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FOREX Trading Mistakes

Averaging Down

Traders often stumble across averaging down. It is not something they intended to do when they began trading, but most traders have ended up doing it. There are several problems with averaging down. The main problem is that a losing position is being held - not only potentially sacrificing money, but also time. This time and money could be placed in something else that is proving itself to be a better position. Also, for capital that is lost, a larger return is needed on remaining capital to get it back. If a trader loses 50% of her capital, it will take a 100% return to bring her back to the original capital level. Losing large chunks of money on single trades or on single days of trading can cripple capital growth for long periods of time. While it may work a few times, averaging down will inevitably lead to a large loss or margin call, as a trend can sustain itself longer than a trader can stay liquid - especially if more capital is being added as the position moves further out of the money. Day traders are especially sensitive to these issues. The short time frame for trades means opportunities must be capitalized on when they occur and bad trades must be exited quickly.

Pre-Positioning for News

Traders know the news events that will move the market, yet the direction is not known in advance. A trader may even be fairly confident what a news announcement may be - for instance that the Federal Reserve will or will not raise interest rates - but even so cannot predict how the market will react to this expected news. Often there are additional statements, figures or forward looking indications provided by news announcements that can make movements extremely illogical. There is also the simple fact that as volatility surges and all sorts of orders hit the market, stops are triggered on both sides of the market. This often results in whip-saw like action before a trend emerges (if one emerges in the near term at all). For all these reasons, taking a position before a news announcement can seriously jeopardize a trader's chances of success. There is no easy money here.

Trading Right after News

A news headline hits the markets and then the market starts to move aggressively. It seems like easy money to hop on board and grab some pips. If this is done in a non-regimented and untested way without a solid trading plan behind it, it can be just as devastating as placing a gamble before the news comes out. News announcements often cause whipsaw-like action because of a lack of liquidity and hair-pin turns in the market assessment of the report. Even a trade that is in the money can turn quickly, bringing large losses as large swings occur back and forth. Stops during these times are dependent on liquidity that may not be there, which means losses could potentially be much more than calculated. Day traders should wait for volatility to subside and for a definitive trend to develop after news announcements. By doing so there is likely to be fewer liquidity concerns, risk can be managed more effectively and a more stable price direction is likely.

Risking Too Much Capital

Excessive risk does not equal excessive returns. Almost all traders who risk large amounts of capital on single trades will eventually lose in the long run. A common rule is that a trader should risk (in terms of the difference between entry and stop price) no more than 1% of capital on any single trade. Professional traders will often risk far less than 1% of capital. Day trading also deserves some extra attention in this area. A daily risk maximum should also be implemented. This daily risk maximum can be 1% (or less) of capital, or equivalent to the average daily profit over a 30 day period. For example, a trader with a $50,000 account (leverage not included) could lose a maximum of $500 per day. Alternatively, this number could be altered so it is more in line with the average daily gain - if a trader makes $100 on positive days, she keeps losing days close to $100 or less. The purpose of this method is to make sure no single trade or single day of trading hurts the traders account significantly. By adopting a risk maximum that is equivalent to the average daily gain over a 30 day period, the trader knows that he will not lose more in a single trade/day than he can make back on another.

Unrealistic Expectations

Unrealistic expectations come from many sources, but often result in all of the above problems. Our own trading expectations are often imposed on the market, leaving us expecting it to act according our desires and trade direction. The market doesn't care what you want. Traders must accept that the market can be illogical. It can be choppy, volatile and trending all in short, medium and long-term cycles. Isolating each move and profiting from it is not possible, and believing so will result in frustration and errors in judgment. The best way to avoid unrealistic expectations is formulate a trading plan and then trade it. If it yields steady results, then don't change it - with forex leverage, even a small gain can become large. Accept this as what the market gives you. As capital grows over time, the position size can be increased to bring in higher dollar returns. Also, new strategies can be implemented and tested with minimal capital at first. Then, if positive results are seen, more capital can be put into the strategy. Intra-day, a trader must also accept what the market provides at different parts of the day. Near the open, the markets are more volatile. Specific strategies can be used during the market open that may not work later in the day. As the day progresses, it may become quieter and a different strategy can be used. Towards the close, there may be a pickup in action and yet another strategy can be used. Accept what is given at each point in the day and don't expect more from a system than what it is providing.

Running losers and cutting winners

The most common trading mistake is holding on to losing positions for too long and taking profit on winning trades too soon. The key to limiting losses is to follow a risk-aware trading plan that always has a stop-loss order and to stick to it. No one is right all the time, so the sooner you’re able to accept small losses as part of everyday trading, the sooner you’ll be able to refocus on spotting and trading winning strategies.

Trading without a plan

Resist the urge to trade spontaneously based on your instincts alone without a clearly defined risk-management plan. If you have a strong view, go with it, but do the legwork in advance so you have a workable trading plan that specifies where to enter and where to exit — both stop-loss and take-profit.

Trading without a stop loss

Trading without a stop loss is a recipe for disaster. It’s how small, manageable losses become devastating wipeouts. Using stop-loss orders is part of a well-conceived trading plan that has specific expectations based on your research and analysis. The stop loss is where your trade strategy is invalidated.

Moving stop-loss orders

Moving your stop-loss order to avoid being stopped out is almost the same as trading without a stop loss in the first place. Worse, it reveals a lack of trading discipline and opens a slippery slope to major losses. Move your stop loss only in the direction of a winning trade to lock in profits, and never move your stop in the direction of a losing position.

Overtrading

Overtrading comes in two main forms: trading too often in the market and trading too many positions at once. When you trade too often, you always have a position open and are constantly exposed to market risk. Trading too many positions at once is like throwing darts at a board and hoping something sticks. It eats up your available margin collateral, reducing your cushion against adverse market movements. To avoid these mistakes, focus on opportunities where you think you have an edge and apply a disciplined trade strategy to them. Also be careful about trade duplication and overlapping positions — a long USD/CHF position can be the same as a short EUR/USD or GBP/USD (all long USD versus Europe), while a short EUR/USD and a long EUR/JPY position nets out to be the same as being long USD/JPY.

Overleveraging

When you trade too large a position size relative to your available margin, even a small market move against you can be enough to cause your position to be liquidated for insufficient margin. To avoid this scenario, don’t base your position size on your maximum available position. Instead, base it on trade-specific factors such as proximity to technical levels or your confidence in the trade setup/signal.

Not adapting to changing market conditions

Stay flexible with your trading approach by first evaluating overall market conditions in terms of trends or ranges. If a trending move is underway, using a range-trading style won’t work, just as a trend-following approach will fail in a range-bound market. Use technical analysis to highlight whether range or trending conditions prevail.

Being unaware of news and data events

Even if you’re a dyed-in-the-wool technical trader, you need to be aware of what’s going on and what’s coming up in the fundamental world. You may see a great trade setup in AUD/USD, for instance, but the Australian trade balance report in a few hours could blow it out of the water. Therefore, make data/event calendar reading a part of your daily and weekly trading routine.

Trading defensively

After a series of losses, you may find yourself focusing more on avoiding losses than spotting winning trades. At those times, it’s best to step back from the market, look at what went wrong with your earlier trades, and refocus your energies until you feel confident enough to start spotting opportunities again.




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