Day trading in the largest and most liquid financial market can be a profitable venture if done right. However, many day traders end up experiencing huge losses even when they are experienced and competent. Because they make some minor and major mistakes which lead to frequent losses in the volatile forex market. The first rule of Forex day trading is to close trades before the end of the day, and major pairs are best suited for day trading due to their high liquidity.
Day traders also use leverage to amplify their profits. You should not forget to calculate the required margin when your trades are leveraged, as a margin call from the broker can ruin your day. Therefore, you should always use a margin calculator before opening trade positions, so that you can calculate your margin requirements based on your capital. There are many other tools and techniques you need to use to avoid costly mistakes as a day trader.
So, let’s take a look at the top 6 mistakes day traders make and how you can avoid making such mistakes.
- Don’t focus on the market and trends
It is obvious that no one can beat the market. You need to move with the market and not against it, unless you see a potential reversal. Day traders need to focus on shorter time frames and make trades based on what they see on the charts. Technical analysis and price action are the core of many day trading strategies, and they work well. Fundamental analysis is of little or no use to a day trader since short-term fluctuations do not have much to do with fundamentals.
But you still need to watch out for any major news event or economic data release that may cause sudden volatility in the currency pairs you trade. Day traders who fail to adapt to the market will have difficulty making significant gains on a regular basis. You need to backtest your strategy with different market conditions using historical price data and see how it performs. Identifying the direction of the trend and assessing its strength is critical to making informed trading decisions.
You need to go long when the price of the currency pair is rising in an uptrend and if the price is falling due to a downtrend, shorting the pair would be the best strategy. You should always make calculated moves and you can rely on a pip calculator to calculate the pips needed to reach your daily profit target. So, always see where the market is going and enter positions based on ongoing or future trends.
The second big mistake that causes day traders to drown in losses is emotional trading. Since day traders spend a lot of time monitoring the market and analyzing charts, they are prone to making decisions under the influence of emotions. When your screen time increases, you are more likely to become exhausted or tired, and this state can lead to brain fog and therefore making costly mistakes. Excessive and impulsive trading are signs of emotional trading as you would not make such trades under normal circumstances.
Day traders with unrealistic goals and expectations also tend to make decisions driven by feelings and emotions when they become frustrated and impatient. Following a rational approach and being disciplined is important to stay on the right path throughout the trading process, but once you start breaking the rules, you will get used to it and such bad trading habits can wipe out your trading capital very quickly.
Therefore, you need to keep your emotions under control and stop making trades without a valid reason justifying the risk.
Another tip to avoid emotional trading is to use trading tools such as Forex calculators to discover the potential outcomes of the trades we make and estimate the key metrics needed to properly plan your trades. When you can see possible outcomes before placing trades, you will be able to make better trading decisions by considering potential profits and risks instead of trusting your intuition or guesswork.
Not placing a stop loss order is one of the worst mistakes you can make as a day trader. You may open multiple trades throughout the day and when you let them execute without stop losses, your account drawdown can increase if the market moves against your expectations leading to huge losses. If there is a stop loss, your potential losses can be significantly reduced as the trade will be closed automatically once the price reaches the set price level going into a loss.
Trading without stop losses not only makes you more prone to heavy losses, but also stresses you out because you will have to constantly monitor and manage the position to manually exit the trade before the end of the day. But when there is a properly placed stop loss, you can let the trade proceed freely without worrying about loss. Let’s say you need to step away from the screen for a while and the trade goes into a loss, you will still be left out of the trade with a small loss due to the automated exit.
Apart from this, you can also place trailing stop losses that are not as stagnant as a regular stop loss. The trailing stop loss will move on its own if the market situation is favorable allowing you to lock in your profits in any situation. Using stop and limit orders is important to manage risk and maximize profits as a day trader.
- Trading with a higher margin
Another major mistake day traders make is trading with a higher margin or leverage. Leverage is a great tool to increase your potential profits, but when you use too much leverage, the risk increases as you may lose more than you can afford to lose in the first place. Leverage amplifies your gains but can also lead to huge losses when the market does not move in your favor. Therefore, day traders must limit the use of leverage and always calculate the required margin with the help of a margin calculator, as I mentioned before.
If you are a beginner, you need to use as little leverage as possible. Since beginners encounter losses more often during the learning process, using high leverage or margin will not be ideal at the beginning of your trading journey. But you can definitely consider taking advantage of more leverage once you achieve a consistent win rate and gain enough trading experience.
- Do not set trading limits
Not setting a trading limit and not staying within the set limit are common mistakes made by all types of traders. Day traders are more likely to exceed their trading limits as they spend more time monitoring the market and looking for trading opportunities. You must set a limit on the maximum number of days you will enter in a day and you will need to close the trading terminal once you reach that limit, regardless of the profits and losses made at the end of the day.
When you win more trades, you place more trades because of greed, and when you are on a losing streak, you want to recover your losses by winning and place more trades because of it. But you must avoid going beyond the set limit as this will have a negative impact on your performance.
- Choosing the wrong broker
The final day trading mistake I want to talk about is choosing the wrong broker to execute your trades. Day trading involves placing multiple trades on a regular basis and you will pay spreads and commissions for each trade you place on the brokerage platform. This means that your profitability will be affected by the amount of trading costs and if you do not consider this while choosing a broker, the spreads and commissions will eat into your profits.
You need to choose an affordable broker that offers solid trading conditions such as tight spreads, low commissions and fast execution with high liquidity. ECN brokers are a popular choice among scalpers due to their low prices and high liquidity. You should also consider trading major pairs with the lowest spreads and try to trade during major sessions or overlapping sessions to take advantage of the high liquidity.
You can also trade smaller pairs with sufficient liquidity. Day trading with exotic pairs is very risky as they lack sufficient liquidity and at the same time are highly volatile. By choosing the right broker and the right currency pairs, you can minimize trading costs and increase your profit potential.
Final thoughts So, these are the 6 most common mistakes made by day traders and you must avoid making them to achieve long-term success in the Forex market. One thing to remember here is that some errors are allowed when you first trade, but being able to spot them in time makes you a better trader. Take your time to learn and perfect your day trading strategy, so you can trade with ease and reach your profit goals.
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