Holding Steady: 5 Forex Day Trading Mistakes to Look Out For
With the advent of the internet age, the popularity of forex trading, and day trading particular, has risen exponentially. People who previously had no access to the markets due to various constraints and limitations can now participate with little more than an internet connection and a bit of capital to start with. With every new enterprise, especially where money is concerned, caution is always key. In currency trading, there are many risks to be navigated and mistakes the experienced ones must learn to avoid in order to be successful.
An important point to note here is that in the currency markets, what you do can sometimes be just as important as what you fail to do, and the best way to try and find the right balance is to get as much quality information as possible while keeping your expectations, risk appetite, and emotions at healthy levels. It can be a challenge for anybody. To help out forex market participants, both beginners and old-hands, here’s a quick look at some of the most common avoidable mistakes and negative trading habits. We’ll get right to it.
Trading Before News Releases
This might sound a little strange, but taking a position on a particular security before some anticipated news hits is rarely a good idea. News trading, whereby the current events of the day determine the trading behavior of market participants, might seem like the natural day trading method, but it has its pitfalls. When news hits, the market expects that there will be a general market reaction or a particular related security will be influenced.
The fact is, nobody can ever be sure exactly how the market will react to certain events or news. Good news might send a holding’s value to absurd heights only to have it crash once the market corrects itself. Price action can create vast gaps in mere moments and these spreads can catch the unwary trader short. The volatility involve here simply isn’t a gamble worth the risk involved, and is a dangerous trading habit to cultivate.
Part of being a great day trader is knowing when to cut your losses and move out of a position. Being able to accept the reality in front of you – that you were wrong about a particular holding – is what will allow you to exit it once you’ve hit your stop loss criteria. The temptation to lower your stop loss levels in the hopes that the holding will recover is simply throwing good money after bad, and has no place in a winning strategy.
Taking Up High Leverage Positions
Leverage refers to the ratio of debt to equity on any purchase you make or position you take. Forex traders are a prime target for brokerage firms who offer them to traders who are unable to resist the chance to trade at levels multiple times the size of their account. The temptation of astronomical profit relative to their input can simply be too much.
The thing to keep in mind here is the fact that systematic controls and proper planning are the hallmarks of a successful trading regime, and this is what makes most experienced and successful traders keep away from highly leveraged positions except in very rare circumstances. The fact that you’re not making money trading without leverage should tell you that you won’t make money trading when you do decide to use it. Keep things simple and safe – Admiral markets recommends that you wait until the effectiveness of your trading strategies is proven before making use of leverage.
Trading More Than 1%
This is probably the most commonly repeated trading advice you could get out there, but the fact is, it’s so often ignored that repeating it here can only be helpful – never risk more than 1% of any account on any one given trade. A lot of people ignore this rule because it doesn’t fit in with the high-excitement trading they pictured in their minds or because of the finances involved in sticking with the rule (you’ll need to have $10,000 or more in an account to make a $100 trade). Day traders have a huge advantage here, as they can start off with relatively small trades with no restrictions. Stick to the rule and you can avoid quite a bit of headache down the road.
Trading for Immediate Income
Many people become traders hoping to be able to earn a livable income from it. This desire can be an overwhelming one, and it has caused many out there to forego proper planning measures. A sure sign of such cases is where a trader requires profits immediately in order to settle their bills. This isn’t what trading is about – it’s about building up sizable risk capital over time but this is impossible if money is being pulled out every so often to settle living expenses. It can also be an incredibly stressful way to operate as the profits on trades are not guaranteed and will vary depending on the market conditions.
There is an important relationship between Gold and Oil in the Forex market. Because these two commodities are used as the leading indicators in trading decisions in the Forex market. According to a 2011 survey of mine production in various countries, China is the only country in the world, followed by Australia and the United States. Thus the production of different countries in different years hits the currency of that country. Note that the USD has an inverse relationship with the GOLD, despite the fact that the US is often the largest producer of the GOLD. The main reason behind this is that the price of GOLD is always set against USD. Another reason is that sometimes investors think it is safer to transfer their capital from USD to GOLD. Gold: See the image below Oil In general, we see an increase in the price of oil, especially transportation costs. At the same time, the utility and heating cost of the finished product also increases. Its impact is particularly felt in oil-dependent economies such as the United States, China, India and other developed countries. But the exception is Canada, the world's second-largest oil producer and net oil exporter, which has seen a positive correlation between the oil price and the Canadian dollar, which is not unique among developed countries. One of the things I have learned so far is the economic calendar, let's see how you can understand the fundamental issues with the economic calendar.
If there is one feeling that traders universally abhor, it would probably be the emotion derived from watching a losing trade turn deeper, and deeper against them.At this specific point in time – you are watching yourself getting poorer; the complete antithesis of why you trade.If the trade is left unchecked, things can get really ugly very fast. An overleveraged position can lead to an outsized loss; and as a position can move against you for an extended amount of time, these losses can irreparably damage futures. Prevention is the Best MedicineBy prevention, we don’t mean preventing taking trading losses altogether. That would be impossible. Rather, we refer to the fact that traders should do their best to prevent unmanageable trading situations and placing themselves in these precariously unfavorable scenarios.This is like a trader taking an overleveraged position, without a stop on the position – and after the trade moves against them they have to watch and decide how to react after they’ve already lost money; and are staring at the prospect of losing much more.We saw the effects of this phenomenon in the DailyFX Traits of Successful Traders series. The Number One Mistake that Forex Traders Make is the fact that they take such large losses and such small wins. The chart below will show the average gain v/s the average loss on some of the most popular currency pairs, as taken from The Number One Mistake that Forex Traders Make: So much so that these traders can even have a winning percentage of 60% and STILL be losing money as a whole.Many may think that this mistake is relegated to new traders. It is not. As a matter of fact, confidence can be a huge contributor to this conundrum.Confident traders, thinking they could successfully manage trades on the fly – might look to take a large position on what they feel to be an extraordinary opportunity.This trader has forgotten that nobody can tell the future, but this happens to all of us. We think we have an inside track and we want to take advantage of our opportunity.But before you know it, hope can turn to despair. And overconfident, experienced traders can suffer from lack of planning just as easily as a new trader.There is no reason to belabor the past if this has happened, or is happening to you. It’s happened to me, and it’s happened to most traders.The only way to fix it is to learn… and institute this in your trading plan.As David Rodriguez stated in The Number One Mistake that Forex Traders Make: 'Always trade with a stop.'Set your maximum loss on the outset of the trade, before you have any ‘skin in the game,’ so that you don’t have to ask yourself the dreaded questions of ‘when is enough,’ while you’ve already got a losing trade on your hands.AcceptanceSome traders might not consider losses on open positions as losses until the trade is already closed.Make no mistake about it – these are still losses. This money is no longer yours as the price that you previously paid is no longer trading in the current market.A floating loss is still a loss; it just hasn’t been realized yet.So if you do find yourself in a losing position with the question of ‘when should I stop the bleeding?’ you should first accept the fact that the loss on the position is an actual loss. It just hasn’t yet been realized as a loss, and you still have the chance to lose more.Set Your Line in the SandWhen looking at the equity on the account – taking into account floating gains and losses – you can then decide how much more you want to commit to this trading idea.In the DailyFX Trading Course, we advise keeping total risk to less than 5% of an accounts’ equity; so if a trader has equity of $10,000 in their account – they would attempt to keep losses below $500.Some traders will take this concept a step further, and allow themselves to diversify within this risk amount. So if a trader wants to be able to manage 4 trades at once, and keep total account risk to less than 5%, they can look to risk 1.25% of their account equity on 4 different trade ideas. Using the above trader with a $10,000 account, looking to keep total risk below $500 – they can place 4 different trades, risking $125 each. You can take your current account equity, and calculate the percentage of that equity that you want to further commit to this idea. Once you have that amount, you can place a stop on the trade so that if price moves that far against you – the bleeding will be stopped.
There are lots of reasons why a trader might not execute their trading plan properly and not wanting to be wrong is a big one.If you have been trading for any length of time, you understand that it’s impossible to take winners 100% of the time and avoid all trading losses.For those just beginning to trade, the fact that you will lose is a lesson in itself.All data on your charts is historical which means you’re only able to assess what has happened already.Everybody is perfect in hindsight.As smart as you are you can never really know who is sitting ready to act and so a big trade or unexpected event can change everyone’s perspective of what a fair price currently is regardless of what has traded before.Then there’s the fact that the market can make you wrong for a tick whether or not the concept for a specific trade was valid or not. Until you’ve closed the trade, you cannot be certain that it will achieve your profit target.Ego In Trading Is A MistakeWe know we will be wrong at various points in our trading, then what’s the reason why we often see traders having a hard time in “letting go” of unsuccessful trades?Surely by knowing that we are all but certain to take losing trades on any given day, it should be easy to just click the mouse and exit the trade, right?Wrong.And I believe it’s not really to do with being wrong at all but all about the way in which a trader loses that leads to many of the problems they face.FACT: Trading Is Not About Being Right We have a deeply ingrained aversion to being made to feel/look like a fool. Perhaps this is down to evolution and the drive for a mate. But it’s certainly observable in many walks of life.People often revel in denigrating those who have said or done something silly or naïve. Many a comedy moment is centered on this type of thing (think Homer).At many mainstream schools, much of the learning is focused on being right or wrong as opposed to reasoning (part of the problem I believe with producing genuinely capable people at the end of education – rather than people who have learnt to pass exams).So it is with trading that not being made to feel like a fool, not having your money taken from you in a silly way and proving to yourself that you really do know what you’re doing can become a millstone around a trader’s neck.This taps into some pretty strong instincts – ones which when we’re already in a heightened state of emotion, can be extremely difficult to negate.The compounding effect of multiple experiences can lock you into negative behavior patterns until you’re really able to recognize what’s going on.Here is just a sample of situations you may be able to relate to:1. Getting Stopped Out To The Tick AgainYou don’t want to be the patsy at the table who keeps getting their stop taken out right before the market moves to target. This can lead to trading on the edge to try to exit out of the position when your price starts to get traded out.The problem with this is that there’s a seemingly invariable jump through your price and you end up missing your exit.Another observation is where a trader just keeps moving their stop until they are so committed to the trade that they refuse to take the loss at all.2. You Skip Parts Of Your Trading PlanYou take a loss because you missed an important piece of information that’s normally part of your decision making process because either you weren’t paying attention or didn’t prepare properly.You want to avert this feeling of inadequacy and acting in a stupid way and so only take high probability setups – in reality ones which you feel will definitely be winners, so when they lose you either refuse to accept the loss or feel betrayed by the market.3. You Don’t Ever Want To Miss A MoveThe market keeps acting in a certain way that it doesn’t usually do and you’re taking loser after loser because of this. You don’t want to feel like a fool when you stop trading and it reverts to its usual self so rather than sit on your hands, you keep trading and taking losers.Either this or you start trading “off plan” which could be disastrous. You start to feel like you know what’s going to happen whilst you’re in a trade, so you mess with your plan “on the fly”.4. Trading For RevengeYou take an impulse trade that ends up a losing and you know you should have followed your plan instead. Rather than trading your plan, you try to make up for it by taking further impulse trades whilst digging yourself into a deeper and deeper hole.If you can never truly be right on a trade, how can you ever really be wrong?Your Trade Outcomes Are Never WrongWe appreciate we will take losses in our trading so what does “Never be Wrong Again” actually mean?Trading is as much to do with changing your mindset and therefore behavior as it is to do with strategies, money management and everything else.Perhaps more so as everything else is dependent on how well you grasp these concepts.Being right is NOT about taking winners and you can do some real damage when you profit with poor logic. Being rewarded for bad plays will cause you to repeat the mistakes.It’s about being able to assess a situation, what is more likely to happen next and apply a strategy properly and consistently where appropriate. If your reasoning is sound and you take your trade, you have done the right thing in spite of the outcome of the individual trade.You have identified your trading edge and given it the opportunity to play out in the market.But if being right is about taking a trade and not the outcome then surely you can still be wrong?Of course but not how you think you can be wrong.Focus On The Act Of TradingThe point is that if you view it this way, your focus is on trading properly.You can never be wrong about the outcome because you know it’s uncertain.The only thing we can fully control in trading is when we trade and how we trade.The proper way of being wrong….the only way in an uncertain environment..is not doing what we know we should do.In order to give yourself the best possible chance of assessing an opportunity correctly and executing your strategy consistently there are a few simple (but uncertain – there’s no concrete right or wrong) steps you can take:You need a clear and simple enough plan of how you will trade and under what circumstancesLeaving the level of discretion to a minimumBy monitoring market conditions (for example, as simple as whether the market is trending or consolidating) you can understand when the strategy is likely to work better and therefore what you should be looking for leading up to a trade.Strip the word wrong from your trading vocabulary by following your trading plan.If you have a strategy that has a genuine edge in the market, the most important step to success is being able to execute it effectively and eliminate trading errors.These errors often stem from the strong emotions that come with being made to feel silly and can be averted by changing your mindset on what being right or wrong is all about.Change yours and never be wrong again.