The foreign exchange market, commonly known as Forex, needs minimum requirements to start trading. That is why it is one of the world’s easiest day trading markets to access. All you need is a laptop/mobile phone, Internet connection, and a few hundred dollars to begin day trading.
However, the ease of entering the market does not guarantee quick profits. So before you dive into the trading world, make sure that you avoid these common pitfalls as your success may depend on it.
Trying to Anticipate Forex News
A pair trade can rise or fall sharply in either direction once the scheduled forex news gets released. Many people try to anticipate the direction in which the pair of stocks might move and take a position before the news gets released. It might seem like an easy way to make a substantial amount of profit, but that seldom happens.
The forex price can move rapidly in either direction a few times before heading steadily in one direction. That means you are likely to lose big within moments after the news release. Therefore, instead of trying to anticipate the direction of the stock post the forex news release, rely on analytics and have a strategy. That way, you can profit from the stock volatility and stay safe from the unknown risks.
Trading When You Keep Losing
When you are day trading in forex, you must monitor your win rate as well as reward to risk ratio closely. Your win rate is the percentage of the number of trades you when out of total trades. For example, if you earn profit from 31 trades out of 50, your win rate would be 62%. You must ensure that your win rate stays above 50%.
The reward to risk ratio will tell you whether your losses are greater than your winnings in value. For example, if the average value of your winning trades is $100 and the losing average is $50, your reward to risk ratio is $100/$50 = 2.
If the ratio is less than 1, you are losing more money than you are winning. Therefore, your reward to risk ratio should ideally be more than 1.25 to ensure that you are making profits.
One of the easiest ways to ensure that your risk to reward ratio stays high is to have a stop-loss order for each trade. A Stop-loss order can save you from a losing trade if the price goes against you beyond a certain point.
It can mitigate the risk of huge losses for newbies and experienced traders alike. A stop-loss order will also prevent you from adding to a losing trade and hoping that you can make up for your losses.
Trade More Than You Can Afford to Lose
One of the first things in risk management strategy should be to establish how much money you can afford to lose on a trade. Ideally, you should not risk more than 1% of your capital on a single trade. That will ensure that if a stop-loss order closes the position, the resulting losses are minimal.
Traders should always refer to their chart analysis to know how many lots of a particular trade they can buy. Amateur traders often make the mistake of assessing risks based on the pattern of their recent trades. Instead, day traders should rely on pre-planned position-sizing models to allocate the limits of their daily trade.
Over-Diversifying Your Trading Portfolio Too Quick
Diversifying your trading portfolio is certainly a wise backup move in case your asset values decrease too much. However, it is not advisable to open too many positions too quickly. You may feel that the potential for profits is much higher this way, but it also needs a lot of work, and you may not be able to keep up with that.
When you diversify your trading portfolio, you have to monitor more news and events that can affect the forex market. So while a diverse trading portfolio can increase your chances of potential rewards, make sure that you don’t bite more than you can chew.
Not Understanding Leverage Before You Invest
You may have noticed the trading platforms offer you leverage or a loan to open a position. You only have to pay a margin or deposit to trade with the full value of that position. It might seem lucrative for you to trade with increased levels to earn more profits.
However, you must understand the full implications of participating in leveraged trading before you open a position. If you invest in leveraged trading without understanding it completely, your losses may wipe out your entire trading account. Therefore, make sure you refer to leverage guides to understand the concept before you start utilizing it.
With forex trading, people win and lose fortunes every day. But unlike gambling, it is not just a game of luck. You have to build the right strategy and execute it with patience and skill. Avoiding these five common mistakes can ensure that you can keep making profits from forex trading.