Forex trading doesn’t have to be a game of trial and error. Unfortunately, many traders fall into very common and very avoidable traps because they just haven’t taken the time to learn some basic principles.  Or worse, they are swayed by marketing messages that promise riches from trading without breaking a sweat. And it’s not just new traders that are hurt. Experienced traders testing new systems or trying new trading strategies commonly get snared by these traps.
See charts, analysis, videos and data by clicking on the flags
But there are a few common mistakes traders make that you should understand to avoid getting these traps and losing lots of money in your trading.
-
Essential Reading for Traders
-
| | |
| | | | | You should always back-test and practice-trade Backtesting is the process of applying a trading strategy or idea to past price data to see what its performance would have been like. Theoretically, backtesting should provide some basic expectations about the risks and potential rewards of trading a system in the future. In a later section we will talk about backtesting software and other resources that you can use to speed this process a lot. And even after backtesting, successful traders also practice trading a new strategy or system before trying it in the live market. Learn more about smart practice trading.
You need more than one system or strategy. We have seen too many traders become discouraged because they do not include enough diversity in their trading strategy. That means that a trader should be diversified across several currency pairs, and a portfolio should have more than one strategy or system active all the time. Diversifying strategies and investments helps smooth your equity curve and can help you take advantage of changing market conditions, not to mention minimize risk. We also encourage traders to trade in multiple markets. Forex traders tend to be married to that market alone, but to be truly diversified to control risk and maximize profit, all traders should invest in multiple markets.
Purely technical systems are risky and difficult
Technical analysis can simplify analysis by eliminating subjectivity, and is easy to build rules around. But, it can overlook issues like roll-over, spread and fundamental risk factors. These issues should be accounted for when trading or building a system using only technical analysis, as they can add trading costs and ignore large potential market swings, especially if managed as short term trades. Learn more about proper use of Technical Analysis in Forex Trading.
Bracket orders and fixed stops can hurt as much as help
Very often we see systems establishing a fixed stop and profit taking limit at the same time an entry limit or market order is placed. The fixed stop and limit order “bracket” the position. Risk control is critical, but fixed stops may not work in every situation. In some cases, fixed stops will under perform other risk control measures and each alternative should be evaluated in the backtesting and implementation process. Be careful in short-term trading
Logically, most traders would agree that if you can build strategies and systems that work on the hourly charts, you should be able to build systems that work on the daily charts, and vice-versa. The disadvantage of short term systems, however, is trading costs. Trades are much more sensitive to slippage in the short term and the more frequently you trade, the more spreads you absorb into your portfolio. This can quickly eat your trade profits, where a longer-term system requires less transaction cost.
Learn how a longer-term approach can help you avoid trading costs and getting whipsawn by tight stop losses.
Keep up with us:
| 
