Forex Trading Common Mistakes
Learning about the common mistakes new foreign currency (Forex) traders make will help you to improve your skills and chances of being successful. Here are some common mistakes and assumptions new traders make:
- Misplacing Stops
Stops are necessary to avoid disastrous losses, however poorly positioned stops can be equally as disastrous. Before placing a trade the trader should calculate the risk to reward ratio for the trade. The stop should be set with the traders money management in mind and should not be too close or too far away from the price. Traders should also calculate shifting their stop as the trade goes in their favor to lock in profits and lower potential losses.
- Abusing Leverage
With Forex brokers providing up to 400:1 leverage, it's easy for new traders to get carried away with the dream of making fast profits. When traders use a high amount of leverage the profits can be astounding, but when the trade doesn't work out the result can be disastrous. Traders should always compute the dollar value of the risk they are taking for each trade and ensure that this is suitable for their investment balance. Experienced traders seldom risk more than 2-3% of their investment balance on any one trade.
- Placing Technical's On A Pedestal
Technical indicators are great tools that help traders to make decisions. However making decisions for trades based only on what the technical indicators are telling us can result in large losses. By considering fundamental information together with technical information you will have a much improved chance at being successful.
- Day Trading
There are successful day traders out there. However, for new traders, trading with the longer term trend will be easier and have a improved chance of making profits. Longer duration trades give the position more time to move in your favor, especially if the market is volatile.
- Blindly Following A System
There are a lot of Forex systems out there that promise miraculous results. But if you begin trading one of these systems without evidence that it really works you could find your investment balance quickly reduced to 0. If you want to use a Forex trading method, a sensible approach is to back-test and forward test it using software or on paper prior to putting any real money at risk.
- Underestimating Emotions
Emotions can have a huge impact on your Forex trading. Keeping a trade diary will assist you to understand how your emotions are affecting your trading, you can then learn to use them to your advantage.
- I Back-tested It So It Must Work
A mistake traders make is to assume a back-tested method will continue to work. Forex markets are constantly changing and are effected by global and political events. Before you begin to use a back-tested method you should calculate if it reasonable to assume that the market conditions the method has been tested on are probable to be similar to market conditions in the future.
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