Common Mistakes to Avoid While Trading in Forex
Forex trading is no doubt a very lucrative activity but only as long as it is done correctly. While novice traders tend to make a lot of mistakes, not surprisingly, experienced traders are known to commit errors as well. If you are interested in forex trading then it is very important to know what the most common mistakes are so that you can avoid them.
Risking More Money Than is Safe on a Trade
Too many traders make this mistake because this is actually caused by a flaw in human nature. People tend to be motivated by greed and therefore they invest too much money on a trade that will not necessarily give them a profit. Quite to the contrary, they might actually end up losing money if they chase short-term profits with huge investments. It is always important to remember Warren Buffet’s rule which is ‘don’t lose money’. Therefore, it is advisable to only risk 2% of one’s available capital at any point of time. While this policy might reduce your potential profits, it will also ensure that your losses are kept under check and you won’t have to keep trading to recoup your losses. Staying calm during trading will also prevent you from making hasty decisions. You’ll have to be on your toes all the time, but will be able to increase your profits steadily.
Clinging to Loss-making Positions
Many traders hang on to their loss-making trades because they don’t want to close it at a loss. What’s more, they continue holding the trade as the losses mount. If they hold it long enough there is a chance that the position reverses and the loss decreases, eventually turning into a profit. The traders close the position as soon as it turns a profit instead of waiting for it to climb further. This policy ensures that losses tend to be much higher than wins, with the result that the trading capital gets depleted steadily. A better strategy would be to try for at least two points in gains for each point risked, although gains of three or four points would indeed be desirable. Therefore, if you make losses on your trades, the winning ones will help you make profits overall.
Focusing on Short Term Time Frames
Forex trading is no doubt a fast-paced enterprise, but many traders make the mistake of using short-term charts of five or even one minute. The problem with this is that traders remain ignorant about actual trends that might be developing over a longer period of a few hours or even a day. Since the longest trends tend to be the strongest, it is extremely unwise to not study them. Traders who depend on short-term time frames can no doubt make money but only if they maintain a high level of discipline by setting up tight targets and stops and also sticking to them under any circumstance.
This strategy requires a lot of hard work and should never be done on the basis of mere guesswork. It is easier to manage risk when one is using long term charts since there is a good chance that trades will mature properly. In other words, it is best to do fewer trading activities than more, because of the chance of making more money and keeping losses under control.
As you can see, there is immense potential to make money from forex trading as long as one avoids common pitfalls. It also helps to use the services of a really good forex broker who provides plenty of information and analytics that you can use to make the correct trading decisions.