Is it the start of your Forex journey or are you already an experienced Forex trader? Either way, make sure to know these top 5 Forex Day Trading Mistakes!
AtoZForex – The popularity of the Forex is growing daily, as it has very low barriers to entry. Moreover, the technological progress all over the world makes it easier for traders to access Forex market from any point on our Planet. If you have a computer, an access to the web, and some money, you can already start exploring your way to Professional Forex trading.
Top 5 Forex Day Trading Mistakes
However, even though it is easy to start trading, it does not imply that it is easy to make the profit. In order to be successful, you will need a substantial amount of experience and knowledge. You can learn Forex basics via some online courses/tutorials or read Forex books. When it comes to experience, you cannot gain it without actually trading Forex.
Nevertheless, what you CAN do is trying and avoiding mistakes that most traders do. There are lots of challenges that Forex market involves. Today, we look at top 5 Forex Day Trading Mistakes that can drain your account.
#1 Day Trading with inadequate Win Rate and Reward Risk Ratio
The win rate reflects how many trades you win. This figure is usually expressed in percents. For instance, if you win 50 times out of 100, your win rate accounts for 50 percent. Following on this, as a day trader, you would want to keep your win rate above 50 percent.
As for the reward risk ratio, this is the ratio of how much a trader risks on any single trade, to how much he/she wishes to make if the trade goes in his/her favor. For example, if your average losing trades are $40, and your winning trades are accounting for $60, your reward risk ratio is $60/$40 = 1.5. As a fact, you would want to keep your reward risk ratio at above 1. Perfect reward risk ratio would stand at above 1.25.
In case you keep you win rate above 50 percent and your reward risk ratio above 1.25, you can call yourself a profitable trader. However, you can still be profitable if you win rate is a bit lower and your reward risk ratio is a little higher and vice versa.
#2 Avoiding Stop Loss while Day Trading
We suggest you having a stop loss order for every Forex Day trading you enter. A Stop Loss order is a type of order that closes an open position automatically at a specific price. By having a stop loss, you are assuring that you get out of a losing trade. For instance, the price action did not emerge the way you expected, and there is no more reason to stay in the trade. At this point, you need to take the loss and move on to the next Forex trade.
You need to place your stop loss at a location, where you can’t reach if your price action forecasts are right. Moreover, the stop loss must be placed at the same moment the day trade is taken, since you want the order to be active as soon as you enter the trade.
#3 Lack of Risk Management in your Day trading strategy
The first step to your perfect risk management strategy is establishing how much of your capital you would be willing to risk on each trade. Day traders usually risk 1 percent or less of their capital, also do not forget about the perfect risk reward ratio. This implies that a stop loss order closes the trade in case it results in more than a 1 percent loss of trading capital.
Risking just 1 percent per trade is perfect since even if you lose a number of trades, just a small amount of capital get lost. Meanwhile, in case you make 2 – 3 percent per winning trade, you can easily recover the losses. Moreover, it can provide you with an opportunity to make great trading returns.
Furthermore, the risk management step number two – control of daily losses. For instance, with risking only 1 percent per trade, if you see a lot of losing trades, you could lose a big amount of you account capital. In order to avoid such situation, use stop loss.
#4 How reliable is your broker?
Investing your funds with unregistered Forex broker might lead to very bad consequences. If the broker does not possess a trading license, which reflects the region of operations, we suggest NOT TO DEAL with it. Global regulators caution investors’ community against dealing with firms that have no authorization. Moreover, in case things go wrong, you will not be able to recover your losses and/or be protected.
See also: How to choose the right Forex Broker?
#5 Day Trading With no Trading plan
All of the points above must be included in your trading plan. The Forex trading plan is a written document that contains the exact information about how, what and when you trade.
Moreover, it is very important to actually follow your trading plan. Thus, your plan needs to be very precise, so you know which step to take next. Also, your trading strategy should include the information of the markets you want to trade and the time frames you will use for analysis. In addition, your trading plan needs to have points about how you will enter and exit the trades.
Are you making any of these top 5 Forex Day Trading Mistakes? Think we missed something? Let us know in the comments section below.