Avoid These Forex Trading Common Mistakes

By: Jon Provencher
Learning about the common mistakes inexperienced foreign currency (Forex) traders make will help you to develop your skills and chances of being profitable. Here are some common mistakes and assumptions inexperienced traders make:

- Misplacing Stops
Stops are necessary to avoid disastrous losses, however poorly positioned stops can be just as disastrous. Prior to placing a trade the trader should calculate the risk to reward ratio for the trade. The stop should be set with the traders money management in mind and should not be too close or too far away from the price. Traders should also calculate moving their stop as the trade goes in their favor to lock in profits and reduce potential losses.

- Abusing Leverage
With Forex brokers providing up to 400:1 leverage, it's easy for inexperienced traders to get carried away with the dream of making quick profits. When traders use a high level of leverage the returns can be astounding, but when the trade doesn't work out the result can be catastrophic.

Traders should always compute the dollar value of the risk they are taking for each trade and ensure that this is appropriate for their investment balance. Skilled traders rarely risk more than 2-3% of their investment balance on any one trade.

- Placing Technical's On A Pedestal
Technical indicators are great tools that assist traders to make decisions. However making decisions for trades based solely on what the technical indicators are telling us can end up in large losses. By considering fundamental data together with technical data you will have a much better chance at being profitable.

- Day Trading
There are profitable day traders out there. However, for inexperienced traders, trading with the longer term trend will be easier and have a better chance of making profits. Longer duration trades give the position more time to move in your favor, particularly if the market is volatile.

- Blindly Following A System
There are a lot of Forex systems out there that promise miraculous results. But if you start trading one of these systems without evidence that it really works you could find your investment balance quickly reduced to 0. If you want to use a Forex trading system, a sensible approach is to back-test and forward test it using software or on paper prior to putting any real money at risk.

- Underestimating Emotions
Emotions can have a huge impact on your Forex trading. Keeping a trade diary will help you to understand how your emotions are affecting your trading, you can then learn to use them to your advantage.

- I Back-tested It So It Must Work
A mistake traders make is to assume a back-tested system will continue to work. Forex markets are constantly changing and are effected by global and political events. Before you start to use a back-tested system you should calculate if it reasonable to assume that the market conditions the system has been tested on are likely to be similar to market conditions in the future.

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