Forex trading can be seen as having a number of advantages over other forms of trading. This has lead to huge numbers of newcomers trying their hand at Forex trading. While many traders do go on to profit from Forex trading, a significant number of beginners struggle and come away dissatisfied.
As with all other forms of trading there is a significant learning curve and this does present a real challenge for new traders. These difficulties are compounded by the fact that many new traders make some rookie errors which ultimately cost them dearly. The three mistakes outlined in this article are made by many new traders and it is certainly worth taking some effort to avoid making them.
By simply avoiding these simple mistakes traders will significantly reduce their learning curve, helping them get fully to grips with FX trading in a much shorter time frame.
Forex trading is very exciting and it can be tempting to trade all the time. Over trading is however a recipe for disaster. New traders are often prone to placing trades on gut feelings or simply to be part of the action. Before opening a position, a trader should state their reasons for making the particular trade and ask themselves whether they are logical. All trades placed should have sound reasoning backing them. The reasons should fit in with a traders overall strategy. Once a trader has opened a position, he should continually evaluate whether the reasons for the trade still stand. If they do not a trader should consider closing the position.
By ensuring you always have clear reasons for entering into a trade you avoid trading purely for the sake of it and makes it much easier to exit from losing positions at the same time. Over trading is very tempting and new traders should realise that they don’t have to trade all the time, with many successful traders may only place one or two trades a week.
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The ability to make use of significant amounts of leverage is one of the things which makes Forex trading so attractive to newcomers. It is important to understand that the more leverage a trader uses the riskier a trade becomes. Major currency pairings are relatively stable and display relatively low levels of volatility, with a 1% percent move in a major pairing being quite rare. This allows traders to use levels of leverage which would be unheard of in other financial markets. Still new traders should be wary just because a brokerage may allow them use leverage of up to 1000:1, it doesn’t mean the should do. If trader was to place a trade using 1000:1, leverage a 0.10% market move in his favour would see him or her doubling the value of their account. On the other hand a 0.10% move against them would see the whole value of their account wiped out instantly.
While traders can massively increase the value of their account with a few successful trades, it’s extremely likely they will eventually call the market wrong and lose the entire value of their account. That is why it is recommended that traders use lower levels of leverage. In conjunction with other risk management practices traders can ensure that one wrong call doesn’t cost them the whole value of their account.
Stop-losses are an important risk management tool and they let you automatically close positions which are moving against you. Stop-losses are particularly important for less experienced traders who may find it more difficult to close a losing position. There is a great temptation to keep a position open even as the markets continue to move against you. New traders often keep trades open to long as they hope the market will turn and they will be able to reduce their loss or even make a profit. As trends can continue for an extended period of time this can be extremely costly. By setting a stop-loss when you open a position you can avoid such situations, determine a percentage of your account you are willing to risk with each trade and set a stop-loss at that level. Some traders suggest risking no more than 2% of the total value of their account on any one trade, but there are no hard and fast rules regarding this.
By limiting capital losses on trades that go against you, you will have more capital at play when the markets do move in your favour. Setting a pre-determined stop-loss is particularly important for newcomers who may not be confident enough to close out losing positions or simply hope that a trade will eventually come good.
These three mistakes are made by many new traders, helping explain why significant percentage of newcomers to Forex trading ultimately lose money. By implementing this tips into your trading, you can better control your risk and give yourself a greater chance to really get to grips with the fundamentals of Forex trading.
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