Foreign Exchange trade is widely popular in Australia, with over 450,000 investors holding 2 billion dollars worth of client funds. Having one of the best financial control sectors in the world, it is a hub for international trade markets. The forex trade market is one of the most accessible markets as it has a low barrier of entry. Every day, there are thousands of new forex traders flocking the market with the hopes of making big money. Those who have a computer or a mobile phone with an internet connection can invest a few hundred dollars and start to trade forex from their homes. However, this does not guarantee a quick profit. Here are some reasons why new forex day traders fail to make it big in the market and ways to avoid it.
Not Evaluating the Risk-Reward Ratio and the Win-rate
Any day trader must keep a close eye on the number of trades they win and its ratio with how much they lose on an average day trade. The win rate is expressed in percentages, and a successful forex trader must have a win rate of over 50%. For example, winning 70 trades out of 100 indicates a 70% win rate. The reward-risk ratio is calculated by dividing the average losing trade amount by the winning trade amount. For example, If one loses $25 and their winning trade is $50, their reward-risk ratio is $50/$25= 2. Having a ratio of 1 indicates that they are winning as much as they are losing. And this would be a good time to back out. They must develop strategies to maintain a reward-risk ratio of over 1.25 to ensure profit and investment recovery.
Not Setting a Stop-Loss Limit
Every forex trader must have an offsetting stop-loss order that ensures they are out of the trade if the numbers move against them after a specified limit. Having this will remove the risk of major losses for investments. When they start taking losses during their forex trade, having a stop-loss limit prevents them from losing more money than they can handle.
Investing in a Losing Trade
Understandably, beginners would like to take higher risks, experiment and invest in newer trades to understand its workings hoping to make big bucks. However, if the prices are moving against them, they must not average down or add to their position with the hope that the trend will reverse. It is a dangerous habit to add to a losing trade. If the prices move in the opposite direction for longer, then they would be incurring exponentially larger losses. Skilled traders maintain a proper position size with a stop-loss limit to maintain their risk appetite.
Investing Everything in One Trade
Another dangerous game that beginners might feel compelled to make as they trade forex is going all-in with the hope of winning the money back. There are times when even the traders with a good risk management strategy can feel tempted to invest larger than they usually do. It happens, especially if they have consecutive losing trades, consistent winning streaks or a highly-promising trade that ensures virtually a 100% profit. However, risking too much multiple times can be a mistake. Controlling the risk temptation is a must-have skill that day traders must develop.
Choosing the Wrong Forex Trading Broker
For those who consult brokers or invest in forex trade through brokers, trusting and depositing the money with them will be the biggest trade they make. If they put it in the wrong hands like those who manage it poorly, have financial issues, or are running a scam, then they risk losing all their money. One must carefully choose a broker considering what they want to accomplish, what the broker offers, and reliable referrals.
