Forex Trading: Five common trading mistakes to avoid

In forex trading, even the most common mistakes can prove to be costly. Given are the five common forex trading mistakes that you must avoid to achieve success

June 19, 2019 4:15 IST | India Infoline News Service
Everyone trades to make money, and forex trading is no different. In forex trading, even the most common mistakes can prove to be costly. In this article, we will take you through five common forex trading mistakes that you must avoid to achieve success.

Trading without a trading plan

Never enter into retail forex trading without a trading plan, which is a set of rules that you must follow through. For instance, your plan should include basics such as the currencies you choose to trade in and the time frame you will be making trades in. It should also clearly mention your entry and exit points both for profit and loss making trades. Do bear in mind, that trading in forex without a proper trading plan is akin to gambling and can prove to be dangerous.

Risking more than you can afford to lose

An essential part of the risk management strategy is establishing how much capital you are willing to risk on each trade. Ideally, cap your risk at 1% on a single trade. This way you ensure that a small part of your capital is lost even if you lose multiple trades in a row. You can recoup your losses easily if you make 2-4% on each winning trade on the other hand. However, if you risk more than 2% of your capital on any single trade, it can result in a potential loss of a substantial amount of capital on a bad day.

Trading without a stop loss

Risk management is key to successful forex trading. When you manage your risks effectively, rewards will be commensurate. The ground rule of forex trading is therefore setting a daily stop loss. If you are new to forex trading, consider fixing a daily stop loss in terms of percentage. For instance, if you lose 3% of your capital in a trading day, stop trading. Alternatively, consider setting a cap on the losing trades, before you stop. For instance, if you lose three trades in a row (or any other number you deem fit according to your trading plan) consider stopping for the day.

Adding to a losing trade

Adding to a losing trade when the price is moving against you with the belief that the trend will reverse can be dangerous. Getting into a “revenge trading” mode can result in even bigger losses and have disastrous consequences. Once the losses mount, it is difficult to keep calm and focus. Instead, keep your calm and consider closing your trade, when the price hits the stop loss. Risking more than your capacity goes against the thumb rule of forex trading.

Trading on fundamental data

It is easy to get caught up in the positive news flow especially when you come across favorable economic data. However, one should bear in mind that any long-term fundamental outlook and analysis is irrelevant in day trading. This can hamper your strategy and deviate you from your trading plan. Keep a firm focus on implementing your strategy without any fundamental bias.
In a nutshell, researching, planning, tracking progress and following your trading plan are key ingredients of success. Following these forex trading tips and being mindful of the above-mentioned mistakes will help you succeed in your day trading pursuit.

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