Amongst all the excitement of foreign exchange trading, it can be easy to fall victim to some common trading mistakes. After all, the 24/5 aspect of the forex market means it’s easily accessible to novices and veterans alike, allowing anyone to place a trade regardless of their knowledge of this extremely volatile market.
That’s why today, the forex educational experts over at Learn To Trade are taking a closer look at 3 mistakes to avoid while trading currency, ensuring you’re left in the possible stead to make profitable trades in this potentially prosperous market.
Predicting the news
As the forex market deals with the trading of international currency, the valuation of its stock is very dependant on global current affairs. After all, it’s the strength of a country’s economy and the status of geopolitical relations that fundamentally dictates the worth of a unit of currency.
As a result, it can be tempting to place trades based on a prediction of current affairs or, equally as damaging, reacting instantaneously to a sudden news headline. Although this might work in your favour, no one can be certain of exactly how the market will react to any given situation.
Often, an initial headline is followed by official statements and figures that can have major influence on market reactivity. Though it may be tempting to jump the gun in an attempt to get ahead of the competition, market history suggests that during the early stages of reactivity, volatility surges to reflect an influx of trades – resulting in oscillating market direction before a trend begins to appear. As such, the market can move against you just as quickly and easily as it moved in your favour, meaning you can make a substantial loss just as quickly as a gain.
Risking more capital than you can afford
Just like on any trading market, investing in forex comes with substantial risk. As a result, always be cautious with the amount of capital you risk, regardless of how confident you are in your strategy.
As a rule of thumb, never risk more than 1% capital on a single trade. Excessive risk rarely results in excessive profit, so look to practice caution at all points. After all, even the most experienced of forex traders won’t typically risk more than 1% capital on any given trade.
Further to this, also look to implement a daily risk maximum as a means of restricting your daily investments and effectively preventing financially dangerous reactory trading. Risk management strategies such as this are vital to the success of any trader, so be sure to practice them early in order to prevent yourself falling for a common yet destructive trading mistake.
Having unrealistic expectations
Yes, there are major profits to be made on the forex market, but these come off the back of carefully considered and strategical trades placed by experienced traders. With this in mind, be sure to manage your expectations when first entering the market, understanding that profits will be low (or even non-existent) as you come to grips with the inner workings of this lively yet volatile trading platform.
As a means of properly managing your expectations, look to develop a specific trading strategy. Not only will this help you better understand market movement, but it will bring a consistency to your trading technique that will assist you to make more concise trading projections.
Any inexperienced trader is bound to be susceptible to some common mistakes when they first try their hand on the forex market. By following our top tips however, you can ensure you avoid making any major mistakes that could hold you back from becoming a successful forex trader.
John James is a content writer for Learn To Trade, the foreign exchange education and learning specialists – offering a range of training courses to help people understand the currency trading market, as well as its opportunities and risks.