Common Forex Trading Mistakes

There are common mistakes that Forex traders tend to commit while trading. In this article we will cover the most common mistakes Forex traders make which can be avoided with further knowledge, discipline and an alternative approach.

  • Watching the Forex market too closely

While keeping yourself updated with Forex news, there is a an extensive amount of market news that may confuse a trader, sifting through all of these variables and forging a trading strategy that is simple and effective can be a very a difficult task for beginner traders.

New traders tend to watch the Forex market too closely and over analyze too many market variables which exhaust them and result in analysis paralysis.

  • Pre-Positioning for News

Traders rely on the news events to move the market, yet the trend is not known beforehand. Even when a trader is fairly confident what a news announcement may be he cannot predict how the market will react to this news event. For this reason, taking a position before a news announcement may risk the trader’s chances of success.

  • Overtrading

Trading too much is usually derived from operating mostly on emotion, and usually results in losing money over the long run. An interesting fact is that many traders do very well on demo accounts and start losing money when opening a real account. This is usually an indicator of trading mostly on emotion, since the risk on demo account isn’t real.

Overtrading can be easily avoided by trading on a predefined plan as opposed to gambling in the Forex market. This way you avoid racking up transaction spreads and commissions.

Traders have to be very aware of their state of mind right after exiting a trade, because this is when emotions like revenge and euphoria hit their peak, making it very likely the trader get right back in the market with no actual plan for the following actions.

  • Risking More Than 1% of Capital

High risk does not necessarily result in high returns. Most traders who risk large amounts of capital on single trades will eventually lose in the long run. A known thumb rule is that a trader should risk no more than 1% of capital on any single trade. Professional traders will usually risk far less than 1% of their capital.

  • Averaging Down

Averaging down is accomplished by adding Forex lots at lower prices than you originally purchased.

Traders that average down think that the market will eventually come back in their direction, and that by lowering their entry price, the Forex market will have to move less before their trade comes back into profit. While it may work sometimes, averaging down will usually lead to a large loss or margin call, since trend can maintain itself longer than a trader can stay liquid, especially if more capital is being added as the position moves further out of the money.

  • Using Too Much Leverage

One of the advantages of Forex trading is the ability to use leverage or trading on margin. One of the most frequent mistakes that Forex traders make is using too much leverage. Using too much leverage is when a trader has a low account balance, but makes a big trade. If the market moves against a trader’s position by only a small amount, it may result in large losses. Usually, the beginner Forex traders get emotional and nervous and close the trade for a large loss.

Bottom Line

Many traders get trapped in these common Forex trading mistakes. These mistakes can be avoided by paying attention to their trading methods. For averaging down, traders must not keep adding to positions but rather exit their losses quickly with a predefined exit strategy. Traders should keep updated with Forex news announcements until the volatility has subsided. By understanding the pitfalls and how to avoid to them, traders are more likely to gain money in Forex trading.

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