Dealing with the liquid markets that are involved in foreign exchange, involves a tremendous amount of risk. Here are some of the mistakes that are commonly made when it comes to forex trading.
Different time frames may end up showing completely opposite trends. So before you make a trade, decide on how long a time frame you are planning on using. For instance, the 15 minute or 5-minute time frames are commonly used by “scalpers” who deal with intraday trading and the 4hour charts or daily charts are used by swing traders. Switching between various time frames would result in different support and resistance levels so you need to be aware of the market exposure of the trade you are making. You might want to avoid the lower time frames like 1 min time frames as it is very difficult to make a trade based on these.
Risk to reward ratio
When making a trade it is important that you don’t risk more than you are willing to make. For instance, assume you use a risk to reward ratio of 4:1, you can win 4 trades consecutively, yet a single loss can erase all your profits. One way of improving on this is to use a reliable investment management software, which can help notify you if you make a trade with a bad risk to reward ratio. It is not recommended to use a fixed take profit and stop loss level, since this will depend on market resistances and supports.
Another common mistake made by forex traders, is to try to seek “revenge” on the market, the moment they make a loss or a string of losses. Although there is a possibility of these trades going in your favour, it is more than likely that it would end up being in another loss. Before long you will be risking more than you should and will eventually lead to you blowing your account. If you take a long string of losses, try to call it a day and resume the next day with a fresh mind.
Painting your screen
A common practice by most people who trade currency is to fill their screen with all sort of indicators, labels and other graphics. This will eventually just result in you, either not using them at all or even in making the wrong trades. The likelihood that all indicators point in a particular direction is quite slim so avoid using too many of them.
These are some of the common mistakes made by forex traders and the methods and what you can do to rectify them.