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Forex Trading Basic Mistakes


Forex trading is a market where people may lose lots of money. The sad thing about it is that if these traders had simply taken the time to read articles and were better informed, they could have kept an enormous amount of money in their pockets.

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When it comes to being a successful investor, there is nothing that replaces good old fashioned reading. The first basic mistake that forex traders must avoid is the misplaced stops.

A stop is used to reduce the pain of a loss, and it can keep you from losing a lot of money on a bad trade. At the same time, there are times when one can misplace a stop, which can lead to even more problems.

Prior to making a trade, the trader should take the time to think about the risk/reward ratio that is involved with it.

When the stop is put in place, it should always be done with the management of the money in consideration. It should never be too close to the price, but it also should not be too far away as well.

If the trade is favorable, the trader should consider changing the position of the stop in order to secure their profits and avoid any losses which could result if the trade suddenly turns against them.

The second mistake which causes many forex traders to lose a lot of money is the abuse of leverage. Because many Forex brokers provide leverage which can be as high as 400:1, many novice traders go too far.

Because they are hell bent on making a large profit, greedy traders often increase their leverage substantially, and while the returns can be quite impressive, the loss can be just as horrific.

A wise trader will always take the time to make calculations involving the dollar value of a risk prior to leveraging themselves too much.

One rule of thumb to keep in mind is that most skilled traders rarely risk more than 3% of their account on any given trade.

Third mistake consider to be very dangerous is relying too much on technical analysis. Technical analysis can be useful in giving you a foundation for which decisions can be made.   At the same time, making a decision exclusively on the technical indicators can cause major losses to occur.

The best investors in the world always make their decisions with technical analysis as well as fundamental analysis. When these two factors are combined when making an investment decision, the results tend to be positive more often than negative.

Another investment move which is highly dangerous is day trading. No one can predict what the market will do in a short period of time, because movements are too random. Wise investors always play for the long term.

There are a large number of companies out there that sale investment "programs" and "software." These programs are supposedly designed to help you become more efficient as a currency trader. Are these programs what they are cracked up to be?

Most of the time, they are not. There is no such thing as a magic bullet forex trading program that will allow you to get big results. No matter what the program claims in its advertisements, you need to back test in carefully to make sure it is the real deal "before" you buy it.

The last thing you want to do is waste money on a program and then lose even more money when trying to make investment decisions based on it.

Another mistake that many traders take for granted is investing based on emotions. This is a habit that is hard to break, after all, we are all human, and humans are emotional creatures.

While there is nothing wrong with showing emotion, emotions are best left out of investment decisions. If you allow your emotions to come into play during your trades, don't be surprised when your returns are much lower than you expect.

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When you have back tested a system, this still does not mean that you should make your investment decisions exclusively on it. One thing that you must always remember is that the forex market is constantly in flux, and will react based on geopolitical events.

Read Next: Overtrading Issues




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