COMMON TRADING MISTAKES
Forex trading looks a little intimidating to the newcomer – it has its own jargon, the charts and graphs are complex, and there are potentially hundreds of currency pairs to trade. A smart trader can make sense of it all, however, and get a quick start in the market, by remembering to avoid some common mistakes.
DON’T IGNORE THE DEMO ACCOUNT!
The first, and in some ways most important, mistake that many new traders make is to ignore the demo account option.
Don’t do this!
The demo account is offered for a reason, and that reason is to make your trading easier and more profitable. By using a demo account, you can practice trading, test your strategies, see which assets and currency pairs are right for you, and familiarize yourself with the trading platform – all without putting your own money at risk during the learning process!
Remember, your first trades will most likely not succeed. You may even need a few weeks to learn the ins and outs of the forex markets before you start making money. Setting up a demo account lets you get through the growing pains phase of forex trading without losing any real money. Use the demo account, and when you are ready, open a real account a put real money down.
DON’T FORGET TO MAKE A PLAN!
Too many traders, once they pass the demo account stage, think that they can follow their gut. Don’t fall for that. Financial trading isn’t romance, it isn’t baseball, and it most definitely is not an improve session. You have to trade with a plan.
When you trade, set your feelings and emotions to the side. They can only lead you astray. Make a plan, set your trading limits, and stick to it.
DON’T FORGET THE MONEY MANAGEMENT!
Forex newcomers also find that it’s easy to lose control of their money. You don’t need to be rich to get into the forex markets, but you do need to make sure that you don’t run out of the capital that you do have. This is where money management comes is.
Money management is simply the art of treating your money like the business that it is. You need to make sure that you have some set aside for making trades, another sum set aside for meeting margin, and a reserve set aside in case of unexpected losses. If this means that you have to accept a lower trading volume and smaller profits at first, while you slowly build your capital, then do it. Remember the tortoise and the hare? Slow and steady won that race, and you can treat forex trading the same way. Manage your money to make it work for you.
It’s very easy to trade excessively. Perhaps you just made a great trade that landed you a big profit, or perhaps you just lost more than you expected – in either case, it’s natural to try and win again, or chase the loss to win it back. And in either case, it’s just as wrong.
This goes back to sticking to a trading plan. The best thing you can do when you have a big profit or loss, and have closed out the position, is to sit back, take a deep breath, and clear your head. Try to analyze the transaction rationally. Look at the way it affects your money management. Don’t open a new position right away.
A good rule of thumb to follow is, always close out your trading once you’ve seen a change of 10% or more – up or down – in your underlying capital. That’s the time to stop, step back, and reassess your trading plan.
Leverage is a powerful tool. Simply put, it’s a loan from the broker that allows you to open positions with much less capital than would normally be the case. Using leverage will open the prospect of making larger profits, but it can also magnify losses. It’s the prospect of multiplying profits that causes most new forex traders to overindulge in leverage.
The best thing to remember about leverage is that you are not required to use all that is available. Just a like a credit card, where you are frequently allowed to spend more than you actually do, many brokers will offer leverage up to 200:1 or even 400:1.
Don’t go there! Just because the option is available, doesn’t mean you have to take it.
Admittedly, most traders do use leverage, and it can be a part of a wise trading plan. It can make your available capital go further with every trade. Experienced traders know, however, that it’s best to keep the leverage at a manageable level. A good ratio to use will lie somewhere between 5:1 and 10:1.
In conclusion, forex trading offers newcomers a series of pitfalls when it comes to getting oriented in the markets. Foresight, patience, and a bit of basic financial wisdom will help you get through them, and onto a path of successful trading.