The money market attracts many traders due to the potential earnings on investments, but you need to avoid some forex day trading pitfalls to be profitable.
Forex trading has low entry barriers and this makes it easy for newbies to participate. In fact, you only need an access to a good computer, a stable internet connection, and some money. Nevertheless, this doesn’t mean you can make profits right away. The truth is that there are many forex day trading pitfalls that can decimate your entire investment within no time.
Trading with low win rates and reward to risk ratios
In every trade, the reward to risk ratio and the win rates are quite important. As a serious day trader who is conscious of forex day trading pitfalls, you need to make sure your win rates are above 50% at all times. The reward to risk ratio is calculated by comparing the winnings and losses in any trade. For instance, if you have won $75 and lost $50 in a particular trade, then your reward to risk ration stands at 1.5. To be on the safe side, this ratio should always be above 1.25.
If you consistently stick to these numbers, you will definitely be making a good profit. However, you can also make profits by ensuring that if the reward to risk ratio gets lower then the win rate is higher than 50%. On the other hand, a rate that is lower than 50% should always be complemented by a ratio higher than 1.25.
Ignoring risk management as one of the forex day trading pitfalls
To be a good forex trader, you need to employ proper position sizing when allocating funds to a trade. Before you make any trade, you need to carefully determine the percentage of your capital you are going to risk. Ideally, a day trader should avoid risking more than 1% of the entire investment. This implies that your stop order will pull you out of a trade before you accrue more than 1% in losses.
The main advantage of using this strategy is that you can withstand a streak of losses without damaging your account. This means that if you can make about 3% in profits per successful trade, you can quickly recoup your lost money.
In addition, your risk management strategy should regulate daily losses. This is because even when you’ve only exposed 1% of your capital to risk, taking consecutive losses in any given day can destroy your account. Therefore, you should employ a safe daily stop. For instance, you may want to stop trading if you lose 2-3% of your investment in a day.
Anticipating the effects of news on the market
At times, some economic news can have a significant impact on some currencies. To some people, predicting the movements prior to the news release represents a good opportunity to make a hefty profit. But this is among the forex day trading pitfalls since more often than not, the movement is in both directions and it can happen in a split second.
As such, you may not have sufficient time to trade and you risk losing lots of money. At the same time, there is a huge gap between bidding and asking prices and this implies you might not get a good price quickly. Therefore, instead of falling into this pitfall, find a good strategy that can ensure you will get profits after the news is released.