much you should risk is essential to avoiding a big forex mistake. On average, a day trader can afford to lose around 1% of their capital over a single trade. It also means they place their stop-loss order not to lose more than 1% in a single trade.
Losing is a part of trading, but how much you can afford to lose weighs more. You can lose a little in your trades, but losing more than 1% on every trade would eventually kick you out of the trading zone.
You are advised to set a percentage you can lose in a day. Suppose you can afford to lose 2%; strictly set your stop loss according to that. Losing can be an addiction as it comes with a poison called hope. So, be a disciplined trader and trade strictly within your limits.
5. Getting in a Trade to Win It All Back
Trading has to be done without emotions. With the entry of emotions, logic takes a backseat. Often, even if the risk management strategy is in place, you tend to ignore it to win your losing trades back. But that’s a very destructive thing to do, as it can result in worse.
The chances of getting hopelessly hopeful are high when you want to convert a losing streak into a winning one. There will always be “one more” trade that you think would make it happen, and in most cases, “the next” trade is always that one more trade.
Just like profits, forex mistakes are keen to compound. More greed can result in you taking more margin trades than you can afford, which also means you would not be able to afford it if you lose.
The best way to make your forex trading go in the opposite direction is to stick to the percentage rate you can afford to lose. For example, do not go beyond that if you can afford to lose 1.5% in a single trade and 3.5% in a day.
6. Forecasting the News
Economic events across the globe affect the forex market. Thus, when you anticipate the moves, the current state of trading currency pairs is susceptible to global news, and your wrong prediction can make you lose your hard-earned money. Instead, wait till the news is out and then trade accordingly.
If you think placing a trade before the news burst will make you win big, that isn’t the case. Forex prices tend to move in both directions very rapidly and sharply. As a result, being in the wrong trade has higher possibilities, and within seconds, you would have a big losing trade.
Also, another problem here is liquidity issues. When news breaks, the bid and ask spread (the highest rate to buy and the lowest rate to sell) is significant, and it can result in your inability to be enabled on time.
However, there are a bunch of strategies that you can use instead of predicting the news. One such strategy is the Non-Farm Payrolls Forex Strategy. You can profit from the volatility and can avoid unnecessary risks by using it.
The Non-Farm Payrolls Forex Strategy is a strategy for EUR/USD, in which a trader takes a trade before releasing the non-farm payroll data. The data is released on the first Friday of every month (see Non-farm payroll dates). It states how to enter a trade, which position to take, the position size, and all the other aspects of risk management or a Wrong Forex Broker.
Apart from trading, one of the biggest forex mistakes you can make is choosing a suitable and reliable broker. If the broker you have chosen is unstable enough and the accounts poorly managed, you can face financial constraints. In addition to that, trading forex scams are also not new!
While choosing a broker, try to find answers to various questions like why you chose this broker, what you want to achieve, the advantages you would get, the credibility of the broker, etc. You can also try the broker by using the demo services or by trying a small amount.
8. Taking Multiple Correlated Trades at the Same Time
Diversification is significant, but it requires much knowledge and experience in the forex industry. Following the diversification rule, you can get inclined towards taking multiple trades daily to daily risks. But, the wrong selection of trades can increase the risk instead of diversifying it.
If you take similar kinds of trad forex market, the chances of them being correlated are high, resulting in the same risk but multiple times dangerous! If you win, indeed, you would win big will. If you lose, you may lose more than what you can. To avoid it, take multiple trades, but the trade which correlated.
9. Mistaking Long-term Singles for Short-term Trading
To gain knowledge of financial newspapers and update real-time data. You may read a news piece to gain knowledge of the financial markets and feel that it has specific implications for your currencies. But the probability that it has opposite implications on the day you trade that currency pair is high.
Fundamental news is good for long-term trades; thus, avoid that information on short-term targets. Remember, economic news and fundamental updates affect the long-term trading prospects more than the short-term. Thus, having a positive bias from this can make you get distracted. Also, avoid gambling in your trade; it has to be systematic.
10. Getting into a Trade Without Planning
A trading strategy is an outline that says how your trade should be. It states all the aspects of a trade, like when to enter, what to trade, how to trade, how much to trade, and what the risk should be a kind of analysis for your trades.
Lack of a trading plan is nothing else but mere gambling. The best way to stop your forex trading from going wrong is to try your trading plan or strategy on a practice or simulator account. It would ensure that you do not lose your real money.
Forex trading has gone wrong in day trading. The most common trading forex mistakes in day trading are:
-
- Enormous risk-taking: the risk-reward ratio is terrible. Trader risks hundreds of pips to gain a few pips.
- Overtrading: Trader trade Traders of trades, too often without patience.
- Blind following of mechanical systems: Untested mechanical systems from Expert Advisors can destroy the portfolio.
- Testing systems only a couple of years past instead of several decades. Sound trading systems are robust, and have beenllent i several decades.
The Bottom Line
These tips and tricks do seem generalized on how not to trade or, more precisely, gamble, but remember entering int,o a trade without considering various angles and aspects is gambling to win, and trying to win by applying strategies are two different things.
One of the biggest forex mistakes is thinking of ways to make “Easy Money” or getting involved in such schemes. It would help if you were the final executioner of trades, and your knowledge, skills, and experience should drive your trades. Note the fact that sometimes the best trading strategy is to avoid trading. Trading is not a compulsive act; it requires patience and discipline.
You can follow these tips and tricks to avoid the most common forex mistakes a lot of day traders make, and eventually, with practice, you would learn from your mistakes. The foremost things to have as a forex trader are a trading plan, risk management practices, and a robust and disciplined mind that stops you from deviating from trading goals.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
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