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When considering the forex trading risks to avoid, one first has to acknowledge that a trader generally has to take risks in order to earn a profit trading forex. Those juicy, profit-generating risks are absolutely necessary to your trading business and they do not fall among the group of preventable risks that a trader generally wants to keep away from.
In fact, an important part of becoming a successful trader involves learning how to maintain the necessary confidence in yourself for you to continue to identify and take such risks, even after having incurred some difficult losses.
Forex Trading Risks to Avoid – The Unnecessary Ones
Nevertheless, some potentially-costly trading risks can be rather easily circumvented by carefully managing the trading process as it unfolds. These comprise the category of unnecessary trading risks that will be addressed further in this article.
Sometimes taking an unnecessary risk can make you an unanticipated and seemingly unlikely profit. For example, perhaps you thought you had bought when in fact you made a transactional error and actually sold, but the market declined in your favor. You were lucky to get out of that error at a profit.
Unfortunately, you cannot count on unintentional trading errors resulting in such windfall profits. The trade could just as easily have resulted in a nasty and unprotected loss that could even have wiped out your trading portfolio, if you are a smaller margin trader.
Accordingly, doing what you can to avoid such risky errors and generally directing your risk-taking toward trades that are intentional, have good risk/reward ratios and accurately reflect your market view will be more likely to keep you in business as a trader over the long run.
Primary Unnecessary Trading Risks
- Loss of Trading Discipline
This risk occurs when a trader fails to follow the trade plan they have set up for themselves in a disciplined manner. Since the trade plan was designed to keep them within safe trading parameters, the risk of circumventing it is unknown and potentially large. Plan your trade and trade your plan should be your mantra.
- Overtrading
Some forex traders, especially novices, find executing trades fun and exciting. As a result, they display a tendency to start to trade without a plan or they might trade too often, perhaps taking an excessive number of trades that lack good risk/reward ratios. If such traders do manage to make profits, much of what they earn tends to get eaten up by spreads and commissions. The pros know that it is generally better for the long-term health of your trading business to “sit on your hands” and wait for the good trades than to trade too much.
- Analysis Paralysis
Some traders succumb to “analysis paralysis” as they get overwhelmed with all of the fundamental information and technical indicators they could be looking at, and fail to act in time to take what would have been a winning trade. While one should definitely avoid overtrading, you will still need to trade sometimes to make money as a forex trader.
If you find yourself watching screens all day without ever trading, then perhaps you need to lower your risk/reward standards and jump into the market to get your feet wet. Practice making and execute trading decisions quickly and incorporate that idea into your trade plan since the forex market waits for no one.
Other Unnecessary Trading Risks to Avoid
- Failing to pull the trigger.
- Jumping the gun.
- Not taking timely profits.
- Moving or pulling stops.
- Entering low probability trades.
Finally, keep careful records of your forex trades, and do your best to confirm each and every transaction you make in order to avoid potentially-costly transactional errors. The same degree of attention and care needs to go into placing the orders you need to protect your profits and limit your losses.
While you cannot control the market, you can certainly exercise power over your own behavior.
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