Personal Finance

4 Forex Trading Mistakes To Avoid

Despite being a financial risk, many people still make plenty of mistakes in the foreign exchange (forex) market, which can even result in hefty losses. Novice traders often make these trading mistakes. That’s why being aware of these errors will help both beginner and expert traders become more efficient in their trading journey.

So even if you already have experience in forex trading, here are some mistakes that you should avoid:

1. Failure to come up with a trading plan

Even before you invest in any market, it’s vital that you come up with a trading plan. Failing to do so will almost lead to losses, discouraging you from continuing. Take a day off to sit down and write a list of rules to serve as a guide in your trading and money management. (1)

To help you out, here are some questions that can guide you to success in forex trading:

  • When to enter a trade?
  • What gains are you targeting?
  • Which currency should you focus on?
  • When should you exit a trade?
  • How much are you willing to lose?
  • What is your budget? (1)

Once you have answers to these questions, it’s time to analyze if you can achieve these goals. You can use some free trading charts to help you see trends and eventually perform competitively in the market, allowing you to come up with informed answers to the questions above.

2. Not using the instruments in trading

A critical instrument in trading that you should definitely utilize is stop-loss. A stop-loss is a set order that allows you to get out of a trade if the price of a particular currency moves against the amount you set.

By having a stop-loss order on all your trades, you’re reducing the risk of all your investments. Hence, any loss you might incur will be manageable on your part since you’re the one who set the stop-loss.

Here are other instruments that you should know and use:

  • Leverage
  • Candlesticks
  • Indicators (2)

3. Continually trading despite losing

In addition to the instruments mentioned above, an expert trading tip for entrepreneurs, beginners, and experts is to keep a close eye on two important trading statistics: the win rate and risk-reward ratio.

The win rate refers to the percentage of how many successful trades you make. For instance, if you’re successful in 60 trades out of 100, your win rate is 60%. Experts advise that your win rate should be equal to or above 50%.

On the other hand, the risk-reward ratio is the percentage based on how much you win relative to how much loss you incur. For example, suppose the amount of your average losing trade is USD$50 and your winning trade is USD$75. Your risk-reward ratio is computed as follows: USD$75 divided by USD$50, which comes down to 1.5. A risk-reward ratio of 1 means you’re losing trades. However, a successful trader should have a risk-reward ratio above 1.25.

Take note that you can still be profitable if both your win-rate and risk-reward ratio are lower than the recommended figure. But it’s still best if you keep it simple. There’s no need to possess some strategies that allow you to go above the recommended risk-reward and win-rate ratios.

4. Doing less or no research

The more time you dedicate yourself to studying the market, the greater you’ll understand the game. This means you’ll have a better chance of successful trades. Make sure to always allocate some time in the day for any updates and news about the world of forex.

Moreover, don’t limit yourself to a single source. Instead, you can also watch the news regarding the economy and any decisions the central bank made, apart from the various sources available on the internet. This type of news can have a significant impact on the market, so being aware of it will lessen the chances of you committing a mistake. Conveniently, news always follows a regular schedule, so you can trade after making an informed decision. But remember, it’s still not easy to predict the market even, so always trade with caution.

Takeaway

Before doing any form of trading, it’s important that you have the foundation first. Fortunately, this article already presents some mistakes you should avoid, which means it can serve as a stepping stone on your trading journey.

Also, keep in mind that regardless of the experience level, traders will still eventually make some mistakes, so don’t cling to it too much. Instead, take it as a lesson to sharpen your trading skills further. By knowing the do’s and don’ts of forex trading, you can minimize your errors and take a step closer to success.

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