Forex trading can be very rewarding or very punishing, depending entirely on the skill of the trader. Many are attracted to it by seeing the possibility of making enormous profits. They often fail to take not or attach due importance to the downside risk of forex trading. Since it is possible to do highly leveraged traders, it is possible that a trader can lose his entire capital in a single day, if he is not careful. But there are some common mistakes that a trader can avoid to minimise the risk of loss in forex trading. Some common mistakes that should be completely avoided are:-
Averaging: When a trader begins to make loss on a transaction he has entered into, he tries to minimise his loss by entering into additional transactions as the price moves against him. He tries to avoid accepting losses and exiting the trade. Although this is not what he probably intended to do while entering the trader, he is not ready to accept the loss and therefore continues to enter into additional trades with the hope of bringing down his entry price. In doing so, he is spending both time and money which he can actually save by exiting the transaction and re-entering at a different point or in an opposite trade. Also capital may be lost in such transactions and he now has to spend a larger amount of time to get it back. Day traders must particularly guard against this mistake, exiting the transaction the moment they make profit and exiting it also the minute it starts to make loss.
News based trading: All traders know that markets react to news. An average trader is well informed about the events that will occur on a particular trading day and that news pertaining to that event will move the markets, but he cannot predict the direction of the move. If he tries to make a guess and take a position before the event occurs or the news is released, he may make quick profits or he may be forced to accept huge losses. So taking a position based on news is very risky, as no one can predict how the market will react to certain new event.
Transactions after news: The markets may start to move immediately after the news. But in these days of 24x7 news channels and specialised business news channels, the movement may not be in the right direction. As and when the news is received completely and its real importance is understood, the market may start to move in the opposite direction, causing loss to those who had taken positions initially.
Putting too much money into one trade: However sure you maybe of a particular trade, the most important rule that one should follow is never to put more than one percent of the capital in any one trade. Every trade is a gamble, and you do not want to lose too much on a single trade.
Always remember that trading requires skill, patience and luck on a given particular day. Furthermore, understanding the market and ways of trading will help you in never committing the mistakes discussed above.