The Common Mistakes Made By Traders

Some of the mistakes traders commonly make are concepts that came from "the floor", because until just the last 12-15 years ago there really weren't that many screen based traders. Floors traders that transitioned from the floor to the screen naturally carried their habits and floor techniques with them, and a lot of them continue to promote the things that worked on the floor to screen based traders. What worked on the floor does not work in front of a screen for a lot of reasons that are outside the main point of this particular blog. We'll save that one for a later date.

ABSENCE OF A SOUND TRADING PLAN

Your overall plan should include the currencies you intend to deal in, the amount of leverage you will use, and the amount of time you intend to devote. You also need an exit strategy for each trade you make, which includes the upper and lower boundaries of the trade.

FAILURE TO INCLUDE STOP-LOSS AND TAKE-PROFIT INSTRUCTIONS

Consider adding stop-loss instructions to all open positions – they can limit the amount that you could lose on any given trade, especially if you are unable to constantly monitor your account.A stop-loss instruction will trigger the closing of an open position when the exchange rate touches the specified level. Similarly, take-profit orders allow you to establish the rate at which you want open positions closed in order to lock-in profits.

EXCESSIVE LEVERAGE

Trade leverage can be a powerful tool to help you maximize returns, or it can be the cause of your downfall. Don’t trade until you understand how leverage works.

IGNORING RATE SPREAD FLUCTUATIONS AND THE IMPACT SPREADS HAVE ON PROFITABILITY

Exchange rate spreads – the difference between the bid and the ask price – directly affect trade profitability. Spread differentials can fluctuate during the day, and spreads widen during off-market hours when volumes and liquidity are lower. In addition, spreads tend to widen ahead of important news, such as an impending interest rate decision or the latest employment results.

LACK OF DISCIPLINE

As rates fluctuate, you can easily get caught up in the market. This is why a plan is so important – it allows you to avoid the emotion that is bound to arise during times of volatility. In especially volatile markets, the best option may simply be not to trade. Sometimes the best plan is to stay purposefully inactive.

Before you start trading, try visiting the Introduction to Currency Trading page on our website, and open a demo account to start testing your skills and strategies.

TIME FRAMES

The smaller the time frame you trade the less likely you are to succeed. Day trading is more difficult than position or swing trading. Everyone wants to “day trade.” That’s fine, I day trade, most of my clients day trade. BUT, I am always willing and encourage my clients to be willing to take that day trade into the next time frame if the opportunity presents itself. The big money and the “easiest” money is made outside the intraday time frame. To be consistently successful over the long term you have to at least occasionally have the big winning trade.

WHICH MARKET TO TRADE


It is a huge mistake to focus on one market. This is especially true for day traders. Look at this form a business perspective. Why should you care if you trade the ES (S&P Mini), the EU6 (Euro currency), Corn or Gold? Trade opportunity. This is one of the key edges the screen based trader has – the ability to look across the entire spectrum of tradable assets for the market(s) that may be setting up for the best reward to risk opportunity. Why trade the chop fest in the ES day after day if the Australian Dollar offers better opportunity?

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