Common Forex mistakes

mistakeWhy so many traders make tons of mistakes? Why traders tend to make the mistakes over and over again? I will show you the most common mistakes that traders make which keep them from making money consistently.

Unable to Consider All 3 Aspects of a Trade

There are three equally important components to each trade, each essential to the long-term success of a trader. Unfortunately, the majority of new and unsuccessful traders only pay focus on one, or at most two of these components. These components to every trade are as follows: (1) entry (the price at which the trade is got into), (2) stop (the price at which the trade is exited for a loss) and (3) target (the price at which the trade is exited for profit). The three are essential to the success of the trader, but a majority of first time traders pay only focus on the entry, and possibly the stop.

The Entry

Forex traders will often focus on their entry price, but often for that wrong reasons. Specific entries are crucial for forex traders. It’s not enough to sell a pair simply because you think it’s going to drop eventually. The purpose of every entry is always to type in the market at a price as close towards the price in which you would keep your stop as possible. This often demands patience, and may imply that traders miss out on the occasional trade, but the important things is to reduce your risk.

The Stop

First time traders usually don’t make the fatal mistake of not using stops, but many first time traders don’t use stops properly. A stop needs to be set at the level where the trade setup is invalidated. If you don’t know at what level the setup becomes invalidated, you shouldn’t trade the setup. If the level where the trade setup gets invalidated is too far away for your risk management plan, either decrease size, or don’t trade the setup. A lot of traders are perfect within their analysis, but they are stopped out because they didn’t put their stop higher than the invalidation level. Other traders throw-away money by keeping their stops beyond the invalidation level, meaning they lose more money than is necessary to trade the setup correctly. If you don’t know where your stop should be, then the setup isn’t definite enough to generally be trading, and you should pass on the trade. Stops are meant to protect traders, make sure they are protecting you as best as they can.

The Target

The target is the section of the trading equation that most new traders overlook completely. To become successfully at trading, traders should have a very good risk to reward ratio (r/r). The target is an essential element of this ratio. Numerous traders, when asked about their targets, would say “higher” or “lower”. Others uses multiples of their stop – targeting 100 pips if they have a 25 pip stop, so they really have a 4-1 r/r ratio. Although this second approach is superior to saying “higher” or “lower”, it’s still flawed. It’s simple to set a 1,000 pip target to provide you with a huge r/r ratio, but if that target isn’t likely to be hit, the trade is doomed from the beginning. So how should targets be placed? Just like every setup has a level where the setup is invalidated, each and every setup also offers a target. Sometimes the prospective is a result of a measured move, and sometimes it’s merely the next major area of support or resistance. Traders should placed their targets within these price zones, to maximise not only the amount of pips earned, but the probability the trade gets to its target. If the reasonable target is close to the entry then the invalidation level, this means the r/r ratio is below 1:1, and the trader should pass on the trade.


Over-trading

angryMost traders do not earn money in the markets over the long-run for one simple reason: they trade too much. One interested fact of trading is that most traders do very well on demo accounts, but then when they start trading actual money they do badly. The reason for this is that in demo trading there’s virtually no emotion involved as your real money is not at risk. So, this goes to show that emotion is the #1 destroyer of trading achievements. Traders who over-trade are operating purely on emotion.

Trading whenever your pre-defined trading advantage is not actually present is over-trading. Trading in case you have no trading plan and have not mastered a trading edge yet is over-trading. Fundamentally, you should know EXACTLY what you’re searching for in the market and then ONLY trade when your edge occurs. Trading too much makes you rack up transaction costs (spreads or commissions), and it also causes you to generate losses much faster as you are solely gambling on the market. You have to have a calm and determined approached to the market.

Not using risk reward and money management properly

Risk management is critical to achieving success inside the markets. Risk management includes controlling your risk per trade to a level which is tolerable for you. Most traders ignore the fact that they COULD lose on ANY TRADE. Knowing and believe that you might lose on any trade…why would you EVER risk more than you were confident with losing??? Yet traders make this mistake again and again…the mistake of risking too much money per trade. It only takes one over-leveraged trade which goes against you to trigger a chain of emotional trading errors that wipes your trading account faster than you believe.

Not Following a Trading Plan

Stress traderA trading plan is essential for all traders, old and new. A trading plan should lay out not only the setups the trader will seek to trade, but the risk management strategy of the trader. As an example, a trading plan will include weekly, monthly and quarterly pip targets, the maximum amount capital a trader is willing to lose in a given week, month or quarter, the pairs a trader is going to be trading, the utmost number of trades a trader will require at one time, and anything else which may be important to the prosperity of the trader. Trading plans don’t have to be overly complicated, but they need to be produced and followed. A trader ought to know precisely what he or she is searching for, simply how much they are prepared to risk, and just how much they are seeking to make. A trading plan is important for trading success. Sticking to that trading plan is also important. Sometimes sticking with a trading plan means passing on trades, or perhaps ceasing trading for time. It’s important though, for long term success.

Not Looking forward to Confirmation

There are really two types of confirmation that traders should wait for, but don’t. The very first was that’s, assuming a support level or resistance level won’t hold, rather than looking forward to it to fail. The other type of confirmation that traders should look for is waiting for any key candle to CLOSE below or above a certain level. For example, if a trader is watching a head and shoulder’s pattern , and price breaks underneath the neckline, the trader should hold back until the close of that candle before shorting. The reason for this really is that currency pairs will often put in a false break of key support or resistance, after which shoot into the middle range before the close of the candle. This sharp reversal can be quite expensive to traders who jumped on the break of the key level. By looking forward to the candle to close, traders help reduce the risk of this sort of reversal occurring.

Unfortunately, this list covers only a fraction of the multitude of mistakes created by forex traders. I hope this list is useful to you.

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