13 July 2018
Avoiding Trading Mistakes
Making mistakes is part of the human condition – we all make them. While experience is a great teacher, it helps if you can avoid making major mistakes without learning the hard way. With this in mind, it pays to be forewarned about common trading mistakes that can really hurt the bottom line.
The key to avoiding many trading mistakes is having a solid workable plan and being resolute enough to stick to it. That plan should incorporate strategies to be aware of and avoid these traps.
- Risking too much capital on one trade. Putting too many eggs in one trading basket may net the occasional win, but is bound to fail in the long term. Successful day traders usually have a rule of committing no more than 1% of their capital on any Forex trade. Or in some cases the equivalent of the average daily profit over a typical thirty day cycle. This strategy mitigates the risk of substantial loss and by sticking to this rule the trader ensures that they cannot lose too much in one day.
- Averaging down. The practice of averaging down is buying more at a lower price than you originally bought at. In layman’s terms it’s a little like the practice of doubling down, or going all in. Many traders rationalise the practice by saying it lessens the loss in dollar terms. Rather than increasing exposure, traders must have an exit strategy that they can act upon to minimise potential losses.
- Anticipating how news impacts on Forex movements. Major news announcements, particularly in relation to the Federal Reserve or any Central bank news can impact significantly upon Forex markets. Taking a position prior to an announcement in anticipation of markets reacting in a certain way is at best, speculative. Markets can react in irrational ways when news hits and can be unduly influenced by additional news in the forms of forward projections, forecasts or additional statements. When you add this unpredictability to the inevitable volatility triggered by orders and stops coming from all directions, caution must be exercised when taking a position prior to the news release.
- Similarly, reacting on impulse after major news hits can put your overall trading position at risk. Markets tend to fluctuate wildly after major news breaks, and acting prior to a trend is discernible can be risky.
- Perhaps the most dangerous trap of all is to have unrealistic expectations. Inexperienced traders particularly can be misled into believing that following a “proven formula” will lead to success. The Forex market is subject to many competing forces and is naturally subject to volatility. Formulating a sound trading plan based upon data and evidence will help to form realistic expectations and form a framework in which to operate. Ultimately, you can manage expectations by coming to accept the nature of the market and working within how it behaves on a given day.