An FX trader’s objective is to take advantage of the random price movements of a liquid or illiquid currency pair. The more volatile the market is, the more trading opportunities arise, regardless of the direction in which the market moves in the longer term. However, high volatility increases the chances of experiencing dramatic moves, hence, risk.
Forex trading can be done in different styles; scalping, day trading, swing trading, et al. When using a shorter time horizon to trade a currency pair FX traders look at the markets with a different perspective than long-term FX traders. And that is what sets the trader’s style.
Whatever your style, to start trading Forex you need to equip your self with good knowledge first. So, here we put together 6 Forex trading “don’ts” you need to know to stay in the race.
1. Don’t Start Forex Trading With A Real Account
A demo trading account or a virtual trading account is provided by most Forex retail brokers these days. With some virtual money, which FX traders don’t spend from their pockets, they get to test their trading skills and familiarise themselves with the markets in a simulated environment. They get to understand the workings of different technical indicators on their MT4 or MT5 platform and learn how to execute orders, like stop-loss, take profit and limit orders. Demo trading always helps, as Forex trading requires setting effective entries and exits, which only comes with practice.
2. Don’t Risk Over 1% Off Your Trading Account
A common trading rule that many FX traders follow is to not risk more than 1% of their available capital on any particular trade. This is to ensure that no single trade or no specific day has any significant impact on their account balance. It also keeps losses to a minimum in tough market conditions.
As a rule of thumb, many professional FX traders keep the number of open trades down to a maximum of 5. That protects the trader’s account in case all trades go wrong as it minimizes the effects consecutive losses can have.
3. Don’t Trade Immediately After Major News
High impact scheduled economic releases can cause volatility in the Forex market. While it may seem lucrative to grab some extra pips trading in a reactionary market, doing so without a proper trading plan in place means you risk losing. Instead, FX traders wait out this period of volatility and trade later, or they don’t trade at all.
Some FX traders even tend not to trade the first 15-minutes after the Forex market opens. That is the time when pending orders of the previous night get filled, and prices adjust according to news releases that occurred while the market was closed.
4. Don’t Add to A Losing Trade
Despite the best measures and Forex strategies, losses do occur. They are inevitable. FX traders are cautious about “averaging down” – the practice of opening more trades to support a losing position – when the market is moving against them. Prices can go in unexpected directions for a much more extended period of time than expected. Adding to a losing position can often result in magnified losses. That is why FX traders use stop-losses in every single trade. That would be a good starting point if you are new to Forex trading.
5. Don’t Go “All-In”
Trader’s psychology plays an essential part in a trader’s career or future. It is very easy to fall prey to temptation, fear or some other emotions the Forex market openhandedly offers. If the entire day turns out to be unfavorable, FX traders could get desperate and put all their available margin in one single trade. But it’s not just that. Contrary to desperation, consecutive wins can make a trader overconfident.
In both scenarios, traders have to resist the urge to add up to a trade or to cancel a stop-loss, in the hopes of gains.
6. Don’t Place Multiple Correlated Trades
Multiple trades mean diversifying your risk. However, a balance is needed here. Similar trade setups and chart patterns in different currency pairs indicate a strong correlation. Pairs that tend to show high correlation with one another will move in tandem. So, contrary to the goal of diversification, placing trades for highly correlated pairs would actually increase risks. To avoid this, study the Forex markets in detail.
Different FX traders have different rules and principles they abide by. Only experience will help you find what works for you in Forex trading. In the meantime, don’t forget to take adequate risk management measures and always use stop-losses, irrespective of the strategy rules.