Let’s agree on this straightaway. If you trade currency you will make mistakes. Trading mistakes in the Forex markets are common and are made by newbies and seasoned veterans. It doesn’t matter if you’ve been trading one month or 20 years, you are going to experience making a mistake. We have told you about emotional decisions and certainly those can cause trading mistakes. You may experience lapses in discipline or you may become victim to unforeseen market developments. We’d like to make you aware of some mistakes that you can control.
The most common currency trading mistake is either holding or taking a profit too soon. There is a balance that you need to establish. Holding onto a position to all will deplete your capital very quickly. The key element to avoiding this mistake is to follow your trading plan, that has a built-in stop loss and stick with it. Your emotion will take control of the trade if you allow it. You must follow your plan even when losses occur.
That brings us to another common mistake and that is trading without a plan. If you open a Forex account, and you don’t have a solid trading plan, you are essentially asking the market to take your money. For example, let’s say the market moves against you. When do you cut your losses? The same is true working the trade from the other side. When do you take your profit? If you have not determined when you will cut your losses and when you will take profits and those decisions are not predetermined, you will lose. Either in profit or losses, but you will lose.
If you are trading without a stop loss, you are setting yourself up for another failure. If it were possible for you to be correct on 100% of your trades, you would not need a stop loss. However, if you’re like the rest of us mere mortals you are going to be wrong a percentage of the time. Having a stop loss in place will let you trade another day. A stop loss is an important component of a well thought out trading plan.
Let’s say you have a trading plan and you have stop losses built into it. Many traders began to move their stop loss orders from place to place. These kinds of decisions are generally made on emotion when the trader sees a rapid fluctuation in price. Combined with the human nature of wanting to make a larger profit the traitor moves his stop loss. This kind of behavior also shows a lack of trading discipline. That is not to say moving your stop loss cannot work. When you decide to move your stop loss, move it in the direction of a winning trade to lock in profits. And never move your stop in the direction of a losing currency position.
Trading too many positions at one time and trading too often in the market are two more common mistakes. It is not written anywhere that you have to be trading in the market all the time. And trading too many positions at one time simultaneously is a method some traders use to try and hit it big on one trade.
Finally one of the most costly mistakes that you can make when trading currencies is over leveraging. Trading currencies is more often than not done on margin. Over leveraging can be defined as having too large a position size relative to your available margin. The risk is a small market move against you can be enough to cause your position to be liquidated for insufficient margin. Just because your broker will give you a 100 to 1 position or a 200 to 1 position doesn’t mean you have to use it all.
You should be realistic about your expectations when you begin currency trading. There is no single trade that is going to make you rich. There is however a single trade out there that will break you and your account. Try not to be perfect. Take profits when you can and avoid big losses by using a specific plan and having the discipline to see it through.
Related posts: