Common forex trading mistakes (part 2)
4. Hoping bad trades will come good
One of the worst mistakes new traders make is averaging down: investing more money in a losing trade in the hope of a turnaround. More often than not this amounts to throwing good money after bad and can exacerbate your losses.
The reality is that even if their investment thesis is correct, the price of their pair can move against them for longer than they expected. Similarly, holding on to losing positions for too long will prevent traders from shifting their capital towards a potentially more successful trade.
5. Taking quick profits and missing out on larger gains
The key principle of a forex day trader is to minimise losses and maximise profits but, just as some new traders hold on to losing positions for too long, many will also diminish returns by taking profits too early. At first glance this might not sound like much of a mistake – they still made money on the trade after all – but doing it consistently will seriously sap their earning potential.
Unfortunately, this is a harder problem to solve than the other mistakes listed here. There are often good reasons to close a trade earlier than planned, perhaps their pair has unexpectedly entered a period of consolidation or perhaps a piece of news has emerged to alter the trend completely.
Nonetheless, many traders miss out on gains by acting out of fear or greed instead of a rational evaluation of the available technical and/or fundamental indicators. The best solution is once again to create a clear, well-thought-out trading plan and stick to it.
6. Risking More than You Can Afford
One common mistake new traders make is misunderstanding how leverage works. They need to familiarize themself with margin and leverage to help avoid accidentally putting more capital at risk than they had planned.
Many traders find it helpful to set a maximum percentage of their capital that they are willing to risk at one time, usually 1% to 3%. For example, if they have $50,000 of equity and are willing to risk 2% maximum, they would not tie up more than $1,000 at one time. It is important that they stick to that maximum once they set it.