Forex is a highly leveraged market where you can get a huge amount of leverage on your investment capital which can help you in opening and trading on higher lots in order to make quick profits out of the market. But that also comes with certain disadvantages. as we all know that every trader gets attracted with the Forex market due to its exceptional capability of making huge profits in a very short time duration due to its fast-moving and highly liquid market characteristic which plays a vital role in making money for the trader, but on the other hand that liquidity and movement also can cause serious damage If not handled correctly.
The high level of leverage provided by brokers for Forex day trading, there are few mistakes that may result in a huge loss of even complete erosion of capital. In this blog, we tried to explain the cause and solution for the most common mistakes that a day trader usually makes in an attempt to make money out of the Forex market which can result in a negative outcome for trading.
Unrealistic Profit Expectations
Every trader wants to make money out of the market, and profit is the only goal which attracts a trader to do trading activities in the market. Whenever a new trader jumps in the Forex market there is a high chance that the trader might have made a huge goal in terms of profit due to the high level of leverage provided in the Forex market which makes the trade feel that he can get thousand times of return in only a few trades in Forex market. These unrealistic expectations often result in huge loss or even loss of the whole capital.
The markets have the mind of its own and we cannot put our views on it. Markets can be choppy, volatile, and range-bound. Highly bullish or bearish etc and a trader should always set his goal according to the market movement. As in a choppy or range bound market, you cannot expect a huge movement in the market and a trader should adopt these type of market movement and set the trading goals accordingly to avoid losses.
The best way to avoid the problem of setting unrealistic profit expectations is making a well researched and back-tested trading plan. A good trading plan is the first key to success in Forex trading, with the high level of leverage even a small movement in the market can make good profit out of the market which in turn contribute In the overall profit goals of a trader which will reduce the risk of letting greed take over the important trading decisions as steady positive results make a huge difference in the Forex trading.
Poor Risk Management
The importance of risk management in Forex trading is very high because of the high level of leverage available in the Forex market makes it a highly risky trading system. High level of leverage not only enables a trader to take huge trades which can make a lot of money but it also comes with a risk of losing all your investment in one single trade.
There is a very thin line between gambling and speculating and a successful trader should always understand this factor of difference between gambling and speculating before starting to trade in the Forex market. The only difference between gambling and speculating is the level of risk. In gambling, there is no control on the risk by the gambler but in speculating there should always be a controlled risk in every trading decision. A speculator always takes a well calculated and controlled risk but a gambler tends to play blind which can result in a huge loss. Speculating as a professional Forex trader is not gambling as a trader always manages the risk first before entering into a trade
To make become a successful Forex trader a well-researched risk and reward ratio is a very important factor which has a very large impact of the risk factor associated in Forex trading. A trader should set a risk and reward ratio after considering all the important factors of trading like market movement, risk apatite, trading signal accuracy, and profit expectations. A good and well-researched risk and reward ratio is the backbone of any trading system.
Every trader should set the risk and reward ratio according to the risk-taking capacity and the accuracy of the traders trading decisions. For a new trader whose trading decision is not very accurate, he should keep his trading risk and reward ratio higher so that if in a losing trade accuracy will reach 50% also then too he will not lose his investment.
The Bottom Line
Forex trading is a highly risky business and anyone who is willing to jump into the trading business should consider the factors which can affect the profitability of day trading.
Unrealistic profit expectations are the most common and basically, the root cause of almost all the problems a trader can face in the market as it pushes the trader to take bad trading decisions due to greed, which most of the time results in a huge loss or even losing all the capital invested. Losing all your money invested in the market is always being the nightmare of every trader and to avoid doing this a trader must set the profit goals according to the market.
The other most import factor to consider avoiding any mistake which can result in a huge loss in Forex trading is risk management. This is one of the most underrated factors which most of the new trader do not put their focus in which usually cause them to lose a huge amount of money in only a few trades in Forex market due to the overexposure in the markets. As managing the risk is very important to make money out of the market as the high level of leverage can cause serious damage if not managed properly with a good risk management strategy.