Did you know that forex day trading is one of the most accessible styles of forex trading out there?
The main reason for that is the low barrier to entry. In theory, all you need to start day trading is a computer and a solid internet connection. Well, that and an initial deposit of a few hundred dollars.
That said, making a profit on day trading is a different story. To have a chance at it, you’ll need to learn what not to do as soon as possible. Here are some of the most common trading mistakes you should avoid.
1. Balance Risk and Reward
Using a risk/reward ratio is a great way to measure your day trading performance. For instance, let’s assume your average winning trades are $100, and your losing trades are $75. In this case, your risk/reward ratio is 100/75=1.33.
What you want to do is keep this ratio above 1, and preferably above 1.25. This takes into account that you win more than 50% of your trades, which should be your main goal.
2. Avoid Market Volatility
Scheduled economic news releases can have a big impact on the market. This is why many forex day traders try to anticipate how the market will react. More often than not, this strategy will be too risky.
As soon as the news comes out, market volatility will take hold. Within seconds, the prices are likely to take many sharp turns before picking a direction. Sometimes they’ll swing back in your favor, and sometimes they won’t.
3. Never Go All In
In some cases, you’ll feel like going for a larger trade than your strategy allows. Whatever your motivation, try to stay the course. Not sticking to the plan is one of the most common day trading mistakes you can make.
The reason is simple: this can interfere with your daily stop loss. In day trading, a stop loss helps you moderate your risks. If your large trade doesn’t pay off, you may feel tempted to cancel your stop loss order and wait for a turnaround.
4. Ignore Fundamentals
Fundamental analysis can help long-term investors, but forex day traders should ignore it. Fundamentals have little influence on short-term price movements, which is the only thing you should care about.
Another reason to ignore fundamental data is that it can cause you to develop biases. A bad investment may go up in the short term, but that shouldn’t impact your trading plan.
5. Always Have a Plan
Speaking of plans, it’s good to have a written document outlining your strategy. Your plan can include the markets you trade and the time frame you’ll use for making trades.
Also, consider defining your risk management rules. Knowing how you’ll exit favorable and unfavorable trades can make all the difference. Without these rules in place, you’re gambling with your money.
More on Forex Day Trading
Remember, the most important thing about forex day trading is patience. Having a perfect strategy won’t matter if you don’t have the discipline to execute it. Don’t add to losing day trades, and don’t risk what you can’t afford to lose.
Want to know more about the ins and outs of the forex market? Trying to minimize the risks of losing your money? Take a look at our list of 5 forex myths that you’d be wise to ignore!