Common mistakes you should avoid when trading in Forex
One of the best things about trading Forex is the fact that it is a large international market, which is accessible and has excellent leverage and liquidity.
However, as in all forms of trading, care must be taken when trying to maximise returns. If you see the first signs of loss, it is important not to react rashly in an attempt to recover your losses immediately.
This can be a big mistake as it not only wastes time and depletes capital reserves, but also means that you are neglecting the opportunity to invest in other avenues which may provide a higher yield.
If you find yourself sustaining a loss, it’s better to move on, rather than trying to retrieve lost capital, as such a strategy could serve to cripple your capital growth. Thus moving on allows you to build a stronger platform rather than becoming stuck in a downward spiral of losses with a bad punt.
Besides which, when you are investing in exchange which is falling, it is important to be aware it could also fall still lower, meaning that you lose yet more. Moreover, by averaging down your losses, a currency could still take significant time to rise again, by which time you will have effectively sustained greater losses from losing out on other more lucrative investments.
As a seasoned Forex trader, there are well recognised peaks and troughs which occur on the back of regular financial news bulletins. To react on the back of such volatility is a mistake that many inexperienced Forex traders make. News bulletins such as the weekly financial forecast from the ECB each Thursday can cause market fluctuations and as a result it is easy for traders to get swept up in such a surge. Whilst it is sometimes difficult to predict the direction of a market, knowledge is power and if you want to protect yourself from the buffets of volatile markets, then it is best to at least wait until the effects of the news on the market settle. Hold back and avoid trading rather than risk unmanageable losses by chasing small profits and trying to outguess the market.
Whilst Forex markets are highly leveraged and can prove tempting to take big risks, this can be mistake. For each trading position it is wise not to exceed 2% risk for the capital invested. Professional traders may take a higher risk, but more amateur traders should trade with caution. It is best to make steady profits and manage volatility, than risk making large losses which can take longer to recover from.
Sometimes it can be tempting to look around for more attractive yields even if your portfolio is providing a steady growth. This can be a mistake as, a slow but steady yield is often better than a dramatic rise and an even more dramatic fall! Use your success to look at maximising your returns without maximising your risk.
Regardless of how seasoned a performer you are in the forex market, ignoring stop losses can be a massive mistake despite how much you feel you can afford to lose. Plan your trading strategy and stick to it and make sure that there are regular stops in place before execution of the final trade is applied.
When deciding on position size, being too ambitious can be an easy mistake to make. Take into account your risk profile and the losses you can easily manage without affecting the rest of your portfolio. Getting the balance right for your position is vital if you are to steadily maximise gains.
Take the emotion out of trading and don’t react to volatile markets in panic, remember it’s not a race to the finish but the journey which counts. Slow and steady will always win the race.