5 Mistakes Every Trader Should Avoid in Forex Day Trading
When it comes to intraday forex trading, smart traders know well some of the mistakes every trader should avoid. These are mistakes that are often confused as strategies by most unseasoned traders, and they result in huge losses and demoralization. To survive in the high-stakes forex market, one has to know the most common risks and come up with ways to avoid them. Watch out for these five mistakes in forex day trading.
1.Developing Unrealistic Expectations
There is a lot of money to be made in forex day trading. That said, the high rewards come with high risks. Trades are volatile, and there are a lot of factors to take into consideration. For instance, volatility will often depend on time, occurring mostly at the start of the trading day. It is also determined by factors such as news events. The volatility makes it seem as if there are many opportunities, but in the real sense there are many losses.
You cannot master every trade that comes your way. The safe thing to do is come up with a proven plan and stick to it. Forex trading demands self-discipline and patience, among other virtues.
2. Staking Too Much
How much money do you have to trade with? How much do you stake on an average day? Given the market trends, how long are you supposed to stay in the trade? Such pertinent questions help you know the risks in the market – and they need clear answers.
Professional day traders have a rule whereby they risk no more than 1% of their capital on a single trade. This is because they know that there are good days and bad days. Suppose that you stake 30% of your capital on a single trade and lose it all. You will need to profit in several consecutive trades before you can recover your lost sum. Should you lose more, then your position will be jeopardized and it will take a long time to recoup your lost investment.
3. Averaging Down
Averaging down is an attractive strategy but a crucial mistake that most traders make unconsciously. Suppose you enter a trade when the currency pair is trading at $1. As the market moves, the price lowers to $0.5. This might seem like a great opportunity but it is not. This simply lowers the average price for all the units you have bought.
There are two crucial problems with averaging down. First, it takes a downtrend for the opportunity to show itself since you begin the trade at a disadvantaged position. This trend may continue leading to greater losses than if you did not average down in the first place. Second, you will need to make much more than was necessary with your initial position since you have lowered the average cost for all your units. This is a lose-lose situation in all ways.
4. Staking Your Position on an Upcoming News Event
The financial markets are highly reactive to related developments. When major news breaks, traders always expect a sudden change in movements. At times, one can tell how the markets will react, but this is not always the case.
Other than that, news contains a lot of market-related information that is often misleading and not a real representation of what is going on in the market. The result of breaking news is a volatile reaction in the markets, and this is especially impactful in day trading. As such, placing a trade in expectation of a news event can make you win big or blow away your entire stake in minutes. It is always better to stick to your predetermined trading plans.
5. Staking Your Position Too Soon after a News Event
As explained in the previous point, you can always expect a lot of volatility for some time after a news event. A highly volatile market is a risky market, and high risks are not good for day traders. As such, it is advisable not to stake a trade simply because the news on the market has pointed to a certain direction. Instead, give the market some time to settle and then pick up on a trend that shows signs of strong and decisive momentum.
Forex day trading is a risky affair but it has the potential of bringing in big rewards. It is important to know the common risks in the market and avoid them at all costs. The risks outlined above are especially common in day trading, so be cautious and keep an open eye out for them.