How to avoid the pitfalls.

Basic but important info about trading Forex

How to avoid the pitfalls.

Postby Paul » Tue Feb 24, 2015 6:20 pm

Simple fact is you wont avoid them all and will never have a 100% record as a forex trader no matter what all the spam emails and websites tell you.

However you need to be aware of the main mistakes you can and will make as a new trader.

Trading without a stop / moving your stop
Overtrading
Over leveraging (too many lots)
Holding / Opening trades when Red news is near


Trading without a stop / moving your stop
THE number one cardinal sin of trading!

If you do not set a stop loss order it shows that you have applied absolutely no planing to your trade. If you dont have a stop loss order you cannot assess your risk properly and you will find it very hard to close your trade if it goes against you as your mental state will be saying to you " it will reverse , its will reverse" so you hold onto a trade and eventually you either close the trade for a much bigger loss or you lose your entire account!

REMEMBER : Plan the trade , trade the plan.

Stop loss moving is another pitfall you may encounter , You must only ever move your stop towards your entry , never away. Doing this blows your trade plan to bits and wrecks your risk assessment.


Overtrading

This comes in a couple of flavors.

1. You made a nice couple of trades and are thinking that your invincible. So you start putting on more and more trades and forget all about your trade plan. Result . the gain you made on the first few trades is erased and you end up the day down rather than up.

2. You made a few lossy trades and are pissed at the market so you start putting more trades on trying to get the loss back, this is revenge trading and will cost you . Your mental state is shot to bits.

Remember the market does not care about you or anyone else. It will do what it does , if you have done a few lost trades on a working strategy . Sit back and take stock , grab a coffee and relax for a bit.


Over leveraging (too many lots)

What happens here is that you have failed to correctly work out your risk.

Say you want to take a trade that needs a 20 pip stop and you have an account of $1000 and each pip on your trading account is worth $1

You should only be using 2% risk per trade .

this means that your risking $20 for this trade, at a pip cost of $1 per pip that means you will only be able to trade 1 mini lot.

If you do a couple of good trades you might start to get greedy and trade more lots . so instead of making a measly profit you shoot for the moon and trade more lots for example 10 lots , this now puts your risk at $200 for the trade or 20% .

You lose the trade and your account has now dropped by 20% , you now return to your original 2% risk and it takes a long time to get the account back in shape.


Holding / Opening trades when Red news is near

If you are technical trading you have no business trading when major news events are due to happen. The news announcements can and will throw your tecnical analysis right of sync , not just that spreads can also widen and you will be unable to exit your trades until the news is done spiking the prices around.

There is a place for news trading and we do it here but it takes a totally different view of the market.
Paul
 
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