5 Big Mistakes Every Trader Needs To Avoid
NEVER TRADE WITHOUT A STOP LOSS
When an open trade goes against you, a stop loss order is always there to save you. A stop loss is an offsetting deal which exits your trade if a certain price level is reached. Let’s assume you buy the GBPUSD forex pair at 1.28415, expecting it to go up. Keeping this in mind, you place a stop loss at 1.28400 because your forex strategy tells that if the price falls to this level it could move even lower before it moves higher. The stop-loss order caps your risk at 15 pips per lot traded. Using stop loss on each trade is a good thing as it compels the trader to be disciplined in moving out of negative trades. Humans have a tendency to hang on to negative trades, so having a stop loss in place serves as protection from excessive losses
DON’T TRADE WITH SMALL DEPOSITS
Before discussing how much money you’ll need to invest in the forex market effectively, we need to understand why this issue is important. Does it really matter if you open an account with $500 or $5000? Yes! One of the most important issues small traders face is being under-capitalized. If you want to enter in Forex market, it’s likely because you wish an income stream. Well, you aren’t going to earn much money in case you open an account with $500. Most of the small traders take too much risk on each trade trying to make too much money, and this mindset let them lose money. Professional traders believe in only risking 1% of capital (max 4%) on a single trade. If your account is $5000, that means you can only risk $ 50 per trade. This will let you earn money slowly, most of the small traders wish to build their account much faster and therefore will risk too much money per trade–sometimes more–in an attempt to turn that $500 into thousands as fast as they can. This might work for a time but normally results in an account balance of $0.
BEING TOO GREEDY
All of us wish to earn huge money in the shortest period of time. So we look at Forex trading and market as a tool where this can be fulfilled easily. If you wish to become a successful trader, greed is certainly the biggest challenge you will have to face. If you try to get rich in a couple of days, you will more than likely end up blowing your account – slow and steady wins the race. It’s the big challenge that all trades go through. Just remember there is no shortcut in life. if you want to become rich, you have to do trade smartly by applying knowledge, not greed.
DON’T CHOOSE THE WRONG BROKER
Most FX brokers are actually market makers. A market maker takes the opposite side of your trade. For example, let’s say you decide you buy 1 standard lot of GBPUSD. Now for you to take that trade, someone else has to sell 1 standard lot of GBPUSD, in other words, there always has to be a seller and a buyer for a trade to take place. All of this is managed electronically almost instantly but always keep it in mind that someone somewhere is holding the opposite side of your trade. If your broker is a market maker, he’s holding the opposite side. In other words, if you lose, he wins. If you win, he loses.
NEVER INCREASE A LOT SIZE ON A LOSING TRADE
The normal behavior of traders is to enlarge a lot size of the position when the currency pair is going against them. The intent is to decrease the average entry price by assuming extra risk in the hope that the currency pair turns around and they can close the position at a break-even point. As a result, the market goes against them some more and out of panic, margin call appears or they close their open orders at a larger loss than they initially thought.
NEVER GO AGAINST THE TREND
Whether you are a long-term trader or a short-term trader, you have heard one of the following trend-related expressions: , “Don’t fight the trend”, “The trend is your friend”, or “Don’t catch a falling knife”. In every technical analysis, the trend is the central pillar. Forex traders should respect these three rules:
- Every decision is made in line with a trend
- Never fight the trend
- The trend is your friend.
So never ever go against the trend. Just remember that trading against trend could destroy your account easily.