Avoiding the 5 Most Common Forex Trading Mistakes
A major reason responsible for 95% of retail traders sustaining losses in the Forex market is not necessarily a failure to register profitable trades, but rather a constant repetition of 5 common Forex trading mistakes. In this article, we examine these mistakes and suggest ways that traders can avoid them.
Mistake No. 1: The market players are squeaky clean
If you come into the Forex market with this mentality and refuse to protect yourself, you are in for a rude awakening. Human beings are naturally insatiable, and most will do anything (including illegal stuff) to satisfy that craving. People like money because it brings respect, power and a whole lot more. It is a natural human tendency to want to get that money using the easiest way possible. In a market where four trillion dollars changes hands everyday, you will see those who prefer to get the money cheaply and illegally than having to sweat it out in front of charts and a computer all day long. They come in various guises:
a) It could be that “Forex guru” trying to sell you a trading course of a trading system when in fact, that fellow has never ever traded before.
b) It could those scam brokers who carry out all manner of activities against traders such as stop hunting, unnecessary slippages and re-quotes, freezing platforms and so on. Sometimes such “brokerages” could be a “family” operation being run out of a basement, waiting to amass millions of dollars in trading funds before disappearing into thin air. There have been numerous such cases and more keep happening. Just take a look and see for yourself.
c) It could be in the form of those sweetly-worded, sugar-coated sales pages that promise some Holy Grail trading system or expert advisor that is supposed to suck in dollars every minute of the day like a vacuum pump.
How do you avoid falling into the various traps presented here? The answer is simple. In the market, you are all alone and nobody is your friend. Therefore, do not be so trusting and if you assume the default mindset that “every opportunity, software or trading system is a fraud until proven otherwise”, you will save yourself a lot of trouble.
Mistake No.2: Trading the news spike without the right tools
The following is a common news spike trading scenario that befalls many a trader. Perhaps you have been in this boat as well.
Have you noticed how the market makes a wild move just as the numbers come into your platform, and when you try to enter, you are filled at a bad price and worse still, when the market is retracing from the spike, further activity causes your position to spiral into negative territory and make minced meat of your initial trading idea?
Some traders have been so badly hit repeatedly that they openly canvass for a ban on news trading. Yet companies like JP Morgan and the big institutional traders are making tons of money from these very same trades. So what is the problem here?
The structure of the news trading market is skewed in favour of the institutional traders. They have the money to pay for premium news delivery services from Reuters and Bloomberg which delivers the news faster to their platforms. They have access to the Order Book, a tool that enables traders to see the order flows which is like a torch in a dark alley, showing traders the light as to what side of a trade they should be on. There are several levels of traders at the desks of institutional trading firms, from the very experienced to the least experienced, ensuring that a large pool of knowledge to analyze trades is available. Finally, they have co-location facilities for faster execution of their orders. When they trade, they can get in early, make money and then offload their positions on the retail traders.
Going against these guys in the market is like going into a battle alone against an army complete with air support, heavy guns and artillery shells. You can NEVER beat them this way. The only way to profit from news trades is to either trade the retracement, or if you must trade the news spikes, acquire the same tools that the big dogs have. It is expensive, but it is the only real way to succeed in news trading. Otherwise, its best you avoid news trading altogether whilst bearing this in mind when trading technically.
Mistake No. 3: Trading with too much risk
A trader’s market exposure should not be more than 5% of his account capital. A trader can recover more readily from a loss of 5% equity than from a loss of 30% equity. Trading sometimes is more about staying alive to trade another day, and not using too much risk will help you get there.
Mistake No. 4: Over-trading
Over-trading covers a spectrum of practices. It includes trading to recoup losses soon after they have occurred as known as revenge trading, as well as trading multiple times without a clear plan. These can only lead to one thing: more losses. A clear head and defined trading plan you follow is almost all you need to stay profitable.
Mistake No.5: Trading at odd hours
Regardless of the fact that Forex is a 24 hour market does not mean that traders must stay up late at night to trade. Sleep deprivation does more harm than good in trading. Trading is a mental event, and you need a rested head and clear faculties to make trading decisions. Trading profitably in a sleep-deprived state is detrimental to your trading success and should be avoided. Always make sure you trade during your waking hours especially t when you are at your most alert.
If you can avoid these mistakes, your error rate in the Forex market will go down and so will your loss count in the market.