IN THIS final column, I outline some common pitfalls for new traders. Trading forex is not a get-rich-quick scheme: there is a steep learning curve to understanding the markets and the factors that influence exchange rates.
ABSENCE OF A SOUND TRADING PLAN
Your overall plan should include the currencies you intend to deal in, the amount of leverage you will use, and the amount of time you intend to devote. You also need an exit strategy for each trade you make, which includes the upper and lower boundaries of the trade.
FAILURE TO INCLUDE STOP-LOSS AND TAKE-PROFIT INSTRUCTIONS
Consider adding stop-loss instructions to all open positions – they can limit the amount that you could lose on any given trade, especially if you are unable to constantly monitor your account.
A stop-loss instruction will trigger the closing of an open position when the exchange rate touches the specified level. Similarly, take-profit orders allow you to establish the rate at which you want open positions closed in order to lock-in profits.
Trade leverage can be a powerful tool to help you maximise returns, or it can be the cause of your downfall. Don’t trade until you understand how leverage works.
IGNORING RATE SPREAD FLUCTUATIONS AND THE IMPACT SPREADS HAVE ON PROFITABILITY
Exchange rate spreads – the difference between the bid and the ask price – directly affect trade profitability. Spread differentials can fluctuate during the day, and spreads widen during off-market hours when volumes and liquidity are lower. In addition, spreads tend to widen ahead of important news, such as an impending interest rate decision or the latest employment results.
LACK OF DISCIPLINE
As rates fluctuate, you can easily get caught up in the market. This is why a plan is so important – it allows you to avoid the emotion that is bound to arise during times of volatility. In especially volatile markets, the best option may simply be not to trade. Sometimes the best plan is to stay purposefully inactive.
Before you start trading, try visiting the Introduction to Currency Trading page on our website, and open a demo account to start testing your skills and strategies.
Paul Hayward is head of sales at OANDA Europe.
The OANDA fxTrade platform – available for the desktop, tablet and smartphone – provides traders with easy to use technical analysis capabilities. For more information on technical analysis, visit: fxtrade.oanda.ca/learn/technical-analysis-for-traders
Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.