Forex (foreign exchange market) is one of the most accessible markets globally, and anyone can become a trader. If you own a computer, a good internet connection, and some hundreds of dollars to spare, you could well be on your way to Forex day trading. Being easy to enter into the trade does not mean the going will be easy, and before you take the risk, there are some common mistakes you should know about and avoid.
- Not Stopping When You Lose
You need to keep an eye on two trading statistics: your win rate and risk-reward ratio. Your win rate means the percentage of the times you win. For instance, if you win 60 trades out of a hundred trades, your win rate is 60%. You should try to maintain a win rate of at least 50% and above.
The reward-risk ratio means how much you win compared to how much you lose. If your losing trades on average are $50 and your winning trades are 75%, your reward-risk ratio is $75 divided by $50=1.5. A ratio of one shows you are losing and winning on the same level.
A Day trader must keep their reward-risk level above 1, and better, above 1.25. Your trading can still be profitable if you can keep your reward risk higher than your win rate.
Most Forex Traders end up making no money in the money markets because they overtrade. You can perform very well in a demo account, but you fail in actual trading. This is because in demo trading, you know it’s a simulation; thus, no emotions are involved. When you are trading real money, emotions get in the way, and emotions push over traders.
Trading without a trading plan, or you have no trading edge over-trading. You only need to enter a market when you have clearly defined what you want and only trade when you have a trading edge (read more about a trading plan on Saxo website).
When you over-trade, you incur trading expenses such as commissions or spreads. You also lose faster because you are gambling and stumbling blindly in the market, led by emotions. Trade needs a calculated and calm approach if you want to make money.
- Lack of a Trading Plan
Lack of a trading plan is one of the most common mistakes traders make. Most traders wrongly assume that they will create a trading plan after already in the market or do not need one. Without a trading plan that details your trading approach, strategy, and actions, you will be operating blindly and gambling with your money. Write down your strategy and trading plan, stick to it, and you will see results.
- Risking More Than You Can Afford
One of the most critical aspects of your risk management should be to decide how much money you are willing to risk per trade. A day trader should typically risk under 1% of their capital per trade. This means your stop-loss order maxes out a trade if it ends with not more than a 1% trading capital loss.
Even if you lose several trades simultaneously, you will only lose a tiny percentage of your capital. Similarly, if you make over 1% per winning trade, you recoup your losses. It would be best if you also controlled your daily losses.
Risking 1% per trade means you could lose a significant amount of capital on one lousy day. Set a percentage for how much you are ready to lose in a day. If you can afford a 2% loss per day, ensure you have the discipline to stop at 2%. Only use the money you have allocated to trading and stick to your trading strategy.
- Choosing the Wrong Broker
If you choose the wrong broker, you could lose everything. Take time to research brokers and consider several things. Think about what you want to achieve, what the broker is offering, their reputation via referrals. Test the broker by making small trades and refuse any bonus offers they offer with their services.
Before you enter into Forex trading, research as much as you can. Get mentors who have been in the business for some time and learn from them. Start small and make sure you have a trading plan, and stick to it to see results.