As with all kinds of trading, there is a lot to be learned in the forex market. In order to improve ones trading, it is helpful to be aware of a few of the frequent mistakes traders often make when trading in the forex market.
One commonly made error that traders often make is to guess the direction of a currency. This can be costly if one does not look at the trend beforehand, and open a trade accordingly. An important rule of thumb when trading in the forex market is to always follow the trend of the currency. ‘The trend is your friend’ is a well known mantra for many experienced traders. The idea behind following a trend is that a good trader will be able to identify the movement that exists in the currency market and cash in on it. By researching and estimating the direction of a rate, a good trader is able to open a trade accordingly. Yet keep in mind, you must watch your trade in case the trend reverses and close your trade immediately if this is the case.
Another common mistake made by traders is to set their leverage too high. Those who are weary of putting a good amount of money into the market will often bet small amounts which require high leverages, such as x400. While it is true that the higher the leverage, the more money you can make, it’s also true that you can lose your trade more quickly this way.
A currency trend has only to drop slightly before your trade cuts out. For some, trading with only one currency puts one at ease. Yet this is a common mistake because players do not realize that this can be a difficult way to make profit. Try researching and demo trading with a new currency in order to feel more confident.
Finally, one of the most common mistakes made by traders is not to hedge their risk. One very useful tool for trading in the forex market is to use a stop loss. This is a limit that you can set to ensure you only lose a certain amount of your trade. One example is when a player buys EUR/USD at 1.5800, believing the trade will go up. However, if it suddenly dips to 1.5300, you can save yourself from losing your trade by setting a stop loss at 1.5600.