Are you interested in learning to trade currencies? If so, you’ve probably been wondering about how to avoid the most common mistakes that beginners make. The good news is that it’s relatively easy to learn about the pitfalls. It’s a bit more of a challenge to avoid every single one of them. However, armed with information and a will to succeed, you can side step most of the traps that newcomers fall in to. Half the battle is understanding how people often go astray when they enter into the exciting, profitable world of buying and selling foreign currency. Here are the traps to be on the lookout for.
In trading, planning is the biggest part of a successful strategy. It’s true in almost every profit-making endeavor: having a written game plan means you have a much lower probability of going wrong. Too many traders are overcome by the sheer excitement of getting started. That’s understandable. But taking the time to write out a detailed plan is essential.
Start by listing the amount of time you can trade each day, how much money you have available, which pairs you want to trade, what your profit goals are, and how you plan to select entry and exit points. If possible, be particularly focused on what your trading rules are going to be, what resources you’ll use for research, and what you intend to do if several trades in a row go wrong. When it comes to trading forex for the first time, it can be scary if you don’t prepare yourself. So, make a plan and follow it.
Ignoring Time Horizons
You can include time horizons in your plan if you wish. Some traders like to consider them separately. The point is to know what timeframes you’re going to be working with. For example, are you intending to be a day, swing, or long-term trader? If you want to get in and out of the market quickly, your timeframes will be quite short. It’s important to know these aspects because they will impact the amount of money you place on a given trade and what your entry/exit signals will be.
Using Too Much Leverage
Using too much leverage is one of the most dangerous of the pitfalls and it can wipe you out in a matter of days if you fall for it. No matter how much leverage your broker offers, keep on the conservative side for at least the first month of your activity. Large profits are possible, but so are big losses. This cold truth is particularly true for those new to forex.
Not Using Money-Management Techniques
It’s essential to have a money-management technique in place, a sort of rules-based plan for how to use your funds. Many forex enthusiasts set an upper limit of 2 percent of their total capital. For instance, if you have $2,000 in your account, you would never make a purchase for more than $40 on a single transaction. The two-percent rule is an effective way to rein in the natural human impulse to bet big, and blow out your account in a short amount of time.