Trading forex is simple, but it’s not easy. There are only a handful of currency pairs that are traded by most forex investors. However, the nuances of trading in this market are almost infinite. Before you make a single trade, make sure you understand the basics and avoid these five common FX trading mistakes.
Don’t Trade Forex Like You Trade Stocks
Stock traders often employ something called “averaging down.” This strategy is used when a stock position moves against the investor. For example, an investor buys 1,000 shares of a stock for $20 a share, and the share price drops to $15 per share. The investor may buy more of the stock at $15. When his 1,000 shares at $20 are averaged in with his new share purchases at $15, It produces an average share price that is higher than $15 but lower than $20.
Normally, this is a good thing because the stock trader expects to recover any losses. When he does, he realizes a higher average gain since his cost basis is lower. In forex, however, the market is much larger. The market can move against you and remain in an opposing trend for longer than you can remain solvent. Don’t average down when trading forex. Instead, rely on stop losses to maximize your profit.
Set A Stop Loss
A stop loss is like a safety net. Imagine working on a scaffolding 10 stories in the air without a harness. You might be fine working up there for a while, but the first time you lose your balance and fall, it’s all over. Stop losses limit your loss in the markets so that one bad trade doesn’t wipe you out completely. Use them. Instead of wiping out your entire account, you’ll only suffer small, recoverable, losses.
Stop losses also help to increase your gains. Since you are limiting your losses, you can use this strategy to buy back into the market when the trend reverses and exceeds your original stop loss amount.
Don’t Try To Trade Right After Late-Breaking News
New does affect markets in a dramatic way. However, it’s not always clear how the markets will react. Don’t try to out-think the market. You can’t do it. Instead, wait for a trend to develop. Then, trade on the trend. New forex investors tend to mistakenly believe that late-breaking news stories will have an immediate and predictable effect on the markets.
Often what ends up happening is that the market reacts somewhat unpredictably at first. Disruptive news reports often cause a “whiplash” effect, market orders and stop losses are triggered, exacerbating the issue. If you try to trade on this kind of movement, it’ll be like gambling in a casino.
Wait For The Trend, Forget Revenge
You’ve probably heard the phrase “don’t get emotional when trading.” It’s helpful advice, but many newbie traders ignore it. When you lose money, it’s understandable to want “revenge” on the market. However, the market doesn’t care how much you’ve lost. Revenge trading often involves increasing leverage or investment position to make up for previous losses.
This is an incredibly dangerous strategy. You risk losing even more money because emotions can easily cloud your judgment making it impossible to make any objective investment decisions. Instead, wait for another trend to develop, and trade on that trend. Forget your emotions for a moment, and rely on the goals and rules you initially established prior to trading.
Know When To Cash Out
There’s an old Kenny Rogers song, called “The Gambler” It contains advice that’s actually useful for forex investors. “You have to know when to hold ‘em, know when to fold ‘em. Know when to walk away, and know when to run.” New forex traders sometimes have the problem of “knowing when to fold ‘em” and “knowing when to walk away.” When the market turns against you, don’t let your losses run all the way to your stops. Thinking that you can “handle” the downs and that the market will rebound is a fallacy. The market may rebound, but you’ll be out of money before it does. Walk away from losing trades, and don’t get involved in market trends where you know you can’t win or where winning is improbable.