Hanging onto Losing Bets
If all you take from this article is the importance of cutting your losses, you’ll be far better off than the average forex trader. As it turns out, this problem is pervasive throughout the forex trading community. Unfortunately, hanging onto losses for too long quickly overtakes the money you made from winning investments.
The easiest way to overcome this problem is to simply become comfortable with the idea of losing. It’s going to happen. No forex trader wins 100% of the time and you’re not going to be the exception. Once you become okay with the fact that you aren’t going to retire with a perfect record, it will become easier to accept that a loss happened and cut it before it gets worse. The alternative is letting your ego get in the way so you hang onto a trade in the hopes it will reverse course and prove you didn’t make a mistake.
Cutting Your Wins Early
Oddly enough, most forex traders have the exact opposite problem when they’re actually doing well. Here, we counsel discipline and patience. Chances are you close out your winning moves because you’re trying to protect profits. Just like you’re afraid of having a loss, this same fear is driving you to become overly protective of your money.
Practice holding off when things are going your way. If you can do this and follow the above advice, you’ll automatically see greater profits from your forex efforts.
Improve Your Risk/Reward Ratio
This important piece of advice pulls from the two above. In short, you always want to be seeking a reward that is bigger than the potential loss you’re risking. Almost every trading book is going to cover this, yet a lot of forex traders can’t seem to help themselves and accept risk/reward ratios of 1:1.
Instead, you once again need the discipline to hold out for ratios of 2:1 or better. Again, this one, tiny change will have a very profitable ripple effect on the profits you post.
Trying to Preempt the News
When trading on the stock market, almost the entirety of your efforts needs to be focused on the company you own or plan on buying shares in. You want to figure out what they’re going to do in the future. If you can, you’ll be profiting.
Trying to do the same thing with forex is much more difficult. Attempting to preempt the news almost always ends in disappointment because the market for currencies is so erratic. Some news may force a currency to dip, but what about the reaction to the story? What about other news that may come out regarding another currency?
Remember, too, that most people trade with stops in place. As the market begins moving after major news, many of these stops will be triggered, causing a whipsaw-like effect before the trend you anticipate can ever occur.
While you should always focus on continual improvement, if you simply avoid these four forex trading mistakes, you’ll be better off than most of your comrades.