The 5 common mistakes people make when trading Forex
The fast moving landscape of the Forex market is a trading environment like no other. Fortunes are made and lost overnight and often, when traders are on the losing end of a trade is id down to simple mistakes. A disciplined trading strategy is a trader’s best friend, let your discipline slip and you are doing nothing more than gambling.
Forex trading has enjoyed somewhat of a renaissance in the last year or two and this is in-part down to the rise of the online trading platform, such as the ones offered by CityIndex. Online trading platforms give individual traders access to a range of markets, including Forex
Here are 5 common mistakes made by Forex traders and how they can be avoided.
Look Before You Leap – Avoid Pre-Positioning
Pre-positioning is the act of executing a position on what is little more than a hunch. The trader is in effect trying to predict the future. Even if you as a trader think you know the outcome of a particular report or announcement it is bad practice to open a position on that assumption. The best practice is to execute a position, having had a particular piece of news verified and once you have seen how the market reacts. So keeping your ear closely to the ground and your eyes on the charts is paramount.
Risking Too Much Capital
It is very easy to get carried away, your trading strategy goes out of the window and you end up making mistakes and losing money. Risking too much capital is a common mistake made by traders and tends to result from the heart ruling the head. It is important to be disciplined about the amount of capital you expose to risk, many traders will only expose between 1 and 5% and depending on your own personal circumstances this is a sensible figure to adopt.
Similar to risking too much capital is overtrading. This leaves you with diminished margin collateral and reduces your ability to “ride a storm”. Basically, you are exposing yourself to too much risk and not focusing on a fewer number of positions that are better thought through. Overtrading is not recommended at the best of times, but for inexperienced traders in particular it can put you on a road to nowhere.
Leverage can be a really great option for traders, particularly those who don’t have a huge amount of liquidity. It is, however also something to be wary of, when you open a highly leveraged position you must can see profits shoot up really quickly, but also losses accrue quickly as well. Even small movements in the markets can see your position grow or shrink at what can be an alarming rate. To avoid overleveraging you need to work out the size of the position after leverage and not just how much of your own capital is being exposed.
Take the Money
Another important element to your trading strategy is planning when you will close a position. It is easy to get drawn into holding a position open if the market is going your way, but this can often be a mistake. Having a predetermined plan of when to take a profit or a loss is good practice and can help you have a more sustained success rate. Limit stop orders are good to use, they automatically close the position for you and take away the human element to decision making.
Learning to trade Forex successfully does not happen overnight and if you want to make sure you don’t walk away empty handed, then it crucial that you learn about the commonly made mistakes before you begin trading.