5 Fatal Flaws in Forex Trading

5 Fatal Flaws in Forex Trading
5 Fatal Flaws in Forex Trading

There are some common mistakes that Forex traders make preventing them from reaching their investment goals. Perhaps being aware of these pitfalls can help to keep you from experiencing Forex failure.

1. Trading without a well-tested plan

One of the most disastrous mistakes can be to trade without a trading plan that has been tested and tested again doing demo trading or paper trading. It is essential that in order to build this plan, you do your homework. Your plan should be the result of extensive research, careful risk assessment, realistic goal setting and exit and entry rules. It’s important to keep excellent records and after each trading day, see what worked and what did not work well so that you can tweak your plan.

2. Losing more on losses than you gain from your wins

Most Forex traders also have experience in other markets. Statistics say that Forex traders are correct more than 50 % of the time. BUT, they lose more money on their losing trades than they gain from their winning ones. To avoid this scenario, the recommended strategy is to cut your losses but let your profits keep going. That means, even though our instinct tells us to hang on through the losses, they might come back up, it is counterproductive in Forex trading. Use a minimum of a 1:1 risk ratio. With high probability trades, use a lower ratio like 1:1 or 1:2, for lower probability trades, try 1:2, 1:3 or even 1:4. In order to stay profitable, you will need to be correct less often if you use a higher ratio.

3. Not using your Trading Plan

Just as important as developing a well-tested trading plan is sticking to that plan. So many traders have a great plan, it is tested, and it works, yet they end up falling into a trap of trading based on their emotions. Greed can be an extremely dangerous emotion when it comes to Forex trading. Fear of failure can also be a problem when it causes you to abandon your thought out and tested trading plan. Forex trading needs to be based on a tried and tested plan. People who get too excited by actual trading tend to forget about the plan that worked so well in demo trading and get caught up in the potential or fear and trade with their feelings instead of their plan.

4. Over-trading

Basically this means don’t trade too much. Over-trading can cause increased fees and commissions. Over-trading also causes you to lose more money faster. You need to know exactly what you are looking to gain, how much you have to trade with and use that knowledge when you execute your trades. Some traders who are over-trading don’t even know they are doing it. Traders can get so excited by their profitable trades that they want to do even more. Preventing over-trading brings us back to the idea of having a good trading plan and sticking to it.

5. Failure to manage risk

Risk management is one of the most important parts of Forex Trading. It is what makes the difference between intelligent trading and gambling. Your risk per trade should be a very small percentage of your capital. With elemental and technical analysis you can understand the odds. You then need to make sure you can handle the loss if it should happen. If the loss would be too much to cope with, then the risk is too big. It’s a basic rule of thumb when making trading decisions.