Hi beatiful hive community, today I want to talk about common mistakes day traders of the forex market make when trading and how to avoid them.
The foreign exchange market(forex or FX) is one of the most easiest market to start. As far as you have a working computer with internet connection and enough dollar, you can start day trading and that is why it is one of the mist traded market in the world. Well the issue here is that easy access doesn't mean fast profit. Infact its because of such easy access that many people enter trade anyhow and loose their money. So lets get into those common mistakes and how to avoid them or solve them.
- When you continue to loose you keep trading: people tend to make these mistakes because they ignore these two trading statistics; win-rate and reward-risk ratio. Your win rate is the rate at which you profit from each trade e.g in a day if you profit from 75 trades out of 100 trades then your win rate is 75%. Then your reward risk ratio is how much you profit to how much you loose on an average day trade e.g if you loose $20 and win $80 on an average day trade. Then your reward risk ratio is 80:20=4. When your reward risk ratio is 1, it means you are loosing as much as you are winning which makes it a bad trade. Try to develop a strategy that will make your reward risk ratio ideally above 1.25.
- Entering trades without placing a stop-loss order: many traders make the mistake of not putting stop-loss order which will result in a huge loss if the market move against your trade. Stop-loss order is an order that closes your trade by the amount you specified when the market moves against your speculation. The advantage with this stop-loss order is that its prevents you from loosing more than you can afford.
- Trading with money that you can't afford to loose: some traders put in much money in a trade only thinking of the huge profit they can make and ignoring the fact that they can also loose a huge amount of money. As a day trader you should have a risk management strategy to know how much capital you will be willing to loose if the market goes against your speculation. A day trader should risk at most 1% of his capital per trade. Also you should establish how much you are willing to loose per day for example if you loose upto 3% of your capital then you should stop trading for that day because being stubborn and going on with the trade might just make you loose more. Try to be discipline, risk only money you have set aside for the day, and stick with your strategy.
- Choosing the wrong broker:
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now here is what some people wanting to start trading tend to ignore, because depositing a huge amount of money in a broker that you do not know much of, is one of the biggest risk you will take in your forex trading career. It is very advisable to take your time when choosing a broker, because choosing the right broker is the begining of your success as a forex trader. There are five things you should do and/or look out for when choosing a broker; knowing what you want to accomplish with it, what the broker offers, using reliable sources for broker referrals, testing the broker using small trades at the initials and lastly don't accept offets of bonuses with their services, because 90% of the time its for their own interest.
- Entering more than one trade that are correlated: a wise man once said "diversification is protection against ignorance. It make little sense if you know what you are doing ". People that believe in such sayings may tend to take multiple trades thinking that they are spreading their risk but this can only be true if the currency pairs they trade are not correlated because if they are, then they will move or trend similarly in the same direction, which means that if you are loosing for one trade, you will be loosing for all trades. So its best to take multiple trades on currency pairs that are not correlated.
- Trading with fundamental/economic data: the thing here is that trading with fundamental analysis is not at all wrong but it will likely not work for day traders because its meant for long-term traders and it causes short-term traders to focus on wrong concept and form baises. One of the reasonable solutions here is to trade with technical analysis.
Ok, that it for this post, hope you guys liked it and also learnt something.
THANKS FOR READING. GOD BLESS