Your success depends on avoiding these traps
01 of 10: If you’re losing, don’t continue trading
There are two trading statistics you should be cautious about: win rate and reward-to-risk ratio. A day trader should aim to maintain a win rate of over 50%. The reward-to-risk ratio should be greater than 1, ideally above 1.25. You can still profit even if your win rate is slightly lower and your reward-to-risk ratio is slightly higher, or vice versa. Try to keep it simple and implement strategies that win more than 50% of the time and offer a reward-to-risk ratio better than 1.25.
02 of 10: Trading without a stop-loss
You must have a stop-loss order for every forex trade you make. A stop-loss is a counter order that exits you from the trade if the price moves against you by an amount you specify. Having a stop-loss in place for your trades takes a significant portion of the risk out of that investment. If you start incurring losses in a trade, the stop-loss prevents you from losing more than you can afford.
03 of 10: Adding to a losing position
Dollar-cost averaging is adding to your position (the price at which you bought the trade) as the price moves against you, under the false belief that the trend will change. Adding to a losing position is a dangerous practice. The price can move against you for a much longer time than you expect, and your losses can accelerate. Instead, make a trade with the correct position size and set a stop-loss on the trade. If the price hits the stop-loss, the trade will close with a smaller loss than it would have been without it. There’s no reason to risk more than that.
04 of 10: Risking more than you can afford
A key part of your risk management strategy is determining how much of your capital you are willing to risk on each trade. Day traders should risk less than 1% of their capital on any single trade. This means that the stop-loss order will close the position if it causes a loss of no more than 1% of the trading capital. This means that even if you lose several trades in a row, only a very small amount of your capital will be lost. At the same time, if you make more than 1% on each winning trade, your losses will be recovered. Another aspect of risk management is controlling daily losses. Even if you are only risking 1% on each trade, you can lose a significant amount of your capital in one bad day. You should set a percentage for how much you are willing to lose in one day. If you can tolerate a 3% loss in one day, you should commit to stopping at that point. Day trading can become addictive if you allow it. Only play with money you have designated, and stick to your strategy.
05 of 10: Going “all-in” (trying to make back everything)
Even if you have a risk management strategy in place, there will be times you feel tempted to disregard it and take a trade much larger than you typically would. The reasons vary, and it will be a stroke of bad luck to do the worst of it. You may have lost several trades in a row, making you want to recover some of the losses. A string of wins may make you feel invincible. There will always be one trade that promises very good returns, and you may be willing to risk almost everything on it. If you are risking too much, you are making a mistake, and mistakes tend to snowball. It’s known that traders will cancel their stop-loss orders in hopes of a turnaround. Many of them are also drawn to trying to maintain their margin, believing it will turn and they will win big. When you feel this way, stick to the 1% risk rule per trade and the 3% risk rule for the day. Resist the temptation, adhere to your risk management strategy, and avoid going “all-in” or adding to a position.
06 of 10:
10 of 10: Attempting to Predict News
Many pairs (two stocks – one long and one short – both correlated) move sharply up or down following scheduled economic news releases. Predicting the direction of the pair and taking a position before the news comes out seems like an easy way to make a large profit. It is not. Often, the price will move in both directions, sharply and quickly, before choosing a sustainable direction. This means you are equally prone to a large losing trade in seconds after the news is released and to a winning trade. There’s another problem. In the moments right after the release, the difference between the bid price and the ask price (highest buying price and lowest selling price) is much larger than usual. You may not be able to find the liquidity you need to exit your position at the price you want (using smaller trades to exit the position). Instead of predicting the direction of the news, have a strategy that allows you to enter a trade after the news is out. You can benefit from volatility without risking all the unknowns. A forex strategy for non-farm payrolls is an example of this approach.
07 of 10: Choosing the Wrong Broker
Depositing money with a forex broker is the biggest deal you will make. If managed poorly, financially troubled, or a scam, you could lose all your money. Take time in choosing a broker. There is a process that consists of five steps you should follow when deciding on the broker you will use. You should consider what you want to achieve, what the broker offers, and use reliable sources to get broker referrals. Then, test the broker using small trades at first and do not accept the offers presented with their services.
08 of 10: Making Multiple Correlated Trades
Perhaps you have heard that diversification is good. Diversification is a strategy based on your knowledge, experience, and what you are trading. Warren Buffett said about diversification: “Diversification is a protection against ignorance. It makes very little sense if you know what you are doing.” If you believe in diversification, you may be inclined to make several day trades at the same time rather than just one trade, thinking you are spreading your risks. You are likely actually increasing them. If you see a similar trade setup in several forex pairs, there is a good chance those pairs are correlated. This is why you see the same setup in each of them. When pairs are correlated, they move together, which means you may win or lose on all those trades. If you are losing, you may have doubled your losses by the number of trades you made. If you do several day trades at the same time, make sure they move independently of each other.
09 of 10: Trading Based on Fundamental or Economic Data
It’s easy to get drawn into the news of the day or to form a bias based on an article you read that says the economic conditions are good or bad for a particular country or currency. Long-term fundamental outlook is irrelevant when you are day trading. Your only goal is to execute your strategy, regardless of the direction it tells you to trade. Bad investments can rise temporarily, and good investments can drop in the short term. There is no correlation between fundamentals and price movements in the short term – using fundamental analysis makes you focus on misconceptions and form biases. Any long-standing biases can lead you away from your trading plan. Your trading plan and the strategies within it are your guide in the market and prevent you from taking unnecessary risks or gambling.
10
10: Trading Without a Plan
A trading plan is a written document that outlines your strategy. It specifies how, what, and when you will trade each day. Your plan should include the markets you will trade, the times you will trade, and the time frames you will use for analysis and executing trades. It should clearly define your risk management rules and specify exactly how you will enter and exit winning and losing trades. If you do not have a trading plan, you are taking unnecessary risks. Create a trading plan and test it for profitability in a demo or simulated account before trying it with real money.
Source: https://www.thebalancemoney.com/forex-day-trading-mistakes-4065100
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