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10 Dangerous Forex Trading Habits and How to Avoid Them

When trading forex, you should maintain a businesslike attitude and take your investment seriously.

There are common bad habits that can prove severely detrimental to your trading account and every trader should do his or her best to completely avoid committing them.

10 Dangerous Forex Trading Habits and How to Avoid Them

1. Unreasonable Expectations

If you have heard stories of people investing $50 and making millions in a fortnight then those were lies.

Though it is possible to make a fortune from a small initial investment, this usually takes a lot of time as one gains knowledge and experience to grow the account.

During this learning period, be ready to suffer many losses. Some of them will be heavy enough to wipe out your trading account.

In short, do not quit your day job just yet. Take your time to learn the trade and expect reasonable profits especially in your first few months of trade.

2. Inexperience

Lack of knowledge and high expectations make many traders jump head first into live trading without first grasping the basic forex trading principles.

They then end up paying a very high tuition fee in terms of losses to learn the market. This trial and error approach is not recommended for the currency trading market.

Anyone interested in trading foreign currency should first take advantage of the practice account on the broker’s trading platform before investing funds in a live account.

This site, www.forextradingbig.com, has lots of resources to equip you with enough skills to tackle the forex market.

3. Ignoring Spread Impacts

Most forex brokers do not charge commissions on currency trading online. However, that does not mean there are no fees or charges that may eat into your forex trading profits.

Exchange rate spreads which are the differences between the ask price of a currency pair and its bid price directly affects each and every trade one makes.

During high volatility periods, these spreads can wildly fluctuate and may even turn a profitable trade into a loser.

During off-market periods when the market experiences lower liquidity, forex spreads widen and if not taken into account when managing a trade, may turn a winning trade into a big loss.

Spreads also tend to widen when there are expected news items that can affect currency prices.

4. Forgetting Effective Money Management

One of the worst mistakes any trader can make is forgetting to adopt practical money management strategies.

They then get influenced by greed and keep chasing promising trades that more likely than not turn into big losers.

At such a point, most traders will start treating their forex trading as a gambling game and as they say, a fool and his money are soon parted.

5. Holding Losing Positions Too Long

When you trade using your trading plan, it is highly likely that you will set a stop loss to protect your account from excess losses.

If one of your trades goes wrong, it is better to let it get stopped out rather than adjusting the stop loss in the hope that the price trend will reverse and the trade will turn into a profit for you.

Top traders are knowledgeable and experienced enough to know when to cut their losses and move on.

6. Over Leveraging

Trading on margin can earn you high profits in the forex market more than in any other market.

This is because the high leverage levels offered in the currency trading market enable a trader to control high investment amounts and thus make high profits.

However, the same high leverage is what can cause your undoing since a high leverage level exposes your account to higher risks that may potentially wipe you out.

7. Holding Too Many Open Positions

It is tempting sometimes to enter multiple trades, especially when a currency is doing so well. Whenever you can, kill that temptation as it is a product of greed.

It will make it difficult to manage your position and to contain any emergencies that may occur, especially during a currency price movement reversal.

A sharp trend reversal will result in higher losses on your account.

8. Neglecting Take Profit and Stop Loss Instructions

A trade that does not contain a stop loss is basically a gamble on the total amount of the forex trading account.

You should instruct your broker to allow the trade to play out only to a certain level of acceptable loss that should not be exceeded.

In the same way, you should act early even before entering a trade, to take steps for locking in profits.

Set your take profit level at a point where you feel the price is likely to reach and the point should cover your spreads and leave some nice pip gains.

9. Lack of a Sound Strategy

Every trader should have an overall plan on how they will enter, exit, and manage trades. Traders should also have a well defined plan for each trade before they enter into it.

Such plans should include the amount of funds to be invested in a trade, the amount of leverage to be taken, the currency pairs to be dealt in, stop loss levels, take profit levels, trade entry point, and an exit point.

The plan should also define a realistic expected return for each trade.

10. Indiscipline

You may have the best trading strategy, but if you don’t follow it through it is useless.

Every trader should have the discipline to wait for the ideal market conditions as stated in their trading plan before entering any trades.

Once the trader has entered the trade, he/she should use the formulated trading strategy to appropriately manage the trade until the position is closed.

Summary

Mistakes are a normal part of forex trading. Nevertheless, every trader should take steps to minimize their mistakes.

These dangerous trading habits featured above can be remedied by simple planning and adequate preparation.

Photo credit: ForexLearning

Filed in: Forex Articles

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