How To Avoid 10 Biggest Forex Trading Mistakes
It seems that all traders have similar misconceptions about the Forex market and how it operates. These misconceptions lead to them to commit similar mistakes mainly because they often believe that these strategies will be able to give them the Forex success they’ve always desired. This article is aimed at identifying these mistakes and giving tips on how to avoid them. This article should always be reviewed for future reference and to make sure that you stay on the profitable path of a trader. In providing you with other materials for reference I hope that you would be able to overcome the misconceptions you might hold about the Forex market and its trading process and stop committing these common trading blunders.
- Trade not gamble
Trading might be thought of as gambling by other traders. It is important that before starting in Forex, you must determine if you can trade responsibly or not. Almost every trader is guilty of creating a gambling cycle instead of a trading cycle. The faster you can determine this cycle, the better are your chances of avoiding falling into them and instead start being profitable. Trading is more like risk management than real trading. The ones who can manage their risk have better chances of making money than those who don’t. Manage your risk and the market will do the rest. This is one of the general anecdotes that traders use and it is very true if you want to stay on track and not be distracted on your way to your goal. Take care of your risk and avoid gambling out your money. When a trader starts to focus more on managing his risk rather than obsessing about how much money he can make, profit will come easier. So before trading, ask yourself: “Am I a trader or a gambler?”
- Underestimating risk/return trade-off
One common ground for traders is in understanding the power of risk reward and how to use it in every trade they make. Rookies might know that they have to have winning trades that are larger than their losing trades but using this concept in the real trading platform might be more difficult. Each trade should be weighed in terms of its risk reward trade off, knowing not only if you have trading edge but also evaluating the potential risk that you might encounter in the trade and balancing it off with its possible reward.
Ideally we would want to set our reward twice as the potential risk in a single trade. This strategy will give us a greater chance to be profitable in Forex trading. Sad to say, many traders often lose as much as 2-3 trades in a row because of lack of understanding of how risk return works. Checking the following articles will help you understand better why learning the art of risk return is treated as a holy grail in Forex and how to use this information with the simple aid of price charts to gain an edge in trading.
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- Misunderstanding portion sizing
One of the common misconceptions that traders have is the placing of stop loss on their trade. A wide stop loss does not mean that the trader is putting himself at greater risk than someone who is trading with a smaller stop loss. The reality is that smaller stop loss does not guarantee that risk is lower. When a trader adjusts his stop loss to meet his desired number of lots and not based on a realistic and logical distance that sets the risk lower, an imbalance might occur. Learning position pricing is very important in trading and the management of your Forex trade to maintain a healthy account and to improve the implementation of risk reward in every trade.
- Complex Indicators
One of the common misconceptions of Forex traders is in the use of fancy indicators. This belief is tied to the notion that fully understanding these complex indicators is needed to be profitable in trading. With this, traders might focus their attention more on the forex trading indicators rather than the price movement from where these indicators are derived. This distraction can cost you in Forex trading. The reality is that these indicators are not giving any advantage that a simple price chart can’t provide. As previously stated, they might even be a source of distraction because they tend to block the information that the price chart is giving with their fancy colors. A price action can predict the next movement in the market; the trick is in knowing how to interpret the data correctly. When you start to trade with price action and understand how simple it works, it will be easy to see why trading with indicators only complicates things in your Forex accounts.
- Winging it
The lack of a solid plan or the idea that traders do not really need to formulate one is a dangerous mistake in the world of Forex trading. Much like any other business, a plan is needed in order to make trading grow and prosper. A business cannot survive if it bases its actions exclusively on momentary decisions. Forex also needs a well-conceived forex trading plan for anyone to achieve success. It is very easy to lose track of yourself and your actions when trading in the market. A plan must therefore be created so that you have the path you want in front of you to minimize the possibility of you losing track of your goal. The world of Forex might lure traders in with the unlimited profit they could make and this is why they often forget the risks involved in it. Having a strategy is certainly helpful to keep you from being distracted. Having no plan is similar to letting yourself be vulnerable to all the risky allures that trading might pose. In order to avoid them, a trader must create a plan and see it through.
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Trading at shorter time frames
In my 10 years of experience, it amazes me how beginners trade in a shorter time frame while I usually only look at the daily and not less than 4-hour charts to monitor my trades. I even get emails from individuals who want to know how to trade in the 15-minute charts or sometimes even lower than that. The reason why I prefer using longer time frames is simply because it helps me concentrate my efforts on them. This is harder to do with shorter time frames. Longer time frames filter out price fluctuations in order to have a better picture of what prices are going to be like which is mostly not shown in shorter frames. A strategy having a longer time frame along with price action can be an effective one for any trader.
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- Being impatient
Patience might not be the virtue of rookie traders. The main reason is that beginners usually have wrong misconceptions about trading, one of which is the idea that trading can fix any financial trouble an individual might have. The idea of freeing yourself from a job that you hate or having extra income is attractive bait for most potential traders. While this is not a wrong motivation to have, having the need to make it work because you have no other option is almost usually going to drag you down from success.
A trader must take loss lightly, meaning, a trader should never put in money that he is not willing to lose in the first place. Trading, just like any other business, requires a substantial amount of risk. A trader should be completely fine with whatever happens to his trade. Once a trader lets go of the notion that Forex trading is the only option to make their lives okay, then he would need to have more patience in trading. Being patient will really improve not only your emotional stability but your profitability as well.
- Profit taking
Hope might be a great thing to feel in every aspect of life except in trading in the financial market. Often it is hope that makes a trader lose. Players in the market hope for larger profits and to gain back their lost capital. Traders often miss out on the fact that Forex doesn’t run in a straight pattern for a long time. It bends and it curves and it will be almost impossible exactly how it is going to turn out the next day. Taking profits as they come is simply the best way to earn profit. Not only does it guarantee profit right there but it also protects you from emotional trading. The constant hope of having more profit than what you already have is dangerous; instead, take whatever small profit you acquire and move on to the next trade.
That is why I recommend traders to take profits twice or thrice the risk because wanting to have higher profit above 3 times might prove to be unrealistic. The prices tend to fluctuate but it does not often do so significantly. Once it reaches 2 or 3 times your risk it might reverse and go back to your original entry. This only brings you back to square one, so it is better if you take profits when they are there. Otherwise, they are likely to disappear very quickly. These situations can easily shake up new traders so I end this article with a famous line from Kenny Roger’s song: “You’ve got to know when to hold them, and know when to fold them.”
- Trading excessively
Over leveraging and overtrading are the quickest ways to become a full-fledged emotional trader. Overtrading is a crime that most traders are not even aware of committing. Often they are way in too deep before realizing it. Beginners usually skip the demo trading part and jump right into live trading without being properly informed about the basics of trading and not having a chance to formulate their strategy through a free forex demo account. Overtrading happens after a winning or losing trade. Traders should always keep their emotions in check as emotions usually take control at this stage. The need to recover from a losing trade or the joy of closing in on a big win is what might drive an individual to the market without a proper plan. Trading in Forex has a potential to be addictive so it is better to remember that you should trade less in order to profit more.
- Giving in to your emotions while trading
It is easy for emotions to get out of hand during trading and this is also the reason for failing in trade. Losing money is equivalent to losing your temper. This kind of trading is a result of doing other things wrong like the ones in this article. These mistakes can produce unwanted emotions within the individual and these are harder to control since there are physiological issues that cannot be eliminated immediately. This can only be eliminated if the person would stop trading for a time period in order to recollect his priorities and check his emotional stability before going out and trading again.
Forex is much like an arena where one trader can learn to improve their skill and master the art of trading, but it can also be an area of self-destruction and a source of financial loss. Whichever side you are on, the winning or the losing, it largely depends on your emotional capability to master feelings and your ability to remain logical. There are other articles on emotional trading and how price action can cure it.
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