Forex trading is a highly leveraged form of financial dealing. When dealing with retail Forex day trading there are a few pitfalls to avoid. In effect there are five very common mistakes most day traders regularly practice on in order to drive up the returns. However, continuous engaging in these mistakes is bound to make a trader lose everything. Avoiding these pitfalls is easy if you employ ingenious knowledge, discipline and look for alternative approaches.
Averaging down your Forex position
Some traders intentionally and some stumble accidentally on Forex averaging down strategy. There are several snags associated with this concept. When you are losing your Forex position to a lower tier it means you are not only sacrificing money but the time advantage you had gained as well. Both resources could be utilized in a more profitable initiative helping you to move your Forex level to a better position. When capital is lost, you need to make up for it through a larger return and that has to be created out of the remaining capital. When a trader loses 50% of the initial capital he/she needs a 100% return to revive the original capital level. In most cases averaging down leads to greater losses and margin calls since such trends have the ability of sustaining longer in comparison to the trader’s capacity to remain liquid, particularly, when added capital is boosted as the trader keeps moving further away from the money. Day traders are highly susceptible to this issue given the short time frame for trading and since every opportunity has to be capitalized as an when they occur, making sure to exit from bad trades at the earliest opportunity.
Prepositioning and trading just after market influencing Forex news
Though Forex news have the power of moving the market, traders most often find it difficult to predict in which direction a news event could drive the market. Though in most cases traders have strong advance knowledge of the nature of the news they cannot predict the market reaction to the expected news. Moreover, accompanying figures, statements, forward indications contribute in making the trader’s movement highly illogical. With volatility intensifying amidst an outbreak of orders traders triggers stops from both sides of the market spectrum. The result is a whipsaw action as the market waits to see signs of a definite trend emerging. Taking a position with advancement to a news announcement on presumption can severely chop a trader’s prospect. In Forex trading despite popular belief there is no way of accomplishing easy money and those who regard the Forex market as such are bound to be the biggest losers.
When a news headline hit and the market reacts aggressively to it, most traders consider this the time to come aboard in search of some easy money. The concept is simple, clear and works only if it is done in a well regimented and tested manner with a solid trading plan to back your actions. If not, you are just placing a highly risky gamble even before the news hit the stands. Day traders are advised to use caution waiting prudently for the market volatility to subside and to see if a definitive trend would develop following the news announcement. This will help you to hedge against the inevitable whipsaw action resulting from hairpin twists in market assessment of the news. The wait and see attitude mitigates the risk of liquidity concerns and help better management of risks as the decision will be based on a more stable price direction.
Taking excessive risks of Forex capital on unrealistic expectations
Taking excessive risk does not necessarily mean excessive returns. Traders who are prone to risk massive capital amounts on a single trade are more at risk of losing in the long run. The rule of thumb is that a trader should only risk 1% of the capital on a single trade. Most professional Forex traders risk even less on single trades. The Forex market has many facets it can turn from choppy, trending to volatile at the turn of events within short, medium to long term cycles. A trader should not try to isolate single moves and try to profit from them. That is why it is imperative to formulate a strong trading plan to trade on. If the plan yields steady and strong results don’t deviate from your plan because Forex leveraging helps you to reap substantial profits even from the smallest gains.
There are some common Forex trading pitfalls that may snare many traders. These should be avoided at all costs and can be done easily if the trader is careful to develop an alternate approach without delay. When leveraging down, the best strategy is to exit losses soon instead of not adding to the position and to develop a clear and strong pre-planned exit strategy. Traders should learn to check their urge for risk taking while expectations should be moderated in the Forex trading market. News announcements should be watched carefully to see the emergence of a clear trend and until volatility is subsided. By understanding the most common pitfalls in Forex trading and by avoiding them you have laid a very strong foundation in becoming a successful Forex day trader