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Trading skills and common mistakes

13 February 2020, 03:00
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FOREX tRading skills

Before you start something new, begin with the fundamentals. Let’s look at trading tips every trader should consider before trading currency pairs.

Know the Markets

We cannot overstate the importance of educating yourself on the forex market. Take the time to study currency pairs and what affects them before risking your own capital; it’s an investment in time that could save you a good amount of money.

Make a Plan and Stick to It

Creating a trading plan is a critical component of successful trading. It should include your profit goals, risk tolerance level, methodology and evaluation criteria. Once you have a plan in place, make sure each trade you consider falls within your plan’s parameters. Remember: you’re likely most rational before you place a trade and most irrational after your trade is placed.

Practice

Put your trading plan to the test in real market conditions with a risk-free PU Prime practice account. You’ll get a chance to see what it’s like to trade currency pairs while taking your trading plan for a test drive without risking any of your own capital.

Forecast the “Weather Conditions” of the Market

Fundamental traders prefer to trade based on news and other financial and political data; technical traders prefer technical analysis tools such as Fibonacci retracements and other indictors to forecast market movements. Most traders use a combination of the two. No matter what your style, it is important you use the tools at your disposal to find potential trading opportunities in moving markets.

Know Your Limits

This is simple yet critical to your future success: know your limits. This includes knowing how much you’re willing to risk on each trade, setting your leverage ratio in accordance with your needs, and never risking more than you can afford to lose.

Know Where to Stop Along the Way

You don’t have time to sit and watch the markets every minute of every day. You can better manage your risk and protect potential profits through stop and limit orders, getting you out of the market at the price you set. Trailing stops are especially helpful; they trail your position at a specific distance as the market moves, helping to protect profits should the market reverse. Placing contingent orders may not necessarily limit your risk for losses.

Check Your Emotions at the Door

You have an open position and the market’s not going your way. Maybe you could make it up with a trade or two that don’t fit with your trading plan…just a couple couldn’t hurt, right?

“Revenge trading” rarely ends well. Don’t let emotion get in the way of your plan for successful trading. When you have a losing trade, don’t go all-in to try to make it back in one shot; it’s smarter to stick with your plan and make the lost back a little at a time than to suddenly find yourself with two crippling losses.

Keep It Slow and Steady

One key to trading is consistency. All traders have lost money, but if you maintain a positive edge, you have a better chance of coming out on top. Educating yourself and creating a trading plan is good, but the real test is sticking to that plan through patience and discipline.

Don’t Be Afraid to Explore

While consistency is important, don’t be afraid to re-evaluate your trading plan if things aren’t working like you thought. As your experience grows, your needs may change; your plan should always reflect your goals. If your goals or financial situation changes, so should your plan.

Choose the Right Trading Partner for You

It’s critical to choose the right trading partner as you engage the forex market. Pricing, execution, and the quality of customer service can all make a difference in your trading experience.

Common mistakes in FOREX TRADING

Trading forex can be a rewarding and exciting challenge, but it can also be discouraging if you are not careful. Whether you’re new to forex trading or an experienced veteran, avoiding these trading mistakes can help keep your trades on the right track.

Not Doing Your Homework

Currency pairs are closely linked to national economies and are affected by many factors. They are also traded 24/5, meaning there is usually something going on that will move the markets.

Before entering a trade, make sure you do your homework. Not only should you be aware of upcoming events that could affect your trade, but you also need to forecast which way these events could swing the markets. Pay attention to what your technical indicators are telling you and how they compare to your fundamental event analysis.

Risking More than You Can Afford

One common mistake new traders make is misunderstanding how leverage works. Familiarize yourself with margin and leverage to help avoid accidentally putting more capital at risk than you had planned.

Many traders find it helpful to set a maximum percentage of their capital that they are willing to risk at one time, usually 1% to 3%. For example, if you have $50,000 of equity and are willing to risk 2% maximum, you would not tie up more than $1,000 at one time. It is important that you stick to that maximum once you set it.

Trading without a Net

You cannot watch the forex markets 24 hours a day. Stop and limit orders help you get in and out of the market at predetermined prices. This not only allows the trading platform to execute trades when you are not available, but it also makes you think through to the end of your trade and set exit strategies before you’re actually in the trade and your emotions get the best of you. Placing contingent orders may not necessarily limit your risk for losses.

Overreacting

A loss never feels good. It can make you emotional and irrational, tempting you to make kneejerk follow-up trades that are outside your trading plan.

No trader makes a great trade every time. Accept that losses are part of the reality of trading and stick to your plan. In the long run, your trading plan should compensate for that loss; if not, review your plan and adjust.

Trading from Scratch

Using your hard-earned capital to test a new trading plan is almost as risky as trading without a plan at all. Before you start trading real money, open a forex practice account and use virtual funds to try out trading plans and get a feel for the trading platform you are using. Although you will not be affected by your emotions the same way you will be when trading your own money, this is also a chance to see how you react to trades not going your way and learn from your mistakes without the risk.

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