Forex trading can be a very rewarding and exciting challenge, but it can also be discouraging if you are not careful. Doing it well, making money and learning from your mistakes is your goal, but what are the most common forex trading mistakes people make?
In our experience, amateur and professional traders alike have made these mistakes, they fall into 5 main categories, so here they are - avoiding these trading mistakes can help keep your trades on the right track.
1. Not Doing Your Homework
Know what's going on from a big picture perspective - the macro economic level. For example, currency pairs are closely linked to national economies and are affected by many factors, a breaking national news story, positive or negative economic data, or even politics and elections, can all add uncertainty and instability to the currency markets. Because forex trading is 24/5, there is usually something going on in the world that will move the markets. You must be aware of what is going on - those who don't ... can make foolish mistakes.
Before entering a trade, make sure you do your homework. Not only should you be aware of upcoming economic and political events that could affect your trade, but you also need to forecast which way these events could swing the markets. Pay attention to what your technical indicators are telling you and how they directly compare to your fundamental event analysis.
2. Risking More than You Can Afford
A common mistake by amateur traders is they fail to properly understand how leverage works. You must familiarize yourself with the concepts of margin and leverage to avoid accidentally putting more capital at risk than you had planned.
Many traders find it helpful to set a maximum percentage of their capital that they are willing to risk at one time - we recommend 1% to 3%. For example, if you have $100,000 of equity and are willing to risk 2% maximum, you would not risk losing more than $2,000 at one trade. It is important that you stick to that maximum once you set it.
3. Trading Without a Safety Net
The reality is know one, even professionals, can watch the forex markets 24 hours a day.
Stop and limit orders help you get in and out of the market at predetermined prices. This not only allows the trading platform, such as our newly launched SCM Forex SCANDEX trading platform, to execute trades when you are not available. But it also makes you think through to the end of your trade and set exit strategies before you’re actually in the trade and it can prevent your emotional judgement getting the best of you. Placing contingent orders may not necessarily limit your risk for losses.
A loss never feels good. It can make you emotional and irrational, tempting you to make knee-jerk follow-up trades that are illogical as they are outside your trading plan.
No trader makes a great trade every time. Accept that losses are part of the reality of trading and stick to your plan. In the long run, your trading plan should compensate for that loss; if not, review your plan and adjust.
5. Not Using a Demo Account to Test Trading Ideas
Using your hard-earned cash to test a theory or a new idea with a new trading plan is almost as risky as trading without a plan at all.
Before you start testing a new plan, and trading real money, open a forex practice demo account and use virtual funds to try out your experimental trading plans and get a feel for the trading platform (check out SCANDEX) you are using.
Opening a demo account is an ideal chance to see how you react to trades not going your way and learn from your mistakes without the risk.