The forex market has low barriers to entry. It’s the most accessible day trading market. You need a few bucks a computer and internet connection to start trading. But that doesn’t mean it’s all flowers and rainbows. There are a few things you need to mind. With that said, following, we are mentioning common mistakes beginners make when starting Forex trading:
When You Keep Losing, you can’t Trade
There are two things you should mind, you have to mind your win rate, and risk to reward ratio. The win rate shows how many trades you win; it is expressed as a percentage. For instance, if you won 50 trades out of 100, your win rate is 60 percent. Your win rate should not be less than 50%.
The risk-reward ratio is how much you will win as compared to how much you will lose on your average trade. If the average losing trade is $50, and winning trade is $75, then your reward to risk ratio 75-50 is 1.5. Ideally, you should keep your risk to reward ratio at 1.25; it shows a probable profit.
Don’t Trade Without Stop Loss
It’s important you understand forex before trying out your luck. You have a stop loss for every trade. It’s an offsetting order that gets you out of trouble if the price moves against you by the amount you specified. The loss is controlled, but you have to take it and move onto the next trade.
Never Add to a Losing Day Trade
Average down is adding the position as the price move against you. It is mistaken that the trend reverses. Adding to losing trade is taking a high risk. The price will move against you for longer than you expect. It happens when the loss gets high.
Instead, you better trade with a proper position size and set a stop loss on the trade. If price hits the stop loss, the trade will be closed at a loss. There is no reason to risk more money than this.
Never Risk more than you can afford to Lose
An important part of risk management is to establish how much capital you are willing to bet on a single trade. Online Forex Brokers need to risk 1% or less of your capital on a single trade. This means the stop loss will come out a trade if the result is more than one percent of the capital loss.
Never Bet Everything You Have
Even if your platform has a risk management strategy, there will be times when you want to risk more than you should. The reasons may vary, but if you do this, you will have several loses in a row. As you will lose, you will want to make a comeback with a single stroke.
This will force you to take drastic measures, and you will end up losing even more capital. So, you better control your temptations of risking all and winning a bit in one stroke. This is how most people go broke.
Don’t Anticipate the News
Pairs rise and fall with scheduled economic news. Anticipating the direction in which a pair will move and taking a position before the pair moves is a risk. It’s a deadly and common pitfall. The fact is, sometimes the price moves in both directions. The values change before you can anticipate anything.
In these important moments, the spread between bid and ask price is often much bigger than usual. You won’t be able to find liquidity to get out of position and get the price you want. Instead of anticipating the direction news, you will need a plan that will put you back in trade after the news. You can still make a buck from volatility.