Pitfalls in currency trading and day trading

There are several pitfalls in both currency trading and day trading. Here we will guide you through some of the most common pitfalls and mistakes that can happen to an inexperienced currency trader who is not familiar with them.

With such low barriers to entry, Forex markets attract many new traders. This is especially true as this market is open 24 hours a day, giving these new traders more flexibility in terms of when to trade. The initial capital requirements are also attractive – thanks to the leverage that most brokers offer, you can get started with just a few hundred dollars.

Pitfall 1: Starting without training

The most common mistake in Forex trading is thinking you can succeed without any experience or training. You’d be surprised how many new traders think they are somehow special and can make money from day one. These fantasies are often short-lived and expensive.

Trading is a skill and like every other skill on the planet, it takes time to get good at it. And like any other skill, you develop it either through trial and error or you can cut your learning curve by learning from an expert. In practice, you need both.

The problem with trading is that newcomers can often confuse luck with expertise. Everyone has almost a 50:50 chance of making a first win, regardless of their skill! You’d never get this with a skill like chess, painting or football – where half of the newcomers were given the impression that they were experts after they first went at it. However, the fact is that long-term results return to the trader’s average skill level (their advantage).

Investing in a trading education that can really help you understand how the markets and trading works is indispensable if you want to outperform the masses of other Forex beginners. We hope it’s with my trading skills, but if we’re not for you, try training yourself elsewhere.

Don’t try to run before you can walk! Learn the basics first, start small and slow, and forget about becoming successful with get-rich-quick schemes. Investing time and money to get a good Forex trading education is investing in yourself.

Pitfall 2: Trading without a plan

Because most traders try so hard to make the most of the trading opportunities the markets offer, they forget to follow their trading plan – if they even have one!

This, by the way, is what separates a professional trader from a beginner: how they approach their daily trading.

Beginners mostly trade from deal to deal without a plan and trade on emotions and tips, while more experienced traders will follow a trading plan and a routine that they spend energy and time developing. A trading plan should always be part of your trading.

A trading plan should always be part of your trading strategy so that you can make money more consistently. It allows you to better spot trading opportunities and better manage your open positions. So now you understand why trading decisions should follow a well-established process according to an effective trading strategy, preferably one that has been re-tested.

But having a trading plan is not enough – you need to stick to it. This will help you become a more experienced trader, especially when things are not going well.

Trade plan checklist

Consider the following when deciding on your trading plan:

– Your knowledge of trade, markets, economics

– Your strengths and weaknesses

– The reasons why you shop

– Your financial goals

– How to deal with large profits / losses

– Your initial trading capital

– How much money you can afford to lose

– The type of analysis you will use to discover your trading sets: technical analysis, fundamental analysis

– What type of currency pairs you mostly trade: majors, minors, exotics?

– The leverage you use

– The money and risk management rules you will follow

Pitfall 3: Trading without any money and risk management rules

Most beginners to the Forex market forget to use a stop-loss order, which is an automatic order that tells your broker to close your position if it reaches a certain level of loss.

If you don’t use stop-loss orders, this means you have an open risk, as your positions can freely fluctuate according to market price movements. Thus, there is a greater risk of excessive losses if things do not go your way, as you do not limit your losing positions to a certain level, leaving you vulnerable to large swings against your position.

You must have money management and risk management rules firmly cemented into your trading plan if you want your winning trades to be bigger than your losing trades. But having money management and risk management to follow is not just about using stop-loss orders to cover your losses, there are other things to consider.

Here are some tips and risk management:

– Always use stop-loss and take-profit orders to know in advance how much money you can lose and make on a single trade.

– Set a maximum loss per week and immediately stop trading if you reach it.

– Follow a risk/reward ratio of at least 1:2 if you are a trader, 1:3 if you are a swing or position trader.

– Use the right position size – only risk a maximum of 1% of your total trading capital on a single trade.

– Don’t change your risk level as soon as you make money – keep it constant.

– Do not cut your position up or down when the market goes against you.

Pitfall 4: Averaging down (or up) to get out of loss positions

You may have heard the saying before:

Cut your losses and let your profits run.

When you are losing money, it is wise to reduce your positions. But many traders fail to do so. On the contrary, they hang on to their losing positions in the hope that they will turn around, or put even more money on their losing positions.

Why should beginners do it?

Because they hope that the market will develop in their direction again, and that their current lost positions will become profitable and make even more money. In most cases, however, their losses are exacerbated, with prices going further than expected.

While this common mistake may be slightly less risky if you are a long-term investor, it is too dangerous when you are a day trader in a volatile market like Forex with a lot of leverage.

So never cut down or up a position at a loss. Open a position with the right size and use a stop-loss to avoid the temptation to cut your position up or down.

Pitfall 5: Use excessive leverage

Not understanding and overusing leverage is probably the most expensive mistake new traders make. There was a good reason why ESMA stepped in and restricted it for retailers in the EU – it is very poorly understood.

Leverage and margin trading are great tools that help you trade with more money than you have in your trading account, giving you greater exposure to the market. But this only benefits you if you have a consistently profitable strategy with a positive outcome.

Leverage can just as easily magnify your losses as well as your gains, so if you don’t have a winning strategy, you end up amplifying losses and mistakes. Leverage increases profits and losses in equal measure. For this reason, excessive use of leverage can wipe out your trading capital quickly if not understood and managed properly.

There is also a psychological aspect to consider, as traders often act less rationally when dealing with outsourced positions. When using high leverage, there is a greater individual risk for a single trade, which amplifies the psychological pressure you have to deal with when trading. In the end, you will risk more than you can afford to lose.

Pitfall 6: Having unrealistic expectations

Many beginners start trading currencies with the aim of getting rich very quickly, which often leads them to make mistakes. To stay motivated and disciplined, you need to work on setting realistic goals. If you don’t set goals that are actually achievable, all they will be is a source of frustration and disappointment rather than a challenging yet achievable goal.

To make significant changes in your trading, you should use the SMART method, so your goals are Specific, Measurable, Attainable, Relevant and Timely. This method helps you bring structure and manageability to your financial goals.

Pitfall 7: Choosing the wrong forex broker

Choosing one of the lowest rated forex brokers such as ForexTB or CMC Markets is almost always a non-optimal choice.

It is best to choose an STP or hybrid broker, while market makers are rarely good. There are some exceptions, the forex brokers that are in the top 3 list, eToro, Libertex and Plus500.

Pitfall 8: Forgetting about interest costs

If you have opened a trade and want to keep it open overnight, you will be charged a daily interest fee, or actually overnight given the timing of the reconciliation. This fee, or interest for those who prefer, will be applied to cash CFD positions held during the daily cut-off time. The daily cut-off time is 22:00 UK time. However, this may vary for international markets.

Note that futures and forwards do not incur overnight funding costs, but they have wider spreads. These contracts are usually used for long-term business.

Why is overnight interest charged? When you trade a CFD, you are using leverage. This means that you are actually lent the money required to open your position outside of the initial deposit you have paid. To keep your position open after the daily cut-off time, an interest adjustment will be made to your account to reflect the cost of funding your position overnight, plus a small administration fee.

Turning a short trade into a long one can quickly result in a loss if interest rates eat up a small profit while the trader hopes to see better prices. In this case, it is better to close the position, take a new one and continue to monitor the closed position until it is time to enter again.

Pitfall 9: Trying to predict news before it is released

Trading currency on the news is more difficult than it might sound. Not only is the reported consensus figure important, but also the so-called whispers (the unofficial and unpublished forecasts) and any changes to previous reports.

Some versions are also more important than others; this can be measured in both the importance of the country releasing the data and the importance of releasing in relation to the other data released at the same time. New traders rarely know these things. This means that a figure that looks very good may in fact be much worse than the market expected. It could also mean that the published unemployment figure, which looked catastrophic, was actually a sigh of relief for the market, which thought it would be much worse.

Pitfall 10: Central banks

Usually the market knows when central banks act, when they will announce what was said at their last policy meeting. Before these results are announced, we often see spreads widening, liquidity decreasing and many forex traders sitting on the sidelines before acting on the news.

However, the difficulty is to act when central banks act outside these windows. They may, for example, make an intervention that goes completely against your own positions, or decide to support their own country’s currency, which may cause the exchange rate to move in the wrong direction from what you intended.

For example, it is difficult to speculate on the JPY because the Japanese government provides pre-reports before news releases that slow down volatility. The US, UK and EUR markets do the same but not through the government. We have business media but we don’t use it properly. Business media are always trying to gain market share over the competition. They are the best source to let us know what is happening.

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