The foreign exchange market comes with a low entry barrier which makes it a very accessible day trading market. All you need is a computer, an internet connection, and some initial capital to begin day trading. Know more best forex brokers.
The ease of entry does not translate into quick profit. Before you dive into the market, make note of the common mistakes that you should be avoiding.
If there are more losses than profit, pause
You need to keep a close watch on two yardsticks: win-rate and risk-reward ratio.
Your win-rate shows the number of trades that went in your favor as expressed as a percentage. So if you win 60 trades out of 100, your win-rate is 60%. A day trader must be able to keep the win-rate above 50%.
Your reward-risk ratio represents your win rate with respect to your losses on an average trade. If your losing trades have an average of $50 and your winning trades stand at $75, your reward-risk ratio is $75/$50=1.5. A ratio of 1 shows that you’re losing as much as you’re winning.
Day traders must strive to maintain their reward-risk above 1, and in the best cases above 1.25. Create strategies that help you win more than 50% of the time and come with a better than 1.25 reward-risk ratio.
No stop loss- no trade rule
Every forex day trade you undertake needs to have a stop-loss in place. A stop-loss is an offsetting order that helps you exit a trade when the price moves against you by an amount you spell out.
If there are stop-loss orders on your trades, you eliminate a major risk out of your investments. If you begin to incur losses on a trade, the stop-loss keeps you from losing more than what you’d be able to pay back.
Adding on to a lost trade
Averaging down means adding more funds to your existing position when the price moves against you, hoping that the trend will reverse. This is a dangerous practice. The price could keep moving in the opposite direction of your expectation for a long time and your loss may increase.
Rather, you should take a trade with a guest posting sites good position size and put a stop-loss on the trade. If the price reaches the stop-loss level, the loss you incur would be much lesser than what it could be without a stop-loss order. That loss is the only risk here.
Investing more than you can afford to
The major part of your risk management strategy is to determine and set aside the capital you are willing to risk on a single trade. Day traders should try to keep their risks below 1% of their capital on one trade. This essentially indicates that a stop-loss order closes out a trade if the loss moves towards being more than a 1% loss of trading capital.
This is helpful because even if you lose multiple trades in a row, you would not lose out on a large part of your capital. Additionally, when you make more than 1% on every winning trade, you make up for the loss.
Keeping a check on daily losses is very important in any good risk management strategy. Even when you risk only 1% per trade, you may end up losing a considerable amount of your capital in a day.
Expecting to win it all back
You may feel tempted to let go of your risk management strategy at times and take a much larger trade than usual. There could be a number of reasons why you would want to take a chance. You may have lost a couple of trades in a row and want to earn back your money. Or you are on a winning streak and hence feel invincible. Or, you find one trade that promises great returns, you want to take the risk.
In any case, risking too much is a mistake. Traders have turned around their stop-loss order in the hopes of profit. Others tend to get caught up in maintaining their margin
When experiencing this, remember to stand by your 1% risk per trade rule and your 3% risk per day rule. Avoid giving into the temptation, stick to your risk management strategy, and never put all your funds in a trade.
Anticipating the news
Several pairs could either rise or fall sharply in response to scheduled economic news releases. Though it may seem wiser to guess the direction the pair might move, and take a position before the news is out, it rarely ever works.
More often than not, the price moves in both directions quickly and monumentally before taking a steady direction. This implies that there is an equal chance of winning or losing a big trade in a matter of a few seconds before the news comes out.
The right broker can make all the difference
Keeping your money with a forex broker is the first and the biggest trade you would make. If you do not work with the right broker, you could end up losing all your capital due to poor management, financial concerns or a scam.
Study the market well and spend time finding and choosing the right broker. Take into account what you wish to accomplish, and what does the broker offer, and make sure your broker referrals come from reliable sources. Once this is done, test the broker using small trades at first and avoid accepting bonuses along with their services.
Never trade without a plan
A trading plan is basically a written document that spells out your trading strategy. It clearly states how what, and when you will day trade. Your plan must specify the markets you will trade, your timing, and the time frame you will use to analyze trades.
Your plan must also clearly mention your risk management rules and define how exactly you would enter and exit the market for both winning and losing trades.
Trading without a plan is simply a gamble. Make sure you have a trading plan in place and you have tested it for profitability in a demo account prior to putting your money at stake.