Day trading the foreign exchange market can be a lucrative endeavor. With trillions of dollars worth of transactions conducted every day, the Forex market remains one of the largest and most liquid financial markets in the world.
Yet while you might see Wall Street bankers and hedge fund managers proudly flaunting their Falstaffian profits, day trading the Forex market or any other financial market for that matter is also fraught with risk and potential monetary loss. Here are five mistakes that every inexperienced trader should avoid:
Not Measuring Risk
Risk management is key to success when day trading any financial market, even more so a market as volatile as Forex. Every day trading plan should have measures to minimize and respond to times of high price volatility.
For instance, if New Zealand’s central bank changes course with its interest rate or if the U.S. suddenly finds itself in a trade war against another major economic superpower, you should have a risk management plan that tells you how to position your capital accordingly based on this newly available data.
Averaging Down on a Losing Trade
Averaging down amplifies your current trading losses and puts you at a higher risk of getting margin called by your broker. A margin call is essentially when your broker closes a position, typically a losing one, without your say-so in order to cover the position. Getting margin called is your broker’s way of demanding additional money or securities to be deposited into your account to meet their margin requirements.
Not Having a Comprehensive Understanding of Forex
To answer the question of what is currency trade requires a more in-depth understanding that extends beyond knowing how to buy and sell a currency pair. You’ll need to know what intrinsic factors move each currency, what margin requirements each pair requires, how volatile each currency pair is, etcetera.
Not Knowing Your Tax Obligations
Most Forex traders start off learning anything and everything about the market but neglect to read up on the legal implications of day trading. When it comes time to file your taxes, you’ll need to know how trading profits are treated in order to determine how much you owe. The same goes for when you print out losses at the end of the fiscal year; you’ll need to know about available deductions and credits that can cushion your losses.
Listening to Noise
There is a misconception that more knowledge equates to better results when day trading Forex. The reality is that absorbing as much information as you possibly can doesn’t protect you from trading losses. In fact, listening to every lead from financial scholars and self-proclaimed market experts can actually be a detriment to your trading. Do your own research and trust your own instinct when trading the market.
Day trading Forex can be a double-edged sword if not carefully approached. By acknowledging the five common mistakes above, you can effectively avoid them long enough for you to find your footing in the market and start making money off of it. For more information, you can check out reliable resources like Capital.com.