5 Common Trading Mistakes in Forex
Trading forex can be a rewarding and exciting challenge, but it can be discouraging if you are not alert and careful. Whether you are new to forex trading or an experienced expert, avoiding these common trading mistakes can help to keep your trades on the right track.
1. Not Doing Your Homework
Currency pairs are closely linked to national economies and are affected by many factors. They are too traded 24/5, meaning there is usually something going on that will move the markets.
Before entering into a trade, make sure you do your homework. Not only should you be aware of the upcoming events that could affect your trade, but you also need to forecast which way the events could swing the markets. Always pay attention to what your technical indicators are telling you and how they compare to fundamental event analysis.
2. Risking More than You Can Afford
One common trading mistake new traders make is confusing how the leverage works. Familiarize yourself with margin and leverage to help avoid the accidentally putting more capital at risk than you had planned.
Many of the traders find it helpful to set a maximum percentage of the capital that they are willing to risk at one time, usually 2% to 4%. For example, if you have $50,000 of equity and are willing to risk 2% maximum, you would not tie up more than the $1,000 at one time. It is important that you stick to that maximum once you set it.
3. Trading without a Net
You can’t watch the forex markets 24 hours a day. Stop and limit orders help you get in and out of the market at the predetermined prices. This not only gives the trading platform to execute the trades when you are not available, but it also makes you think through to the end of the trade and set exit strategies before you are actually in the trade, and your emotions get the best of you. Placing contingent orders may not necessarily limit the risk for losses.
A loss never feels good. It can make you irrational and emotional, tempting you to make kneejerk follow up trades that are outside your trading plan.
No trader makes the great trade every time. Accept that loss which is part of the reality of trading and sticks to your plan. In the long run, your trading plan should compensate for the loss; if not, reconsider your plan and adjust.
5. Trading from Scratch
Using your hard-earned capital to test the new trading plan is almost as risky as trading without the plan at all. Before you start trading real money, open a forex system account and use virtual funds to try out the trading plans and get a feel for the trading platform you are using. Although you will not be affected by the emotions the same way you will be when trading your money, this is also an opportunity to see how you react to trades not going the way and learn from your mistakes without the risk.