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Top five common Forex mistakes every trader should avoid

Learning from your mistakes is important, but there is also a way to avoid them—by using knowledge and skill.

Here are five mistakes that may have devastating consequences for your trading capital and how to avoid them.

1. Mistaking binary options for Forex

Although many people think that Forex and binary options are similar, they are completely different.

In binary options, you can only make bets as to what direction will the price of an instrument go and for how long.

In contrast, Forex brokers allow you to build complex strategies and manage your positions while they are open, apply leverage to increase your trading capital, and employ risk-management tools, such as Take Profit and Stop Loss orders.

Pay attention to whether these settings are available and make sure that you are trading with a Forex broker.

2. Losing more than you can afford

When trading, it is essential that you count your reward-to-risk ratio. For instance, if your winning trades amount to 100 U.S. dollars and your losing trades amount to 50 U.S. dollars – your reward-to-risk ratio is 100/50=2. Don’t let this ratio go below 1 and, ideally, 1.25.

Another useful thing to keep in mind is that you should put no more than 4% of your capital into a trade and quit it if the loss grows to 25%.

3. Trading without a plan

You should develop a strategy to profit in the long term. If you don’t do that, your trading will hardly bring any consistent returns.

A day-trading strategy should be based predominantly on technical indicators, while medium- and long-term strategies should also include fundamental data, such as economic indicators and important economic events.

[Side note: if you want to trade long-term, check if your broker charges a swap fee for holding a position open overnight. Some brokers, such as OctaFX, charge no swaps, therefore creating more favourable conditions for long-term trading.]

4. Adding to a losing trade

This means adding to a losing position, believing that the price trend will reverse.

However, a trend can remain unfavourable longer than you can remain solvent. Remember the first rule and quit the trade when it reaches a 25% loss.

You can also place a Stop Loss order at any level you want to cut your losses. Once triggered, it will close your trade, and you will not incur any additional losses.

5. Opening too many orders

Opening too many orders might not end well. This will distract you and make it hard and stressful to watch all the trades.

Apart from that, many trades mean a considerable part of your trading capital being used, which might lower your margin level and ultimately lead to a stop out.

Make a considered decision about each order you are going to open. Remember, more is not better.

Keeping in mind the rules described above will help you decrease your losses and maximise your profits in the Forex market.

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Top five common Forex mistakes every trader should avoid