Forex trading can be an exciting and rewarding proposition. However, if you’re a newcomer to the world of forex, you may also find yourself making several mistakes.
Not only can trading mistakes affect your bottom line, but they can also cause you to feel discouraged and may result in you backing out of the markets altogether. To reduce the risk of this happening, here are some common forex trading mistakes you should avoid.
Not Knowing When to Sell
As a forex trader, you should track two major ratios – your win rate and your risk/reward ratios. Your win rate is a metric that tracks how many trades you win. Thus, if you win 80 trades out of 100 trades that you make, your win rate will be 80%.
Your risk/reward ratio, on the other hand, compares how much money you make to how much money you lose on an average trade. Thus, if your profits are $125 and your average losses on trade are $100, your risk/reward ratio is $100/$1225 = 0.8. Ideally, you should attempt to keep your risk/reward ratio under 1 while ensuring your win rate is higher than 50%.
Keeping your risk/reward ratio under 1 ensures that even if you have a stretch in which you are winning less than half your trades, you can still turn a profit. This is especially important if you are a day trader and depend on making a daily profit.
Don’t Choose the Wrong Broker
One of the biggest parts of being a forex trader is choosing the right broker for your needs. After all, your broker will be trusted with your money while you trade, and if you choose the wrong broker, you risk losing all your money.
Choosing an online broker may seem challenging. However, if you screen forex brokers carefully, you’ll be able to find the right option for your needs. Some considerations to keep in mind include whether the broker meets all regulatory compliance needs, how convenient their online platform is to use, what features the platform offers, and their customer service.
To be fully confident that you’re choosing the right broker, open a free demo account on their platform so you can personally test how good of a fit they are for your needs.
Not Having a Trading Plan
Before you start trading, you should have a clear-cut plan. Some elements of such a plan include the trading strategies you will use, what markets you will trade-in, and your entry and exit points. It should also include your risk management strategies, what your finances are (how much money you have to trade with), and at what time of day you will be trading.
A trading plan helps you stay focused on your goals and ensures that you will trade consistently. Additionally, it will make it easier to manage your emotions and can even help you improve your trading strategy.
Gaining success as a forex trader does not simply need you to be skilled and lucky, you also need to be patient and disciplined. The reality is that you will make mistakes during your trading journey. However, these tips should help you avoid major missteps, and staying dedicated to trading will result in your success before you know it.