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In today’s episode, you’ll discover the top 5 forex trading mistakes that you must avoid.
So tune in right now…
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Hey, hey, what’s up my friend? In today’s episode, I want to share with you the top 5 forex trading mistakes to avoid.
Mistake #1: You want to make X amount of pips a day
For example, you might be thinking of making 10 pips a day trading EUR/USD. After all, you might think that’s a realistic goal, trying to extract 10 pips a day from EUR/USD since it moves an average of 100 pips a day.
Now I don’t care whether you’re trying to make 5 pips, 10 pips 20 pips a day. Here’s the thing, the market is not your ATM. Let me repeat once again, the market is not your ATM.
This means that there’s no way you are going to consistently pull out 10 pips from the market every day even though it sounds reasonable.
The reason is simply because the markets are always changing. It can be in an uptrend, downtrend, a range market, low volatility or high volatility environment, etc. It’s always changing and your trading strategy is only meant to exploit certain patterns in the market.
When market conditions change, your strategy either has to adapt to it or you will have to tweak your strategy for different market conditions.
So if you agree that market conditions change and if you agree that your trading strategy cannot profit in all different market conditions, then trying to make X number of pips every single day isn’t realistic.
Imagine that you’ve made 10 pips every day for the last 5 days when EUR/USD is in an uptrend. On the 6th day, you remain bullish and you’re trying to simply get 10 pips.
But what if the EUR/USD does a sudden sell-off and instead of profiting 10 pips, you got caught off guard and you are down 100 pips. Then the profits you’ve made over the last 5 days were not enough to cover your losses. This is just one extreme example.
My point is that when market conditions change and when you’re not prepared for it, you will lose and this will happen pretty regularly. Be prepared for it and don’t go into FX trading with the mindset that you can make a consistent amount of pips every day.
Mistake #2: You don’t understand leverage
Forex trading is one of the few instruments out there that you must use leverage to make a profit because the volatility of most currency pairs is very low. This is why you need to use leverage to amplify your returns.
It’s not like stock trading, where if the stock goes up 2%, 3% or you can make some money off it. In FX, you’ve got to use leverage to amplify those returns.
But the thing with leverage is that it comes as a double-edged sword, it has its risks and returns. If you don’t understand how to trade with leverage and position sizing, you might lose your account a lot faster than you expect.
It’s not like stocks where if you have $100,000 and you buy one stock, then for you to lose that $100,000, the stock has to go to zero.
When you’re trading forex and you have $100,000 account, let’s say you use a 1:50 or 1:100 leverage, you can wipe out that $100,000 account much faster. That currency doesn’t have to go to zero. It could just drop like 10% or 20% and you could be wiped out, depending on how much leverage you use.
So it’s important to understand leverage. If you’re the type of forex trader that have blown up multiple trading accounts and you don’t understand why you can’t contain your huge losses, it’s probably due to leverage and it’s because you don’t understand it.
Go and master it because it’s not difficult. It’s just simple math to understand position sizing, risk management, leverage and how all those all come together.
I can assure you this is one of the best investment in your trading that you can make because you will stop blowing up accounts unnecessarily.
Mistake #3: You treat all currency pairs the same
I used to think that, “Oh hey, all the markets out there, whether stocks, forex, bonds, futures, whatever, they all trend 30% of the time and stay in a range 70% of the time.”
Then I came across the work of Andrea Unger where I got proven wrong and I learned something new. What I learned from him is that different currency pairs have different characteristics.
Some currency pairs have more of a trending behaviour, while some a have a momentum behaviour where if the price breaks out of the previous day high, there tends to be follow-through. One example is GBP/JPY.
On the other hand, there are currency pairs with mean-reverting behaviour. What this means is that whenever this currency pair trades above the previous day high, they tend not to have follow-through, instead, they’ll tend to reverse from there. And one example of this is AUD/CAD.
The bottom line is that different currency pairs have different statistical behaviour and it’s your job to find out which are the ones that exhibit a momentum behaviour and which exhibit a mean-reverting behaviour.
If you to make money on certain currency pairs but lose money on other currency pairs, it’s probably because you’re treating all currency pairs the same, and that shouldn’t be the case.
Mistake #4: You ignore exotic currency pairs
Maybe you think that “Oh man, the USD/ZAR and the USD/NOK sound exotic, let’s stay away from it.”
But here’s the thing, when you trade exotic pairs, you’ll have more trading opportunities. Some of these pairs tend to trend well. Like for example, the USD/TRY trends pretty well. The USD/CNY also trend from time to time.
Don’t be fixated on only the major currency pairs. That’s what the whole world is looking at. Everybody looks at because it has high liquidity, low spread, etc.
But if you add in the exotic currency pairs into your watch list, you’ll find that you have more trading opportunities. Do bear in mind that the exotic currency pairs tend to have a wider spread because they’re not as liquid.
So if you are going to do day trading, short term swing trading, then I would recommend avoiding those exotic currency pairs because the transaction costs will kill you.
But if you’re a longer-term trader trading on the daily or the weekly char, then you can look at these exotic currency pairs as another way to get more trading opportunities. Don’t ignore them.
Mistake #5: You think the forex market is the only market out there
That couldn’t be further from the truth because forex is only one category of markets. There are still stocks, stock ETFs, etc. You have many different types of markets out there.
For a long time, I also focused primarily on forex at the start. Then I realised that there are stocks and ETFs, and then I start branching out into these different markets to get more trading opportunities.
Now, I have different trading strategies to trade these different markets. And guess what, the returns on my portfolio, the returns got smoother over time because I’m trading more markets with different trading strategies for different markets.
And here’s the thing, just because a particular strategy work in the FX market doesn’t mean that it’s going to work in the stock market.
For example, a mean-reversion trading strategy might work well in the stock market where you buy pullbacks and sell the rallies, but that might not work in the FX market, because they behave differently.
It’s your job as a trader to learn and find out more. Don’t restrict yourself to the FX markets. There’s a world of trading opportunities and a lot of other markets out there you can trade with different strategies.
So open up your mind and get exposed to those and soak up all you can.
With that said, I wish you good luck and good trading and I will talk to you soon.
Could you possible share some statistics on your portfolio and a discussion on before/after diversification as mentioned?