Day trading in the largest and most liquid financial market can be a profitable venture if done in the right way. However, many day traders end up encountering huge losses even when they are skilled and knowledgeable. Because they make some minor and major mistakes that lead to frequent losses in the volatile forex market. The first rule of forex day trading is closing your trades before the day ends and major pairs are most suitable for day trading due to their high liquidity.
Day traders also use leverage to amplify their profits. You should not forget to calculate the margin requirement when your trades are leveraged, as a margin call from the broker can ruin your day. Hence, you should always use a margin calculator before opening trade positions, so that you can calculate margin requirements according to your capital. There are many other tools and techniques that you need to use to avoid costly mistakes as a day trader.
So, let’s look at the top 6 mistakes that day traders make and how you can save yourself from committing such mistakes.
- Not focusing on the Market and Trends
It comes as a no-brainer 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 lower time frames and place trades based on what they see on the charts. Technical analysis and price action are the core of many day trading strategies and it works well too. Fundamental analysis is of little to no use for a day trader as the short-term fluctuations do not have much to do with the fundamentals.
But you still need to watch out for any major news event or economic data release that can cause sudden volatility in the currency pairs you trade with. Day traders who fail to adapt to the market will find it hard to make significant gains regularly. 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 crucial for making informed trading decisions.
You need to go long when the currency pair price is rising with 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 can depend on a pip calculator for calculating the pips you need to catch to hit your daily profit target. So, always see where the market is headed and enter positions based on the ongoing or upcoming trends.
- Emotional trading
The 2nd big mistake that makes day traders drown in losses is emotional trading. Since day traders spend a good amount 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 get burned out or tired and this state can lead to brain fog and then you end up making costly mistakes. Overtrading and impulsive trading are signs of emotional trading as you won’t enter such trades under normal circumstances.
Day traders with unrealistic goals and expectations also tend to make decisions driven by feelings and emotions as they get frustrated and impatient. Following a rational approach and being disciplined is important to stay on the right track 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 real quickly.
Hence, you need to keep your emotions in check and stop placing trades without a valid reason that justifies the risk.
Another tip to avoid emotional trading is using trading tools like Forex calculators for finding out the potential outcomes of the trades we place and estimating key metrics that are needed for properly planning your trades. When you can see the possible results prior to placing the trades, you will be able to make better trading decisions considering the potential profits and risks instead of trusting your intuition or guesswork.
- Not Placing Stop Losses
Not placing a stop-loss order is one of the worst mistakes that you can make as a day trader. You may be opening multiple trades during the day and when you let them run without a stop loss, your account drawdown can go up if the market moves against your expectations leading to huge losses. If there is a stop loss, your potential losses can be cut down to a great extent as the trade will be automatically closed once the price hits the set price level going into a loss.
Trading without a stop loss not only makes you more prone to heavy losses but also stresses you out as you will have to constantly monitor and manage the position to manually exit the trade before the day ends. But when there is a properly placed stop loss, you can let the trade run freely without worrying about the loss. Suppose, you have to move away from the screen for a while and the trade goes into loss, you will still be out of the trade with a small loss because of the automated exit.
Besides this, you can also place trailing stop losses that are not stagnant like a regular stop loss. Trailing stop loss will move on its own if the market situation is favorable allowing you to lock your profits in any situation. Utilizing the stop and limit orders is important for managing the risk and maximizing your gains as a day trader.
- Trading with a higher margin
Another major mistake that 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 goes higher as you may lose more than what 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. Hence, day traders need to limit the use of leverage and always calculate the required margin with the help of a margin calculator as I said earlier.
If you are a beginner, then you need to use as little leverage as possible. Because newbies 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 surely consider availing more leverage once you attain a consistent win rate and gain enough trading experience.
- Not Setting 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 break their trading limits as they spend more time monitoring the market and looking for trading opportunities. You need to set a limit to the maximum number of days you will enter in a day and you need to close the trading terminal once that limit is reached, irrespective of the profits and losses you have made at the end of the day.
When you win more trades, you place more trades due to greed and when you are on a losing streak, you want to recover the losses by winning and place more trades for that. But you need to avoid going beyond the set limit as it will have a negative impact on your performance.
- Choosing the wrong broker
The last-day trading mistake that I want to talk about is choosing the wrong broker for executing your trades. Day trading involves entering multiple trades on a regular basis and you will be paying spreads and commissions for every trade that you place on the brokerage platform. This means that your profitability will be impacted by the amount of trading cost and if you don’t consider this while choosing a broker, the spreads and commission will eat away your profits.
You need to choose a cost-effective broker providing solid trading conditions like tight spreads, low commission, and fast execution with high liquidity. ECN brokers are a popular choice among scalpers due to their low pricing and high liquidity. You should also consider trading major pairs with the lowest spreads and try to trade during the major sessions or session overlaps to take advantage of the high liquidity.
You can also trade minor pairs with sufficient liquidity. Day trading with exotic pairs is very risky as they lack enough liquidity and are highly volatile at the same time. By choosing the right broker and right currency pairs, you can minimize the trading cost and increase your profit potential.
Final Thoughts So, these are the 6 most common mistakes that day traders make and you need to avoid committing these mistakes for attaining long-term success in the forex market. One thing to remember here is that some mistakes are allowed when you are trading for the first time but being able to spot them in time makes you a better trader. Take your time to learn and refine your day trading strategy, so that you can trade with ease and attain your profit targets.
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