Forex trading continues to catch the interest of many online entrepreneurs. Some are attracted to the huge potential returns that this industry holds while others are fascinated by the idea of working independently from any location on the globe. There are no huge initial capital requirements or such like barriers to entry into this market. As such, millions of people all over the world are entering the market every day.
However, there are not as many Forex trading success stories and this automatically indicates that becoming a successful Forex trader has its challenges. Research has shown that beginning traders make a number of common mistakes that cripple their progress toward success in Forex trading.
Here are 4 big mistakes you want to avoid to achieve your Forex trading objectives:
1. Failure to commit to learning
Forex training is crucial for beginning Forex traders. It equips you with useful knowledge and insights on the foreign exchange market. You also get to understand how to use your desired Forex trading software confidently.
While most aspiring traders go through some form of initial training on Forex, not many of them continue learning. They just want to immerse themselves into trading activities right away and serious learning seems unnecessary. This is a huge mistake bearing in mind that Forex markets are ever changing. One needs to continually learn and keep up with market trends. Only a constantly informed investor can trade successfully for an extended amount of time.
2. Not monitoring your performance
Many traders begin trading without understanding what performance metrics to use to measure their progress.
Your win-rate and reward/risk ratio are two very important statistics that you need to always keep an eye on. Win-rate is the number of trades won as a percentage of total trades while reward/risk ratio is a relative performance metric that measures how much a trader wins on an average trade. If you lose $100 on average and your winnings average to $150 per trade, your reward/risk ratio is $150/$100 or 1.5. Higher win-rate and the reward/risk ratio indicate better performance.
3. Poor strategizing or total lack of planning
All too often, individuals get introduced into Forex and by evening the same day they are uploading funds onto their accounts to start trading. Lack of proper planning, which involves setting up trading strategies prior to making the first trade, is a recipe for losses in Forex.
Have a trading plan that precisely outlines how you will enter and exit trade positions. Also make sure you test the strategy using a demo account before using it on real money.
Risk management is a key element of the trading plan as well. It provides guidelines on how to diversify to reduce your risk of losses. A well thought-out risk management plan will also include the use of stop loss orders so that you avoid averaging down (adding to your position as currency prices go down believing that the trend will reverse).
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4. Making too many trades
When it is just you and your Forex trading software in your home office, you might be tempted to make trade after trade, especially on good days. However, this tendency is a loss trap that can swallow your entire month profits in one sweep.
Experts recommend that beginning Forex traders start with a small portfolio then continue diversifying it gradually as they get a good grasp of the business. It is easy to monitor a small portfolio and you will avoid making small mistakes that may end up decreasing the profitability of your strategy.
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Traders who take many trades increase their chances of taking multiple correlated trades. If two trades are correlated, it means that the currency pairs in the trades move in the same direction. In case one trade returns a loss, the other gives you a loss as well. This is poor risk management and can significantly affect your business.
To avoid making correlated trades, don’t make two trades with currency pairs that have a similar trade setup.
Forex is a potentially lucrative market for anyone. Why do some people succeed while others experience crippling losses that frustrate their trading efforts? You can be a successful Forex trader as long as you take time to learn and strategize adequately how you will carry out your trades, minimize risks and maximize profits.
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