Forex Trading Mistakes That Cost You Money (Part 2)
Education - AxiTrader Team | 17 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.
In our previous post we learned about 5 mistakes that cost you money:
- Letting profitable trades turn into losses
- Trading too many currency pairs
- Not trading enough currency pairs
- Not understanding base currency differences
- Basing your trade size on leverage.
If you did not read the first post go back and read it now.
If you did, then here are 5 more.
Forex Trading Mistake #6: Leaving short-term trades open over the weekend
In some ways the Forex markets are quite beautiful.
When trading stocks, you have to deal with overnight gaps and news announcements that dramatically displace the price. This means that sometimes you can have a loss much greater than your initial risk.
In contrast, if you stay away from big news events, your stop-losses on currency pairs can pretty much be relied on. (Note: this is not a guarantee!!!)
Except over the weekend.
Weekend gaps in the Forex market can cause a whole lotta havoc in your account.
Say you are happy to risk a $100 a trade.
Weekend gaps can cause that $100 loss to blowout to $500 or more. It won’t happen often, but when it does I can guarantee it won’t be a nice feeling.
Add a rule into your trading plan (you have a trading plan, right??) to close any position on a Friday that could be at risk of gapping significantly through your stop-loss over the weekend.
Forex Trading Mistake #7: Not understanding “negative carry”
Negative carry is when your account is charged a small fee for holding a currency trade overnight.
Why does this occur?
Trading a currency pair is similar to having cash in a bank account in the currency of your purchase. And when you have a bank account you (typically) get paid interest.
But when you trade a currency pair, you are buying one pair against another. The currency you buy, you earn interest on; the currency you sell, you pay interest on.
The balance of these two equations is called the “carry” and this can be either positive or negative.
Negative carry can make your trading suck. For the unwary it adds up.
In your MetaTrader 4 account is a column called “swap”.
In the swap column you can see how much you have earned or paid in carry since you opened the position.
While you don’t need to avoid trading against the carry, remain aware of its impact on your account balance and take it into consideration when you place a trade, particularly if you are taking a long term position.
Forex Trading Mistake #8: Trading with fat fingers.
Have you ever lost $662,100 in 30 seconds?
On 30 January 2014, a London trader just may well have.
Due to a so-called “fat finger trade”, the share price of HSBC rose more than 10%, causing a significant loss for an unnamed financial institution.
Fat finger trades are just as common amongst currency traders.
Ever gotten confused with the pip value when trading the Japanese Yen? Or added an extra zero to your Lot size?
I know I have.
And it played havoc with my psychology. Rather than making $100 on my winning trade I made $10…and then ended up placing a risky trade in the hope that I would make back what “should have been mine” (and ended up losing of course).
Create a checklist to review before you execute a trade. This checklist could include:
- Do I have the correct currency pair selected?
- Have I placed a practice trade on the currency pair in my demo account? (For the first time you trade a new pair.)
- Am I trading the correct lot size?
- Am I using the correct order type?
- Is the stop-loss price correct?
- Is the profit target price correct?
- Am I clicking the right button for buy and sell? (So you don’t sell when you meant to buy.)
- Should I have one-click-trading activated?
- Was the order processed correctly?
- Once the trade has been placed, have I checked the profit and loss window for any discrepancies?
Forex Trading Mistake #9: Not recording your performance
All professional traders record their results. They do it almost obsessively.
They know that if you don’t record your results…
You are not tracking what you are doing right or wrong…
So it’s difficult to know what to do to improve.
But it’s hard for me to remember the last time a retail trader told me they diligently record their trading performance.
They all know they should.
But they don’t.
So they don’t improve. And their trading sucks.
Maybe they don’t know why it is so important.
Why you should record your trades
Try this on for size.
- You place 20 trades exactly per your rules and record your results
- You make a change to improve your system
- You place 20 more trades exactly per your rules and record your results
- You make a change to improve your system
- You rinse and repeat, making small controlled changes until you have a successful trading system.
(You can significantly improve this process by understanding the first key to Forex system development: market types)
The good news is that if you have an MT4 account, you can connect to a free service like MyFXbook which will automatically upload your trades into analysis software.
I like to mark up my chart with the day’s Forex trading (by using drawing tools in the trading software) and take a screenshot in order to keep a visual record of each trade.
You might find it useful to score each trade, giving it an A, B or C for quality. This is another little mental tool that can help you to achieve consistent performance.
Forex Trading Mistake #10: Focusing on account “balance” rather than account “equity”
“To get what you want you need to focus on what you want.”
Your balance is the amount of money in your account before any profit and loss from any positions is included. As a position is closed, the profit or loss from the position will be added or subtracted from the balance.
Your equity is your balance plus or minus any profit or loss on the position.
- Should you be sacrificing your equity to grow your balance? or
- Should you be sacrificing your balance to grow your equity?
The answer is option 2.
(If this is getting too technical, just remember that you want your equity to be growing, even if your balance is going down.)
It is your equity that matters.
Your equity is what you can withdraw from your account (once you close your trades of course). You can’t withdraw your balance.
Be comfortable with taking a small loss and preserving your equity, instead of holding onto a big losing position because you don’t want it to impact your balance. That can really make your trading suck.
Don’t let your trading suck
In Forex trading mistakes that cost you money part 1 and part 2, you have learnt 10 common errors that can seriously dent your trading performance.
But knowledge is not power without action.
And action comes not from casual acknowledgement or a passing appreciation not to make these mistakes.
It comes from an integration of this knowledge into a written trading plan.
Create rules and processes that ensure you take consistent and repetitive action.
They don’t have to be complicated (simple is better). But they do need to be written down and they need to be practised.
And if you do take these steps then your trading is going to far from suck – it’s going to rock.
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