With the advent of the internet age, the popularity of forex trading, and day trading particular, has risen exponentially. People who previously had no access to the markets due to various constraints and limitations can now participate with little more than an internet connection and a bit of capital to start with. With every new enterprise, especially where money is concerned, caution is always key. In currency trading, there are many risks to be navigated and mistakes the experienced ones must learn to avoid in order to be successful.
An important point to note here is that in the currency markets, what you do can sometimes be just as important as what you fail to do, and the best way to try and find the right balance is to get as much quality information as possible while keeping your expectations, risk appetite, and emotions at healthy levels. It can be a challenge for anybody. To help out forex market participants, both beginners and old-hands, here’s a quick look at some of the most common avoidable mistakes and negative trading habits. We’ll get right to it.
Trading Before News Releases
This might sound a little strange, but taking a position on a particular security before some anticipated news hits is rarely a good idea. News trading, whereby the current events of the day determine the trading behavior of market participants, might seem like the natural day trading method, but it has its pitfalls. When news hits, the market expects that there will be a general market reaction or a particular related security will be influenced.
The fact is, nobody can ever be sure exactly how the market will react to certain events or news. Good news might send a holding’s value to absurd heights only to have it crash once the market corrects itself. Price action can create vast gaps in mere moments and these spreads can catch the unwary trader short. The volatility involve here simply isn’t a gamble worth the risk involved, and is a dangerous trading habit to cultivate.
Part of being a great day trader is knowing when to cut your losses and move out of a position. Being able to accept the reality in front of you – that you were wrong about a particular holding – is what will allow you to exit it once you’ve hit your stop loss criteria. The temptation to lower your stop loss levels in the hopes that the holding will recover is simply throwing good money after bad, and has no place in a winning strategy.
Taking Up High Leverage Positions
Leverage refers to the ratio of debt to equity on any purchase you make or position you take. Forex traders are a prime target for brokerage firms who offer them to traders who are unable to resist the chance to trade at levels multiple times the size of their account. The temptation of astronomical profit relative to their input can simply be too much.
The thing to keep in mind here is the fact that systematic controls and proper planning are the hallmarks of a successful trading regime, and this is what makes most experienced and successful traders keep away from highly leveraged positions except in very rare circumstances. The fact that you’re not making money trading without leverage should tell you that you won’t make money trading when you do decide to use it. Keep things simple and safe – Admiral markets recommends that you wait until the effectiveness of your trading strategies is proven before making use of leverage.
Trading More Than 1%
This is probably the most commonly repeated trading advice you could get out there, but the fact is, it’s so often ignored that repeating it here can only be helpful – never risk more than 1% of any account on any one given trade. A lot of people ignore this rule because it doesn’t fit in with the high-excitement trading they pictured in their minds or because of the finances involved in sticking with the rule (you’ll need to have $10,000 or more in an account to make a $100 trade). Day traders have a huge advantage here, as they can start off with relatively small trades with no restrictions. Stick to the rule and you can avoid quite a bit of headache down the road.
Trading for Immediate Income
Many people become traders hoping to be able to earn a livable income from it. This desire can be an overwhelming one, and it has caused many out there to forego proper planning measures. A sure sign of such cases is where a trader requires profits immediately in order to settle their bills. This isn’t what trading is about – it’s about building up sizable risk capital over time but this is impossible if money is being pulled out every so often to settle living expenses. It can also be an incredibly stressful way to operate as the profits on trades are not guaranteed and will vary depending on the market conditions.