The forex market has lower entry constraints, and hence, this makes it one of those markets with the maximum number of participants and is more than liquid.
The forex market is responsible for more than 6 trillion dollars traded in one single day. If you have a reliable internet connection, a computer and some money, you can easily day trade.
The ease of access does not mean that there will be a for sure profit. There can be situations where you fall in the market, and here are ten common mistakes that can be easily avoided.
Trading after consecutive losses:
Two trading stats have to be watched closely when trading in forex. The rate of winning the trades and the risk-reward ratio.
Win rate is simply the number of trades won, expressed in percentage. For instance, if you win 40 trades out of 100, the win ratio is 40%. Therefore, the day trader should work towards keeping the win rate above 50%.
The risk-reward ratio is how much the trade wins as compared to how much he or she loses.
If the average losing trades are less than the winning trades, that indicates that the trader is in profit at the end of the day. The ratio above 1 means that the trader is losing as much as he is making.
The day traders need to keep their risk-reward ratio above one and, in ideal cases, above 1.25. They can still profit if the winning rate is less and the reward risk is a bit higher vice versa.
The more simple things are kept, the better they are. Strategies can be developed where the traders win more than 50% of the time, and their risk-reward ratio is often over 1.25
Trading without a stop loss:
Trading without a stop-loss order is not just a bad practice but is also toxic for the trader because once that begins, the traders forget about the price levels that can eat their capital. There are certain price levels that, if breached, can destroy whatever that investment is and also, move ahead and begin eating the capital.
The stop loss makes the traders exit the trades automatically as soon as the price reaches such levels.
Trading in forex without such things is a bad idea, and there are also situations where the stop losses might save the trader from imminent losses. Hence, never trade without a stop loss.
Trading more on a risky position.
A common mistake that a lot of traders do is that they begin adding the trades to the position they are at and this is after the fact that the market has already begun moving against them.
The reason behind this blunder is the mentality that tells the traders that the trend will reverse. Things like this can always make the loss grow exponentially and still, the price can keep moving against you.
What the traders can do is take the right position size and then set a stop loss on that trade. If the price goes to the stop loss level, then the trade will be closed and the loss will not be as large as what could have happened in the case of a trade without a stop loss.
Trading more than that can be lost:
The main idea of the risk management strategy is to create a concrete calculation of how much capital can be risked on each trade. The day traders should technically be risking less than 1% of their total capital on each trade.
This means that when the trade goes wrong, the loss should be less than 1% of the total capital.
This means that even if the trader is consistently losing the trades, there will only be a small amount that will be lost at the end of the day. If the trader risks more than 1% and still makes the wrong trades, then the loss will naturally be amplified.
Another thing that can be done to manage the risks in forex is to control what you lose daily. If you are risking just 1%, re can be a substantial loss if the trades made are wrong and are multiple. The traders can do here to set an amount that they are willing to lose every day. If you have decided that you will risk only 3%, then stick to that.
Revenge Trading in forex
Even if there is a risk management strategy in the right place, there will be situations where you might ignore all the red flags and trade on a larger position than you usually do. The reasons for this can be different, and you might make those trades because you want to catch up with some of the losses you might have had.
Every trader knows that once a month, there is one day, and on that day, there is a trade that will earn them money. Most of the traders risk it all on that trade. Don’t be like most traders.
Risking too much is always a mistake, and mistakes tend to add up and compound. Unfortunately, many traders get caught up in the mix and ignore their stop losses, strategies, and, most importantly, the risk potential of their capital.
In such a situation, always stick to the 1% rule for each trade and the 3% rule that is there for the forex trading day. Always try and resist the temptations. Stick to the risk management strategy you have in place and avoid adding more funds to the position at all costs.
Trading forex in anticipation:
There are chances that a pair will move after certain news hits the market. The pair will move but making the trades before the news is out is risky. This puts you in equal probabilities of a loss and a profit.
The winning trades can be made only after the news is out, and speculation does not put you in a place where you can 100% win a trade. Speculation is just probability, and probabilities are probable, not a certain event.
Mostly, the price of a currency pair will move randomly after the news is out, and it will do that for a certain amount of time before it stabilises and moves in one single direction.
This means that it is just as likely for you to lose a trade as it is to win a trade.
Not just this, news trading has other problems as well. The initial moments after the news is out, the spread between the ask and bid price is larger than usual. There are chances that you won’t find the liquidity you might need to get out of the positions at a price you want.
Rather than anticipating where the news will take the market, make a strategy that will get you inside the trade after the news is out. You can always make profits off of the volatility without the risks being persistent.
The non-farm payrolls forex trading strategy can be a prominent example of this kind of an approach.
The Wrong choice of a broker:
Depositing funds in your brokerage account is the most significant trade you will ever make. If the broker is a poorly managed firm, or even worse, if the broker is a scam, then all the money can die in an instant.
Take your time in choosing the correct broker. Before getting financially involved, you should always consider what you are looking for, from trading and is the broker ready to deliver that?
If you are a beginner, we recommend the leading online broker Capitalix. The broker has been in the market since 2019 and has been doing nothing but obliterate the competition ever since.
With HFTrading, the traders can trade over more than 300 CFD tradable assets that can be traded with three different trading accounts.The broker is a trading name of CTRL investments Pvt. Ltd and the parent firm is regulated by the FMA.
HFTrading offers the clients an opportunity to be in the market with one of the most reliable trading platforms ever built, the MT4 trading platform. With the platform, the traders can trade in forex with ease.
Remember, Diversification and correlation are different:
There could be chances where you are thinking that you are diversifying your trade, spreading the risk at the same time but look closely, you might be increasing the risks instead of spreading it.
You might see the similarities in some forex pairs as to how they are reacting to the market and you make small trades in a couple of them.
In such a case, the chances are that the currency pairs will move in a similar fashion. If one plunges, all of them will take a fall.
This can also be a different picture than if one goes up, then all of them do but think about it, what are the odds? If you are trading in a lot of different pairs, make sure they are moving differently.
Do not day trade on fundamentals.
It is easy to assume things when you are looking for reasons to be biased. For example, if you are about to trade on a pair and you read an article that speaks a lot about how bad the economic condition of the involved country will be because of an announcement that just happened. This article can cloud your judgement and make you biased towards an opinion.
Always remember, day trading has nothing to do with the fundamentals. All you have to do is to apply the trading strategy that you have devices or are following. It does not matter if the fundamentals indicate that the price will fall. Take the positions regardless.
The fundamentals of an asset have nothing to do with its results in the short term. Fundamentals can have a different opinion of an asset as compared to the opinion the technicals might hold. You have to stick to the technicals in the case of a day trade.
Always have a plan:
A trading plan does not sound like I will invest here today and will be rich three days later. The trading plan ideally, should be a written document that traces your strategy in accordance with your financials and trading goals.
The trading plan has the answers of what, when and how to trade. What should be the time and what should be the timeframe to analyse the markets for the maximum results.
The trading plan should be able to outline all the risks and the risk management tools and should clearly have the reason to exit the trade before the reasons to enter that trade.
If you lack a trading plan, then you are gambling, not trading.
Create a forex trading plan so that you can test the profit rates of a particular strategy in a demo account or a or a trading simulator. This is crucial bfore you really enter the market with real money.
Day trading in forex is hard. Things like leverage and CFDs make them look easy, but the reality is far away from that.
These are just 10 mistakes that you can avoid, there are a billion mistakes that traders do and to be very honest, it is almost impossible to avoid all the mistakes because we are humans after all.
What you can do instead is, be attentive and be open to accepting the mistakes that you do in the market. Because the more you accept your flaws, the room for improvement gets bigger. Always remember, there is always roof for improvement in everyone.