In the highly lucrative and often turbulent foreign exchange market, there are a number of practices and bad trading habits that should be avoided from the off in order to secure you as a well-rounded and professional trader. Particularly for those of you entering the currency markets for the first time, familiarising yourself with both the right and the wrong ways to trade will help put you in good stead for your journey towards potential profitability.
So, in this blog post, we’re highlighting the key points made by Greg Secker over on his two-part Youtube video, detailing the 7 ways not to trade forex and why.
You use too many indicators
One of the biggest mistakes both novice and experienced traders make is using too many indicators. Whether this involves using trending indicators, oscillating indicators or range-based indicators, you need to stop. You’ve all heard the saying; two is company, three’s a crowd and four you can get the door, right? In the forex market, this is particularly true of trading indicators, where the more you use on your trades, the more likely you’re gambling your capital due to not sticking to a measured and thought-through trading plan.
It’s important to note that the more indicators you’re putting on, the less likely it is that they’re correlating with one another – meaning that you’re likely to be getting mixed signals, confusing you and your trading plan as a result. So, stick to the rule where two is preferable and three indicators are maximum – this way, you’ll be able to focus on adding only the most relevant indicators to your trades. For example, for those of you in a trending market look to restrict yourself to using only trending indicators, similarly, if you recognise that you’re in a range-bound market, only apply range-bound indicators such as moving average convergence or divergence indicators that will correlate with each other, allowing you to trade more effectively as a result.
You trade off of emotion
Trading using emotion can be identified if your trading isn’t consistent with a strategic trading plan or if there is no rationale behind the moves you’re making, using gut reaction to place trades instead. Forex trading isn’t an exact science, therefore, when it comes to making a trade, it’s normal to feel nervous. However, if you can’t wait to get in the trade then the reality is that you’ll probably be eager to get out of it when things start to go wrong, as you won’t have consulted sound forex trading strategies!
In this case, it’s important to start by creating a trading plan – defining what trade you’re looking to trade, the time frame you’re trading in and the positions you’re in. We recommend keeping our 531 rule in mind that states you should only trade five currency pairs (to gain an intimate understanding of how the pairs move), using three trading strategies and trading at the same time of day (so that you become familiar with what the markets are doing at that time). As a beginner, make sure you’re spending at least five minutes per trade to plan what you’re going to do – ensuring you ask yourself the tough questions so that all scenarios are considered and planned for in advance.
You keep switching trading plans
When it comes to taking on a new forex trading strategy, it takes some bedding in time. This is the adjustment period that’s needed for you to come to terms with your strategy until it becomes familiar and you’re carrying it out without even thinking about it. Typically, it takes approximately 21 trading days to embed these new sets of principles and rules into your brain. So, remember to resist the urge of swapping strategies if you drop a few positions. This feeling is normal and it will naturally take some time for you to adjust your new method to your trading mindset.
As trades on the FX market are usually placed between Monday and Thursday, to complete the full 21 days it should take you a little over a month until your strategy becomes normal to you. Using the 531 analogy we mentioned above, make sure to trade what you know and not what you don’t know. This will help you to achieve a level of mastery that ensures you’re unconsciously making trades according to your forex strategy, leaving the conscious part of your brain to spot if there is anything problematic with the trade at any given time.
You trade around news events
While trading around economic news is encouraged, altering your plan on an adhoc basis in response to uncalendered news events is strongly advised against. It’s no secret that economic news causes volatility in the market (the price range movement over a set period of time), meaning that your trades can take a dramatic turn for the worse due to the instability of the market. For example, in a volatile market if you have a stop-loss in and you’ve entered a position, you could quickly get stopped out of it and lose your trade – making a big loss as a result.
When forex trading as a beginner, if you don’t use smart charts, make sure you consult an economic calendar at all times. We’d recommend using the forex news site, Daily FX as this will ensure you’re regularly made aware of important news that will disrupt your trades – for example, election days where you shouldn’t trade that country’s currency due to political and economic instability.
Gambing in forex means trading without an appropriate position, risk management and trading plan and, instead, using impulsive gut instinct only. A tell-tale sign of a forex gambler is someone who tends to go long, meaning that they’ll buy the position then sell it multiple times within the same trading session. This is likely because they’ve lost one trade and are looking to recoup their losses on another trade without consulting a trading plan – this is a very dangerous area and can see you getting into a pattern of losing large amounts of money as a result.
It should come as little surprise to you that traders have been known to lose thousands simply by trading outside their plan, trading in multiple directions on the same asset class within the same trading session. To avoid this, make sure you spend time learning about forex trading strategies and forming a foolproof risk management plan as this will make you a better-rounded trader not tempted by instinctive trading opportunities.
Thinking there is such thing as a holy grail
Lots of traders believe that they’ll walk into the forex market and find that one strategy that works for them and that’s it. Unfortunately, that’s not the case. Market conditions change over time, as does price range movement and volatility to name but a few. As a result, it’s important to apply a grey box system into your trading which involves you using real-time trading strategies but with human intervention – as opposed to a black box system that auto-corrects your plan according to changing market conditions.
While it’s important to be flexible in your strategy, above all else you need to recognise your market condition – and therefore the limits to how much of your strategy you should change at any given period of time – which will be dependent on ranging conditions, trading conditions, short conditions and long conditions. Ultimately, remember not to search for the holy grail, but instead, search for a professional trader to help you identify such conditions and better your overall trading plan.
You don’t honour your stops and limits
The biggest mistake traders make is moving their stop-losses in the hopes they’ll get a little wiggle room when the markets move. Ultimately, your level of risk is calculated by your entry price and your stop-loss and that risk should be used to calculate your position size. So, making the slightest change to your stop-loss can have serious implications on your level of risk as a result.
Be sure that when you place your stop-loss it is agreed on up front and not moved after the trade is in play, this will guarantee stopping spiralling losses.
To learn forex trading effectively, naturally, there’s no better experience than actually immersing yourself in trading. However, before you do this, it’s crucial that you understand the forex trading tips and practices to avoid that will put you in good stead for potential profitability. To find out more forex trading, visit our blog or explore Greg Seckers’ Youtube channel here.