5 Classic Trading Errors Costing You Money At Forex Trading
By Jonathan Dayan |
Every activity you’ll ever try supplies its own list of shameful errors and online financial trading is no different. They’re the mistakes you make which are too obvious or too embarrassing for you to tell anyone else about. They haunt you in your sleep and they hurt you in your wallet. We’ve all made at least a few of them and none of us like to talk about it. But in the interest of keeping these sloppy mistakes under wraps in the future, here named and shamed are the classic mistakes traders make when trading Forex, indices and commodities online. And don’t worry we all make them; regardless of whether we’re starting out or we’ve been in the market long enough to know better.
1. What’s In A Name? – Confusing “Ask” And “Bid”
It’s the mistake we don’t own up to but getting confused between “Bid” (that’s buy … I think) and “Ask” (sell) whether you’re trading online or through the phone is all too common. “Why couldn’t they just name them up and down” is what you may start wondering if you make this costly error. Because in Forex trades a pair of currencies is being traded every time – one currency bought and one currency sold simultaneously – it’s the error that’s almost bound to creep in at some point or other.
What to do when it happens to you: exit the position and learn better for next time.
What to say to your friends: absolutely nothing.
2. “It Can Also Go Down?” – Misunderstanding Margin
Margin, leverage, leverage, margin: sometimes you’re only completely sure about what it all means when one of them is at $0, the other is at 400x and you find yourself wishing it was the other way around. Yes, for the all time future avoidance of doubt, your margin will decline if a trade goes against you and yes you should always keep enough money in your account to cover the scale of the positions you have open – the more leveraged your positions, the more money you’ll need. Think of margin, the funds in your account and leverage as three friends in a field – the closer they are together the better everyone gets along, the further apart they move the more quickly your likely to see the friendship fall apart; and realize to your sadness that all three are gone.
What to do when it happens to you: register for the eToro Forex course.
What to say to your friends: it was a vital experiment within my long term strategy.
3. Oops I Did It Again – Forgetting Your Stop Loss When You’re Trading On The Fly
Few mistakes can be more common or more costly than this one. In the middle of a volatile trading session – with action happening all around you – it’s easy to neglect your stop loss but it can be a fatal mistake. Once they’re opened, most brokers will keep your trades open until you close them, so if you exit your platform or otherwise forget a trade and leave it to run on, the results can devastate your account. Even if you’re not so unfortunate, keeping unlimited positions open when you’re trading under heavy leverage can very quickly eat into your funds if the market moves against you suddenly. Unless you’re a serious scalper, think twice about opening a position without a stop loss. Never forget that acts of God and acts of technology conspire all too often to leave your account at risk.
What to do when it happens to you: blame it on lack of sleep and know better for next time.
What to say to your friends: stop loss is for sissies (and so is making money)
4. Too Much Of A Good Thing – Getting Drunk On Leverage
Nothing feels so much like easy money as trading under leverage when you’re starting out. Instead of investing with the $500 or $1000 which you thought you had available, suddenly you’re able to start making deals worth many hundreds of $1000’s. That kind of power can easily go to a trader’s head: and all too often it does. Getting intoxicated with leverage is a risky business. Keeping your leverage within a reasonable range – of between 10 to 50x for the majority of positions you enter will help you develop a more reliable feel for the trading market. It should also shield you from the short sharp market shocks which often leave the 400x leverage trader with nothing left to hold on to but his memories.
What to do when it happens to you: remind yourself you’re not demo trading – it’s time to trade sensibly
What to say to your friends: it was only $—– (fill in as appropriate)
5. How To Lose Money And Alienate Profits – Setting Your Stop Loss Too Close For Comfort
As we’ve already discussed stop loss (and also take profit) orders are really important for effective and secure Forex and financial market trading. However, even these faithful tools can let you down in a crunch if you haven’t yet mastered how to use them. The most common error traders fall in to with stop loss limits is placing them to close to their entry points. At first glance this strategy seems to make sense because it offers a way for you to protect your account from unfavourable market movements. In practice, however, the markets rarely run smoothly and even the most favourable trend on an asset which you’re trading will see moments of reversal within the wider positive trend. To avoid you’re trades closing prematurely at a loss make sure your stops are set a fair distance away from the open rate – a few pips isn’t going to do it. Alternatively, employ a trailing stops approach where you move your stop loss level forward or backwards in-line with the direction of trade.
What to do when it happens to you: re-examine your trading strategy. If you’re anxious to contain your losses consider reducing the leverage in your trades instead of shortening your stops.
What to say to your friends: I may not have made money but I didn’t lose that much