This article looks at the different mistakes beginners make when entering the FX trading market.
The foreign exchange market can be both extremely exciting and extremely frustrating for new traders. Many of these individuals believe that by trading according to the forex rules and trading examples, they will be profitable. Many of these individuals find themselves either experiencing losses or just breaking even. There are numerous reasons for this, and this article will look at the mistakes traders are probably making.
1. Not setting risk management techniques
The majority of new traders enter the market with unrealistic expectations of instant wealth – this is the first mistake. Due to an excitement around all the money they are going to make, many new traders will forget to implement risk management techniques increasing their level of trading risk. There are also those who will not implement these techniques purposefully in the hope to obtain a quick and large profit on the trade. Unfortunately, this often results in detrimental losses as the forex market is highly volatile and unpredictable. The rule of thumb is that you should never risk more than 2% of your trading capital. This may restrict the amount of profit made, but it also reduces the amount of capital lost.
2. Entering the live market too quickly
Many new traders are excited about FX trading and choose to enter the live market as soon as possible. This impatience combined with inexperience can only result in certain damaging losses. It is essential that you do not enter the live FX trading market until you have had the opportunity to master your forex strategy and become familiar with your trading platform. The easiest way to do this is by opening a demo trading account. Some individuals may benefit from opening several of these accounts in order to test strategies and FX trading methods. By practicing your skills on the demo account or accounts, you will gain practical experience in FX trading.
3. Not considering the FX trading risk to reward ratio
A trade can turn bad for many reasons, but one of the more common reasons is a fault in the trader’s FX trading strategy. If you are not experiencing profits you should examine your current strategy to determine what is causing the error. The risk to reward ration must be exact, and it has been seen that losses can occur because of a limited risk to reward ratio. An ideal strategy will allow you to leave profiting trades whilst they are positive, but cut losses before they become too damaging.
4. Using too much leverage
Leverage plays a large role in many new traders FX trading careers. By using leverage you are able to execute large trades with minimal amounts of trading capital. While this seems convenient, it can be dangerous due to the fact that leverage increases trading risk immensely. This means that if one were to experience a profitable trade using leverage, the result would be highly advantageous. However, if one were to experience a bad trade then the loss would be more damaging than if leverage had not been used. It is important to use leverage with caution or avoid it altogether.
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