Forex, or the decentralised global market of currency trading, can be an attractive investment activity. As explained in a previous post here on The Financial Advisors Perth blog, the $5 trillion (A$6.43 trillion) per day market is the largest and most liquid market in the world, making Forex trading a great way to earn money quickly and efficiently – if done right.
Here are 3 of the most common Forex trading mistakes rookies make, and how you can avoid them.
Not diversifying enough or diversifying too much
Traders are often advised to diversify their investments, as diversification can minimise risks of loss and open up new profit opportunities. However, Real Business points out that many Forex beginners build portfolios which are either under- or over-diversified. Inadequate diversification exposes beginners to too much risk, while overdoing it can backfire by making it harder for you to spot which positions and trades work. The latter also increases your risk of trade duplication, which can even double your losses on a bad trade.
In truth, there is no real formula for the best amount of diversification for day traders. A good place to start, however, is evaluating the portfolio you have right now to see if any single one will have an unreasonably large effect on your success should things go downhill. Make sure that your portfolio is wide enough to have a comfortable amount of risk, while still limiting your investments to what you can make sense of easily.
Trading without a stop-loss
Jumping into Forex trading without a stop-loss is like cleaning the windows at the top floor of a building without protective gear. You may not fall on some days, but on the day you make a mistake – which traders are bound to do no matter how experienced they are – you will sorely miss that harness. Futures Magazine explains that having protective stops can give you an idea of how much you’re willing to risk losing on a particular trade, and can protect you from too much loss should markets for your investments turn sour.
Make sure you place your stop-loss order on the same day you make your trade. If you hit it, do not give in to the temptation to adjust your stop-loss. Simply move on to the next trade.
Not keeping track of news
Last but not least, a common mistake in Forex day trading is not keeping track of world news, which has a tremendous influence on the direction of foreign currency markets. All Business emphasises the importance of keeping tabs on world events and central bank pronouncements because markets are very sensitive to such instances.
To avoid being caught off-guard and making hasty decisions based on volatile market movements, it is good to check out financial news reports to better understand what is happening in Forex markets everyday. You may also use tools online which provide details as well as insights on specific developments related to the global finance sector. FXCM shows an economic calendar that tracks financial events like the Reserve Bank of Australia’s meeting regarding the local economy and the International Monetary Fund’s discussion on stabilising international exchange rates. These are bound to have tremendous impact on exchange rates, and must be taken into account when analysing each trade and predicting which ones will be beneficial for you.
Like any other business endeavour, Forex trading requires adequate knowledge, discipline, and a good sounding board, all of which are factors to success that were explained in another The Financial Advisors Perth article. Using the right combination of these elements, you too can navigate the many risks that come with Forex investments and gain from the fast-paced world of currency trading.