Forex trading is one of the most easily accessible day trading markets. Usually, all one needs is a reasonable amount of money, a computer, and good internet connectivity to get started. On the one hand, this is good as it means more interested parties gain access to the forex trading profits pie. On the other hand, however, it is more of a downside as most people tend to make a run for it without learning the ropes first. As a result, they end up generating losses within the first few months and wonder where they went wrong. That said, read on some of the top mistakes to avoid if you are planning on taking or recently took the plunge into the world of forex trading.
Common Forex Trading Errors to Avoid
Making mistakes is part of the learning curve in the forex trading market. However, making them repeatedly can prove to be quite costly. That is why you need to be well informed about some of the top trading errors day traders make and work towards avoiding them
- Trading Based on Performance
Trading based on performance is a mistake common not only among novice traders but also the experienced ones. Most of them usually tend to select their strategies, forex brokers, and even asset classes based on strong past performance.
What they don’t realize is that a strategy that might have been effective three years ago may not be as effective today. In other words, it might still be fruitful, but it’s probably nearing the end of its great years.
Therefore, while performance is an essential factor to consider, it shouldn’t be the only factor you consider. Analyze all relevant factors first, and strive to learn more about a particular broker, strategy, or asset class before you make your final decision.
- Not Having Stop Losses
The forex market operates in a very straightforward manner. That is, the more the sell orders, the lower the market will go, and the higher the buy orders, the higher the market will go. Stop orders usually help limit losses when there is a higher number of sell orders, or whenever there is an adverse market movement.
Unfortunately, most traders usually prefer not to use stop orders as they are so caught up in the idea that the market might start moving in the profitable direction immediately it hits their stop limit. They think they will be locked out of profitable price trends once they are stopped out. Well, the truth is this does happen sometimes, but not always. Therefore, as much as you do not want to miss out on any profitable opportunity, you should make good use of stop losses as most of the time, they help prevent imminent losses you didn’t see coming.
- Over diversifying too Quickly
Diversifying your portfolio helps spread risks, and gives you a place to bounce back on when you incur losses on one of your portfolio. However, over diversifying your portfolio is not a good idea as it means more work. How? Well, having to many positions at the same time means you’ll have more markets to keep an eye on every day. This can easily overwhelm you, and as a result, you might miss some critical market movements on some of the most significant stocks in your portfolio while focusing on the insignificant. Therefore, as appealing as an over diversified portfolio might seem, only invest in the positions you can comfortably manage.
- Emotional Trading
Forex trading is a game of numbers and is often influenced by external factors traders have absolutely no control over, for instance, governments. That said, there are times the market will work in your favor, and there are times you will lose.
Also, keep in mind, there are plenty of experienced trading professionals, and none of them will sit and watch you walk away with their money. So, don’t let your emotions guide your decisions as you are going to go home a dejected person every time.
Instead, make logical choices based on the variables affecting your trades. In other words, the only way to beat professionals at their game is to do like they do. That is, ensure you have and follow a trading strategy instead of blindly entering a trade.
For instance, it’s okay to be happy when you win trades. But don’t let this happiness take over you as it’s during such moments that you over-leverage and as a result cause damage to a trade that was already going well. Instead, stick to whatever strategy you had in place before the wins.
Note, emotional trading is something that even the most experienced traders struggle with regularly. Therefore, there are moments that you, too, will find yourself struggling with it. So take time to learn some of the signs of emotional trading, so you can snap back to reality the moment you notice you are walking down that road.
Over to You
Every trader makes mistakes, but some of them are avoidable. We’ve highlighted some of the most common, yet damaging mistakes you could make and how to avoid them to help make your venture smooth sailing.
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