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Whilst it is very simple to become a foreign exchange market (forex) trader it is wise to do some preparations before going live with a trade. A lack of preparedness and knowledge will likely lead to needless losses that those new to trading often make. Here are some of the most common mistakes in forex trading to avoid that will make you a better trader.
Choice of broker
Be wise with your choice of forex broker as this is likely to be your biggest trade for a while and signing up with a broker that is poorly managed could risk losing all your money. When making your decision, you need to be clear about what you want to achieve with your forex trading, what the broker offers, including whether they have the best brokerage bonuses which can help your bankroll. Check sources to find out more about their reputation. Trial small trades with the broker before signing up.
Not understanding forex trading
The major issue with most new forex traders is that they do not have a full understanding of how the markets work. In the same way, you would not expect a business to succeed in a sector you know nothing about, going into forex without an education is likely to fail. A good trading strategy on its own is not enough.
You will always be learning as a forex trader so set aside to read good trading books, watching webinars, attending seminars and reading extensively on the topic before trading. With demo sites, you can practice what you have learned about financial trading through studies. With this education, trading should make sense before you start and increase your chances of consistent profitability.
Trading without a management plan
Basing your transactions on a clearly defined and consistent strategy gives you the change to look at monthly results to see any pitfalls you can avoid in future. Your strategy, or management plan, defines what markets you will trade, at what times and include times for analysis. To check if your plan is profitable, sign up for a demo account and for at least a month, see how the different market conditions will impact. Remember that losses in trading are part and parcel of Forex trading so need to be treated with objectively.
Trading without a stop-loss
A stop-loss is an offsetting order that protects you if the price moves against you by an amount that you have set in advance of each forex trade. In a losing trade, a stop-loss caps your loss within the limits set, usually one per cent of trading capital. It also stops you chasing a losing trade when anxiety overrides your plan and even if you have several trade losses following each another, only a small part of your capital is lost that may be at a level that can be recouped by later winnings.
Potential losses on any trades should never exceed your acceptable loss amount as this could lead to making further decisions under stress, decisions that are usually emotional rather than good analysis. Control daily losses by setting an amount you can afford to lose in one day and stop at this point.
Not tracking trading statistics
Traders need to know their average win-rate and risk-reward ratio. If a losing trade averages USD50 and winning trades average USD75, the reward-risk ratio is 1.5. You want a ratio of above 1.25 ideally since 1 indicates losses equal winnings.
Focusing on one currency or product
To focus on one single currency or tradeable instrument increases the chances of a complete loss of capital if the currency crashes. It also means you can lose out on other potential opportunities in the markets. Study many currencies and instruments at the start of the week and focus on those that appear to hold some promise.
Making emotive decisions
Approach trading with a cold rational mind and step away when you feel like you are succumbing to emotions rather than viewing things objectively. Sitting in front of the platform and checking charts trying to find a signal to buy or sell because you are anxious to trade will make you fall into entering random deals.
Ignoring the psychology of trading
Traders should not ignore the part that psychology plays in forex trading. Understanding market psychology, particularly about fear and greed, can affect trading. This requires mind training to trade objectively.
