Trading forex on margin can carry a lot of risks that may not be suited to investors and traders from all backgrounds. The high level of leverage that exists can work for you as well as against you, depending on your actions. Thus, before investing in the world of forex, you should carefully evaluate your financial and investment objectives, level of experience, and appetite for risk.
In the last decade, the growth of internet connectivity and the emergence of several online trading platforms seen the participation of novice traders skyrocket. However, because of a lack of judgment, less experienced, and certain situations, novice traders can lose a lot of money too if they don’t play their cards right. Luckily there are certain things they can learn from the experts in this field, especially from their trading behavior and practices. With that in mind, here are eight costly mistakes that expert forex traders never commit.
Not Finding A Balance Between Discipline And Risky Behavior
Many novice traders make the costly mistake of not maintaining a balance between risk and trading disciplines. There can be many reasons for this, including emotions such as greed, or an unexpected winning streak which can force a trader to take risky trading opportunities. This often ends up in a loss.
To be a good trader, you need to maintain this balance. There are many people who are too wild or lack the discipline to succeed as a forex trader. There are others who are too risk-averse to take good trading opportunities. To find a person with a perfect combination is quite rare. Most experienced Forex traders are either risk-averse traders who take risks in a meaningful way or have a risk appetite and find systematic ways for risk management.
Not Implementing a Consistent Daily Routine
Expert forex traders always take adequate preparation before they start their trading sessions. Many novice traders make the mistake of jumping into the market too quickly. Experienced traders on the other hand usually have a process and a plan before they hit any buy or sell keys. Start nurturing the habit of maintaining a sheet that will help you gauge where you are emotional. Setting a profit target and a stop loss number beforehand is very necessary. This can help to enforce discipline on your trading actions so that you will know when to stop yourself from trading or when to take some profit.
Trading Without Stops
A stop loss is a type of order which prevents a trader from losing more than they should if a trade goes wrong. The main difference between an amateur and professional trader is that the former think about profits only while the latter takes into account the risks. To be a successful trader, make it a point to never trade without stops in the forex market. A forex market is a place where volatility can last far longer than any other market. Thus, trading without stops can be likened to jumping out of an airplane without any parachute.
When a trader loses his/her own money in the forex market because of a wrong decision, their natural reflex is to try and win back all the money they have lost. However, while doing this, it may so happen that they are unable to make the same amount of money, incurring additional losses as they keep on trying. This is what is known as “vengeance trading” and is the cause for more frustration and anger.
Traders should consciously stay away from vengeance trading. A loss, no matter how big it is, will only be compounded if it is accompanied by a loss of emotional control on your part. Control your emotions by physically shutting down your system for a few days and take some time off whenever faced with a losing streak or a similar situation.
Using Dollar Cost Averaging in Forex
Many forex traders apply the principle of Dollar-Cost Averaging in the forex market as they do in other markets. However, experienced traders know that it is akin to suicide when applied in the FX market. Unless one is a trader with advanced skills who knows how to scale in trades or build their position, it is generally discouraged for forex traders to apply cost average investing in this market.
The main reason for this is the very nature of the forex market, which is a pure two-way street. The prices of the currencies can go either way (up or down) for an extended period of time before heading back up.
Moving Stops to a Worse Position
It may so happen that you are in a trade and have placed your stops. The market then moves against you and you are about to be stopped out. The general tendency among traders is to move their stops away from the price in this scenario, which will make their trades last longer. Human beings are wired to hope for the best when the situation gets tough. However, in the forex market, hope is usually punished if the traders let it get out of hand. Thus, after calculating your stop, you should always treat it as a rule which cannot be changed. You should move your stops only in one direction and in a better position.
Improper Position Sizing
Correct position sizing can be considered as a combination of carefully using stop-loss orders and following sustainable risk-reward ratios. It focuses on the total risked amount on every single trade. It is normally recommended that you risk only up to 1% of your whole trading account on each trade. This means that your stop-loss order should never exceed the above figure.
Many traders start trading with the goal of earning a fortune over a short period of time. Contrary to popular belief, this is actually not true. Having unrealistic expectations like this is a crucial mistake to commit. It is also behind the majority of instances where traders end up wiping their accounts within a few months. To get past this, novice traders should always focus on developing their knowledge and skills by using a demo account, or something similar where they do not have to risk any real money.
The trading decisions and actions that were taken by a trader can vary according to their background. Following the above tips, however, will increase your chances of attaining success in the forex market, and by extension, prevent you from making such amateurish, costly mistakes.