Monday, January 2, 2012

The Top 10 Forex Trading Mistakes


1. Using indicators and esoteric tools

Many new traders believe that without using every formula and fancy tool at his or her disposal profits will run and hide. This is not true, and it often convinces folks to focus on the indicators rather than the actual price action that indicators come from. Using indicator charts can actually stunt your growth as a trader, slowing down your ability to read “naked” price charts.

2. Failing to grasp and implement a risk/reward strategy

Successful Forex traders know how to limit risk and maximize potential rewards. Beginners, on the other hand, generally do not. Focus on the risk/reward benefits of EVERY trade, not just major ones. You should aim to make at least two times the value of the risk in most trades, because this will help you when a trade fails for you and loses money, which will happen.

3. Failing to understand position sizing

Placing a wider stop loss on a trade does not necessarily mean you should risk more cash in order to maximize potential profits, or, conversely, that if you place a smaller stop loss on a trade that you should risk less. Traders commonly adjust stop losses in order to hit the number of lots they’re aiming to trade, rather than adjusting position size in order to hit the most reasonable stop loss distance. Don’t fall in to this trap.

4. Lacking a trading plan

Let’s put one common misconception to bed right away -- you do need a trading plan, no matter how little you plan to trade. Forex trading is a business, so you need a business plan. Without goals and time lines you might fall victim to a whimsical move, and that’s where major mistakes can occur.

5. Eschewing measured trading for gambling

The sooner you can avoid “taking a shot” or “just seeing what happens” the sooner you’ll start making money in the Forex market. Gambling on long shots or not having a goal with a purchase will come back to haunt you, so before you make a trade, ask yourself if you’ve thought everything out or if you’re just spinning the roulette wheel.

6. Letting emotions get the best of you

This is perhaps the most obvious error and the toughest to control. If you make a rash decision, it’s likely you’ll get a rash result. Like in anything, breaks can help, so when you get the chance to refocus and step away from the market after a bad break or poor decision, do it. Your bottom line will thank you later.

7. Forgetting to be patient

Patience is not a virtue, it’s necessary to survive. This is true both in life and in Forex trading. Many new traders start with the Forex market because they think they’ll instantly become rich and never have to work another day in their lives. Form a long-term strategy and give it time to develop and maybe that retirement dream will come true some day, just not in the first week.

8. Trading with overly short time frames

Daily and 4-hour charts are great. Use them, and don’t get too caught up in trying to make moves based on a 15-minute cycle. The shorter the time frame the more luck will rear its head, so remember that filtering out some of the noise of a short cycle by looking slightly longer will help enable you to spot trends instead of missing them in the heat of the moment.

9. Trying to do too much

Over-trading can sap your credit line and your brain. Remember that not every move will make you money, so it’s important to focus on the moves you make rather than spread yourself too thin. Demo trading is a great way to figure out what strategies work for you and how to find the right balance between being aggressive and not exceeding your abilities by making too many trades. Remember, trading less often produces more profit.

10. Forgetting to take profits

Hope can cloud judgment and empty bank vaults. Don’t be pessimistic, but when you have a profit sitting at your fingertips, take it. Not accepting profits often results in perpetual attempts to get even. When money is waiting for you to grab it, it’s also quite capable of flying away. Remember that making money, even if it’s not millions, is always good. Aim for profits of about 2 or 3 times your risk and you should come out on top.

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