Forex is the largest market by volume. Yes, we know that. But the fact that the number of Forex trading beginners has grown by 35% in 2020 is still pretty much surprising. Especially, when acknowledging the fact that Forex is way more complex than stock trading or even crypto trading.
With stocks, you have a bunch of information that the companies release themselves that help you more or less predict what the price of the share will look like in near future. With cryptos, you simply guess or go to Elon Musk Twitter and see if he has posted anything scandalous recently. But with Forex, everything is tough. Even for economists, the picture is never clear unless there is a serious economic crisis in the United States or the United Kingdom, or inflation is hitting the home countries of major currency pairs.
One way or another, Forex is popular and newbies to trading like it. However, due to the complexity of the industry, these newcomers are prone to making mistakes that could make them broke in a minute. We have noticed that there are quite a few common mistakes that come from certain misconceptions about trading Forex. Hence, we will be discussing what they are and why you should avoid them in the article below.
Trading without Understanding Basic Concepts
Probably, every trader has heard about pips, commissions, and leverage. But not all of them think to realize how crucial they are to the financial performance of every single trade. For instance, when traders see high leverage of 1:500 they rush to the broker thinking it is a rare and amazing opportunity without any attempt to understand leverage in trading and its influence. For instance, you invested 500 USD in a certain currency pair and you get 0.05 USD for each pip. Using leverage, you can control 250,000 USD but the value per pip would become 25 USD, which is quite a high payout to the broker.
In an ideal world, the broker has negative balance protection and will not charge you for anything that makes you liable for more than you are holding on your account. But, not every brokerage will grant it to you. Hence, if you opt-out from using a stop-loss feature, you are ordering a recipe for disaster. If you think that your predictions for a certain asset are right but need some time to come true, well, get ready for devastating wipeouts if they are not.
Stop-loss has to be your trading strategy plan no matter how precise you think your forecasts are. But you should not choose the stop-loss amount by chance, too. You have to base it on your research and analysis, how much loss is it OK for your account to absorb, and how much would scare you away. It is the point at which your trading strategy is invalidated.
Oh, dear. We have heard it all too often. Diversify your portfolio, right? Firstly, it means diversifying by different asset classes instead of purchasing every single currency pair on your broker’s instruments list. But in any case, newbies end up with too many positions running at the same time. While experienced traders might test their strategies by trading several simultaneous positions, for beginners it very much looks like throwing darts at the board. You hope that something sticks, right? Well, not really.
It is a much safer and smarter move to choose one or two assets that you know well, for instance major currency pairs EUR/USD or USD/GBP, and see if you can get it at all rather than “diversifying” and losing everything you have got or earned. Apart from it, multiple positions will simply eat up your available margin collateral which pretty much reduces the cushion against any adverse market movement.
We have heard from so many beginner traders that if the market news and events are so important, why is it that people attached to their screens for “news-catching” cannot become rich? And hence these traders will ignore everything going on in the market and simply believe in their own intuition. Ok, so this is gambling. What could happen is that you see a great opportunity to invest in AUD/USD thanks to your technical analysis skills, but the very minute the Australian trade balance report comes out and hints something against you, you are doomed because you missed it.
Market news calendar reading should be on top of your trader’s to-do list the very morning you wake up and before placing or exiting the trades, as well. This habit is your best friend helping you to anticipate any potential data outcome, the investors’ community reaction to a certain event, and helps you factor these insights into your trading strategy plan.