Making mistakes is how we learn new skills, there’s no way around it. However, in certain cases making mistakes is a lot more costly than in others. Foreign Exchange Trading is one of those situations where making one mistake really can cost you a lot. FX trading is one of the most easily accessible day trading markets, being available on the internet and with only a few hundred dollars as a barrier to entry and you can start trading. It being that easy, there are plenty of newcomers all the time and going over some common mistakes to avoid when trading, just to remind everyone wouldn’t be a bad idea, let’s jump in.
A lot of Traders think they are ready to join in the markets after watching candlesticks for a couple of days and think they know which direction the market is going to turn, throw half their account in and hope for the best. It sounds a lot like a casino and it’s not very profitable, for the player that is. Rule number one when trading, is you absolutely have to stick to your trading plan. Do not deviate from it in the slightest you came up with it for a reason stick to it. And if you don’t have a trading plan, don’t trade, it is that simple. If you are looking to make a trading plan and do some forex trading online, make sure to do some reading and spend time on making a solid trading strategy. Your trading plan should be your golden set of rules that you follow when entering and leaving the market. There should be no room for emotional decision making. So that being said let’s take a look at what sort of rules a trading plan should have.
Trading Without a Stop Loss
Stop-loss is an offsetting order that gets you out of a trade if the price moves against you by an amount that you specifically have to enter. It is important to always set a stop loss when entering the market because we never know what happens and having that stop loss in place guarantees us we’re not losing more than what we are okay willing to put on the line. Big time market news events have a tendency of affecting the markets in a way that is extremely unpredictable and extremely volatile. Being in a trade during one of these Market events and not having a stop loss in place is extremely dangerous considering some of these trades can turn on you in seconds. Having that stop loss in place protects you from those asset events. The stop-loss is also an important feature to our next point which is making sure you have an appropriate risk-reward ratio for your trades.
One of the key parts of your trading strategy is risk management, to establish how much of your capital you are willing to risk each time you enter the market. Ideally, nobody should be risking more than about 2% of their account and that’s to say your total account, not just a single trade. So if my investing account consists of $100,000 I don’t want to risk more than 2,000 of that capital. That $2,000 represents 2% of my total account and if I were to enter a trade I would set my stop loss right there. Having that stop-loss means that I can suffer 50 losses in a row before I blow up my account as opposed to losing an unknown % without trading using stop-losses. The other side of that coin means we also need to know how much we are expecting to win. A risk-reward ratio is what we’re looking for. That number should be 2:1. So what I mean by this is that I’m looking to gain 4% for every 2% I risk. What this means is I can spread my losses out a little bit, and it would take two losses to wipe out one win. This takes a lot of stress off of having to win every single trade.
Stress Management and Emotion
Every Trader loses money at some point, it’s just a fact with the market. That does mean they are bad at trading, it just didn’t seem to go the way they thought. It is extremely important to keep your emotions separate from everything that happens in the Foreign Exchange Market. We have to remember that failing is an opportunity to learn something new. However, as I mentioned it’s very costly in this scenario. So by keeping a trading plan in place with proper risk management and a risk-reward ratio, and sticking to that plan should eliminate a lot of emotional decision making. Making Trading more of a matter of fact instead of getting your heart racing every time you click the buy or sell button.
Some up I want to reiterate how important it is not to trade without a trading plan.It will lose you money in the long run just don’t do it. Go online, go do some more reading, take a look at other trader’s strategies. Implement some rules for yourself and work on your own set of rules. Once you’re ready with this then you can start trading. Remember to risk only a small percentage of your total account and to set yourself a reasonable risk-reward ratio. Keep yourself positive, every trader loses some money once in a while but that’s completely normal and part of the job. Manage your stress and manage your emotions and you will become a very successful trader.