10 Forex Trading Mistakes That Cost You Money (Part 1)
Education - AxiTrader Team | 11 Apr 2014
The views outlined by the author in this blog post are their own and do not reflect the views of AxiTrader. Forex trading is risky and is not suited to everybody.
Trading mistakes suck. They…
- Cost you money
- Dent your confidence
- Spoil your trading record.
But it doesn’t have to be that way. You can improve. It starts with identifying your mistakes. If you don’t know where you are failing, then you will be stuck in the same old scenario, time and time again. So give yourself a pattern interrupt. Take a look at these common and major mistakes and make some changes for the positive.
Forex Trading Mistake #1: Letting profitable trades turn into losses
This is a biggie. If you're making this mistake, you're not alone. Even the big guns are guilty of this Forex faux pas. How many times have you perfectly timed your entry, seen a nice paper profit, only to see it vaporised by a sharp reversal? (I bet it’s more than once.) Letting a good trade go bad is the first major mistake you can make in the Forex market… but there is light at the end of the tunnel.
So how do you fix this? Yup. Planning. (That boring old thing.) You should know when you are going to exit before you enter into the trade. And you should have multiple reasons to exit. Develop a variety of exit rules that allow you to achieve your objective from the trade – even if it does not go exactly as you might have hoped. It’s ok to have complex exits (but not complex entries) that cater for a variety of market types. You can have a combination of:
- Profit target(s)
- Wide trailing stop (for trending markets)
- Tight trailing stop (for fast exhaustion moves)
- Risk/reward stop (for when you get close to your profit target).
You can also scale out of your trade. Take a bit of your position off when the market makes some available, take a bit more as the move progresses, and leave some on for the big wins. This type of approach will help you to smooth out your equity curve.
Forex Trading Mistake #2: Trading too many currency pairs
Trading a new currency pair is like taking a new partner. They have their own unique personality and they are wild in their own special way. By committing to trade one currency pair, you get to know it intimately, just like you would with your partner. With time, you can sense their moods and learn to adjust to their different temperaments. You are in sync and trade in moment with your market of choice. Too often traders (particularly new ones) take a scattergun approach to market selection. They try to trade anything and everything. More currency pairs mean more decisions. And more decisions means greater potential to make mistakes. When you’re learning, you should be searching for simplicity in the decision-making process, and this means doing less not more. Doing more of the wrong thing on more currency pairs is not a recipe for success – it only speeds up defeat.
Consider cutting back and committing to truly, deeply understanding one currency pair.
Forex Trading Mistake #3: Not trading enough currency pairs
Two traders buy a currency pair at the same time. One wins. One loses. What is right for one trader is not always right for another. (If you're wondering how one trader wins and another loses when placing the same trade, it comes down to exits and money management.) Narrowing the focus to just one currency pair is right for some traders. It’s wrong for others. If you are impatient by nature and you limit yourself to a singular market, you may find that you chase trades. Your itchy trigger finger may get the best of you. Instead of carefully stalking a high quality set-up and entry, you take any signal, afraid that if you miss out on a move you won’t get another opportunity anytime soon.
By adding more currency pairs to your repertoire you can patiently hunt for high quality entries – because you know that if you miss a move on one currency pair, there will be an opportunity on another one soon.
Forex Trading Mistake #4: Not understanding base currency differences
“I think investment psychology is by far the most important element, followed by risk control, with the least important consideration being the question of where you buy and sell.” – Tom Basso, Market Wizard
Did you know that in a real money trading experiment conducted by Tom Basso, a random entry trading system was proven to make money using position-sizing strategies? Fascinating. While the entry does matter (the random entry system was not that good), position sizing is perhaps more important, or at least worthy of equal consideration. And in Forex the first step to effective position sizing is to understand that not all currency pairs are created equal. If you trade one lot of GBP/USD, it is not the same as trading one lot of AUD/USD. Your…
- Margin requirements will be different
- Profit and loss per pip move will be different
- Profit and loss on the trade will be different.
Sometimes dramatically so.
The solution here is simple (if a bit technical). Calculate your position size on the trade individually for each currency pair. Don't assume one will be the same as the other.
Mistake #5: Basing your trade size on “leverage”
If you want to suck at Forex trading, you should base your trade size on how much leverage you have available . It's like jumping off the proverbial cliff. Some of you will know what I mean. The obsession with leverage in the Forex market is unhealthy. If you had the choice (and you do), what measure would you use to decide on what size you trade?
- How much leverage your broker gives you
- How much of your account you want to use for leverage
- One lot (because it’s a round number)
- How much of your account you are willing to risk on each trade based on a trading plan and an understanding of the expectancy of your trading system (I.e. 1% or 2% of your account).
I hope you said number 4. (I kinda made it obvious ;)) This is your "risk" on the trade. If you base your position size on how much you are prepared to risk, you will notice that the leverage becomes irrelevant. It is calculated as a matter of default when you determine your risk.
When computing your position size, think in terms of "risk" not about how much leverage you can use. To calculate your risk you need to:
- Add an initial stop-loss order
- Decide how much of your account balance you want to risk per trade (typically 1% or 2%)
- Make your position size small enough that if your stop-loss is hit, then you would lose no more than the risk you have decided to accept.
Now just a word of warning. This is the simplest form of position sizing. If you do this consistently it's great for your trading, but there is a far greater depth to the topic. I recommend you shift your focus to learning position-sizing strategies before you focus on trying to find high probability entries. The best resource for this is The Definitive Guide to Position Sizing by Van Tharp.
You can find Forex Trading Mistakes That Cost You Money part 2 here.
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