5 most common intraday trading errors in Forex

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5 most common intraday trading errors in Forex

 

Daily trading on the Forex market with leverage carries a number of risks. There are several typical models of intraday trader’s behavior that eventually lead to a complete failure. We can identify 5 main mistakes of traders, which significantly reduce the level of profits. These mistakes can be avoided if you stick to certain strategies and use your knowledge correctly.

Position averaging

The most common mistake of traders is averaging the position. Almost every trader at a certain point in his trading activity resorts to this erroneous method. The main problem of averaging positions is the “clinging” of a trader to a losing position, which results in losing not only money but also time. In most cases, it is more profitable to close a position and open a new deal in the right direction than to try to “outlast losses”. Equally important is the fact that the reimbursement of large losses resulting from averaging a position requires a much higher percentage of profit. If a trader loses 50% of his capital, he needs to double up in order to return to the previous level. Large lump sum losses can permanently undermine the potential growth of the trader’s capital. In some cases, averaging can bring profit, but in the end, it leads to large losses and margin-call, because the trader may not have enough funds to maintain the position when it is actively increasing.

Placement of positions before the release of major news

Traders are aware of the impact of upcoming economic news on currency rates and the exact time of their release, but often cannot predict the subsequent reaction of the market. Additional statements, changes in the values of indicators and other related news can lead to extremely illogical market movements. At the time of the release of serious news there is often a surge of volatility, resulting in the market absorbs the stops of both sellers and buyers. Traders’ actions, in this case, are impulsive and lead to the formation of a saw-toothed chart, followed by the formation of a real trend (if it is formed). For the above reasons, opening a position before the release of major news significantly reduces the trader’s chances of success. There is easy money in the Forex market; traders hoping to make easy money often incur large losses

Opening a position immediately after a major news release

The release of big news provokes serious market movements, from which it seems to traders that it is possible to easily collect several profit points. However, if you do not adhere to a pre-arranged plan, entering the market immediately after the release of major news can be as unprofitable as placing a position before the release of news. The release of news in conditions of lack of liquidity may lead to the formation of saw-toothed market movements. In this situation, a profitable position can turn into a loss-making one in a few minutes. Market fluctuations can make a trader to open several times seemingly profitable positions, which, ultimately, bring all the increasing losses due to the triggering of the put stops. Intraday traders need to wait for the volatility to drop and the full formation of the trend after the announcement of the news. This strategy allows you to define the main trend more accurately, avoid problems associated with volatility, and use risk management strategies more effectively (the topic of trading on the news is covered in the article Trading on the news).

Risk of more than 1% of equity capital

The use of excessively risky positions does not guarantee high returns. Almost all traders who risk most of their capital eventually leave the market in bankruptcy. The general rule for all traders in the Forex market is to use stop-losses in such a way that losses on an open trade do not exceed 1% of the account balance. Professional traders often risk a much smaller share of their capital. Intraday traders should pay special attention to the rules of risk management and risk no more than 1% of the amount of capital, or an amount not exceeding the average daily profit for the last 30 days. Thus, if the trader’s capital is $50,000, he should limit his daily losses to $500; similarly, if the average daily profit of the trader is $100, his daily losses should not exceed $100. The purpose of risk management is to prevent losses that cause serious damage to the trader’s capital. Acceptance of losses that do not exceed the average daily income for the last month, practically guarantees their coverage in the short term (issues of risk management in the Forex market are discussed in the article Leverage on Forex: a stick about two ends).

Unrealistic expectations

Traders trade according to their personal expectations, which may not be true. A trader can believe that the market will turn around as much as he likes, but it does not happen and he bears losses. Market movements often do not give in to the logic on which a trader relies, and his or her judgments turn out to be erroneous.

The best way to combat unrealistic expectations is to use a rigid trading plan. If the trading plan brings a stable profit, don’t change it – even a small profit can significantly increase your capital thanks to the leverage. Enjoy what the market has to offer. Over time, as your capital grows, you will be able to increase your positions and this will bring you additional profit. All new strategies need to be tested on small amounts before they can be used to maximize profits. When performing intraday trading, a trader needs to divide the whole trading day into different time intervals. After the opening of the trading day and before its closing, the markets are the most volatile, so during these periods of time you should use strategies aimed at taking advantage of strong movements. During the trading day, until it closes, the markets are much calmer, so the strategy used should be less aggressive and more adapted to the calm market. Accept what the market has to offer you for certain periods of time, and do not expect super profits from the trading strategy you are using.

Conclusions

There are 5 most common trading errors, which are held hostage by intraday traders, and which can be avoided by using alternative strategies. Instead of averaging positions, traders are recommended to close unprofitable deals in accordance with a pre-designed plan. During the news release it is necessary to refrain from any actions until the moment of volatility decrease. The risk must be constantly under control – the loss of one day must be compensated by the profit earned the next day. A trader should keep an eye on his expectations and use what the market offers him. Understanding the presence of hidden problems and their competent elimination contributes to the success of trading trader (to achieve success in the Forex market you will help you to article 10 methods of risk management in the Forex market)