The foreign exchange market (forex) is one of the most accessible trading markets in the world. You simply need access to the internet and a couple of hundred dollars to start trading. However, just because this trading market is easy-entry does not mean you are in for a quick buck. The reality is that both rookies and well-seasoned professionals are going to make mistakes on the job. Some of these mistakes are easily avoidable.
Here are 5 common forex trading mistakes you need to avoid.
1. Not Having A Trading Plan
The saying “If you fail to prepare, then prepare to fail” is quite apt for this situation because if you enter the forex without a proper trading plan you are likely to end up in big trouble. A trading plan outlines your strategy, including what, how and when you want to trade. It has all the nitty-gritty details regarding time frames, entry plans, exit plans and how you intend to manage risk. Not having an extensive plan is a big gamble, one that you certainly do not need considering that you will be making lots of gambles already. Your trading plan will act as your safety net, so if you find yourself in a position where you want to make a trade or take a risk that does not fit into your strategy plan, then you do not do it. The trading plan should always have the final say, so that way you can ensure you are not making decisions solely off of emotions or on a ‘feeling’,
Test your strategy and amend it as you go along and learn on the job. There are a lot of psychological pressures that come with forex trading, and one way to ease that pressure is to have a trading plan that you believe in.
2. Not Conducting Enough Research
The research part of the process is probably the dullest aspect, however, it is also one of the most important parts! The foreign exchange market is dynamic and continuously changing which makes for an exciting atmosphere to work in. Rookie traders are lured in by the potential to make big profits but if they enter the market without doing the necessary research then they are setting themselves up to fail. Not only do they risk missing out on big profits, but they also risk making big losses. Successful traders understand that there is always more to learn, so they regularly educate themselves and read widely on several matters. If you are not sure where to start then check out forex suggest for tips and more information on the following areas:
- Market fundamentals
- Trade data
- Currency activity and interest rates
- How to manage money
- Trading strategies – for example how to ensure maximum profit and how to reduce losses.
- Risk management strategies
While it is not the most glamorous part of the job, it has to be done. So make sure you hit the books and keep your knowledge up to date.
3. Focusing On Short-Term Wins
Another common forex trading mistake is focusing on short-term wins. It is easy to forget about the bigger picture and the long term goals when you have little profits in sight. This might not seem like much of a mistake to make, but it will restrict you and will seriously limit your profit potential. This mistake is not as straightforward as the others, because sometimes there are genuine reasons for closing a trade earlier than expected, for example, if news emerges that the trade trends could change completely. However, on other occasions, traders make decisions out of emotion. Whether it is out of fear or greed, these emotions cloud your rational judgement of a situation and you lose sight of your trading plan. Which is another reason why it is so important to have a clear cut trading plan because it can help manage your emotions when making big decisions.
4. Risking More Than You Can Afford
An essential part of trading is understanding how much of your capital you are willing to risk on each trade. As a rule of thumb, traders ought to risk less than 1% of their capital on a single trade. This might not sound like much but even with a 1% rate per trade, you can still lose a significant amount if you have an especially bad day. To ensure that you don’t risk more than you can afford you should set a daily cap for what you are willing to lose in a day. If you can afford a 4% loss in a day, then stick to this and do not go beyond it.
Trading is similar to gambling and so can be highly addictive, so setting a daily cap is essential so that you don’t get sucked down a hole of losses. If you are someone who has an addictive personality, then trading is likely to be a difficult career for you. The emotions triggered in gambling will be the same as those in trading and so your judgement can become clouded. It is a fine line, so be careful and remember to stick to the strategy.
5. Having Unrealistic Expectations
If you are new in forex you have to enter the game with realistic expectations. It is not going to be a smooth ride and you are not going to make loads of money right away. This doesn’t mean you can’t be successful in this market, but more that you have to enter it with a level head so that you are immediately disappointed and then quit. To be a successful trader in the forex market you need to have a good foundation of knowledge, control over your emotions and determination to succeed. It will take hard work and commitment and if you enter the market thinking otherwise then you are doomed to fail.
A career in forex trading has great potential, but mistakes are part of life and nobody is exempt from this. The key as a trader is to be aware of these common mistakes and do what you can to minimize the errors you make.