Major Mistakes Forex Traders Make
The forex market is among the most accessible day trading platforms due to its low barrier to entry. With a laptop, internet, and a few hundred dollars, you can easily start day trading on the forex market.
However, most new traders assuming that an easy entry promises a quick profit. This how forex traders end up making these common mistakes:
Trading Even When You Keep Losing
When it comes to trading, always keep a close eye on your win-rate and risk-reward ratio statistics. The win rate is the trades you win, usually expressed as a percentage. You will get a win rate of 60% if you win 60 trades out of 100. With day trading, you should work to maintain a win-rate that’s above 50%.
The reward-risk ration is the amount you win relative to the amount you lose on your average trades. When the average losing trade is $60 and the winning trades $85, then your reward-risk ration is $85/$50 which equals 1.5. This ratio indicates that you are losing as much as you are also winning.
If you are a day trader, it is best to keep your reward risk above 1 and preferably above 1.25. if the win rate is a bit lower and the reward risk slightly higher, you can still be profitable. Develop strategies that will win more than 50% of the time and present a reward risk ration that is better than 1.25.
Adding to Losing Day Trades
Traders make the mistake of averaging down to their price position even when the trade is moving against them with the belief that the trade might reverse. However, adding to an already losing trade is always a dangerous ploy. The last thing you need is the price moving against you much longer than you anticipated and the loss getting larger.
We recommend taking trades with proper position size and setting a stop-loss on a trade. The trade will get closed at a much smaller loss when the price hits stop-loss, that it would otherwise. There is no reason to keep risking.
Trading without a Stop-Loss
For every forex day trade you make, always have a stop-loss. This is an offsetting trade that gets traders out of a trade when the price seems to be moving against them by the amount specified by a trader.
You will take a huge portion of the anticipated risk out of an investment when you have a stop-loss order on your forex trades. When you begin taking losses on your trades, a stop-loss helps prevent you from losing more than you can bare.
Trying to Win Everything Back by Going All In
Even when traders have risk management strategies in place, there tends to be times when they are tempted to ignore and take larger traders than they would normally do. Reasons vary, there is no use of tempting fate to do worse.
Having several losing trades in a row, can make a trader want to earn back some losses. In most cases, when traders experience a winning streak, they feel like they can’t lose. Unfortunately, there is always one forex trade that promises good returns, making a trader want to risk everything on it.
Unfortunately, risking too much in trading is making mistakes, and in most cases; mistakes compound. Don’t get caught up keeping your margin in the hopes that it might turn around and you’ll win big. Even when you feel like this, we recommend sticking to the 1% risk per trade list and adhering to the 3% risk per day rule. Always resist temptation and stick to a risk management strategy to avoid adding to your position or going all in.
All these mistakes happen because trader lack a trading plan when getting into the forex market. We recommend having a trading plan that perfectly outlines your strategy. A plan that will define how, what, and when is the best time to day trade.
The plan should also include the markets you trade, what time you trade, and the time frame you use for analyzing and making trades. Without a trading plan, you end up taking unnecessary gambles that only lead to losses, while the aim should be making as much profit as possible.