Mistakes to Avoid
Now that you know the basics of the forex market and might be feeling ready to enter, it is imperative that we discuss some common mistakes. This is just so you are conscious of them and make an effort to not fall into these traps.
1. Entering without a risk management plan
You are not expected to know everything right at the beginning and get it all right. However, you should at least understand what risk capital is and how much yours should be. When you’re starting out, do not risk more than 1% on one trade.
This will help you figure out where you should place your Stop Loss and what position size you should opt for.
2. Staying in a trade for too long
In life hope is a much needed emotion, but it should be avoided at all cost in trade. When all signs point at loss, believe them. Cut losses wherever you can.
Staying too long can also be an outcome of greed. The trader makes a decent profit and they have reached eh limit they set for themselves but the trend is still in their favor so they decide to stay. Sometimes this might be useful, when the trend is too strong. Mostly, however, this ends with the trader losing the money they earned because the trend reversed.
Therefore, unless the market is exhibiting abnormal behavior that’s making it very likely to move further in a favorable direction, leave at the mark you previously decided upon.
This brings us to our next point
Trading is not gambling and so should not be treated as such. If once your trading strategy lets you down, it is not reason enough to give up on it altogether. Give it time to prove its worth, or prove faulty.
Inconsistency and restlessness will only lead to loss and dissatisfaction. Trading requires a level of self-confidence and faith in your abilities. So have some faith and stick to the plan.
4. Emotional trading
Hope and Greed and the way they adversely affect trading have already been discussed. The other emotions that can be detrimental to trading are anger, frustration, and revenge.
It may happen that a trader loses a substantial amount of money on GBP/USD. What it shouldn’t do it push you to go for that pair again with the same strategy to make that money back. This will most likel cause more loss.
5. Averaging down on a losing trade
Consider that you enter a long position and the trend is against you and prices are moving down. You, however, believe that they will soon begin to rise so you buy more lots hoping that when it rises from a low point the profits are bound to be substantial.
This addition is called averaging down and this is what you should not do when the currency is losing.
It might seem obvious enough but it is a common mistake made by a lot of hopefuls.
6. Increasing risk/reward stakes after losing
This is extremely emotional behavior and by definition is the opposite of logic and sense. The urge is strong though and understandable too, but it can very likely result in more loss.
At the bottom of this behavior is the urgency to make back what one lost, but it doesn’t have to be right away. The right thing to do after a loss that makes one panic would be to step away, collect your thoughts, strategize and then return.
7. Picking a side before data releases
A lot of times traders who take special interest in fundamental analysis and data releases get too confident about the future of a currency. This leads them to anticipate the trend following important data releases because they feel they know what the data will say and how the market will react.
More often than not, this is a mistake. The forex market is extremely unpredictable and so the safest thing to do is enter positions after data has been released and the initial volatility has blown over.
8. Letting Stop Loss decide
If a trade is losing, you are allowed to cut your losses and get out as soon as you can. You don’t have to wait to hit your Stop Loss.
Stop losses help manage risk, but each case is different. Sometimes the traders can manage that risk even better with the right step at the right time.
These are some main mistakes that have cost a lot of new traders a lot of money. So many traders leave for good after they fall into one of these holes. By being conscious of these tendencies one has a better chance of avoiding them. So, take a hard look at all the above mentioned points and trade only with the mind.