You may deny it, but in reality we all have’em – ‘Bad Habits,’ specially when it comes to trading forex. I have outlined below some of the main bad-habits that I had to overcome personally, in order to improve my trading.
1. Guess Work
This is the mother of them all. Its important to note that as a trader your duty is to trade what you see; not what you think. If you start guessing the next move of the market, trust me; you will find yourself in the most unfortunate situation in no time.
Nobody, I mean nobody, no indicator nor news can project the markets with 100% accuracy. So its ok to make losing trades, even losing streaks for that matter. Deal with the situation or forget about trading. Its that simple. Best traders are the ones who know how to protect their capital, manage risks and deal with the losing trades.
I mentioned about losing trades, because they are the culprits that inflicts fear and doubt over ones trading methodology, then prompts guessing the markets rather than strictly adhere to a single-working-strategy.
2. Over-Analyzing the Charts
This is another widespread disease among traders.
Human mind is a funny customer. The more you try to convince your brain that trading-forex is a game of probabilities, the more it rebuttals the idea by encouraging you to look for faultless and fail-proof setups. So beware of your own mind.
If you are looking at a chart for more than it takes normally, then most probably you are looking for something that isn’t there.
So it helps to have an idea on how much time to spend on each pair or chart for analysis. If no setups were found at the first very first scan, move on to the next chart or be content with a no-trade, no-loss situation.
3. Using Too Many Indicators
I am not against using indicators. They do help me and most other traders with useful information about certain market behavior. However attaching too many indicators distorts the view of the main element – the price chart. This can lead to confusion about the current market condition rather than clarity, which is the main purpose of using indicators in the first place.
Indicators process and interpret the same historical tick or chart data in a different way. Very often indicators and their signals contradict each other. This can only lead to over complicating the trading process.
4. Impulse Trading
This is the hard way one finds out that trading has to be a methodical process in order to succeed.
The fear of losing trade-opportunities do spark an urge to enter trades late. Opening such positions because of gut feeling, even without proper entry conditions is called impulse trading.
When you see a market moves sharply in one direction and you open up a position. Often than not, one of the following scenarios take place:
- Open up a position in the direction of the move, only to see that price stops and turned sharply in the opposite direction.
- Open up a position in the opposite direction of the move at significant level, only to see price continues in the same direction beyond the level with even more momentum.
Of course, there are two more positive outcome possibilities too. But when is the last time that markets treated the retail trader favorably on a pure gamble? Impulse trading is no different to rolling the dice in a casino.
5. Taking Positions without Stop Loss
Every trade I enter should have a predetermined or a dynamic stop loss limit. I should know when to exit the trade if I am wrong. And I must be comfortable in taking that loss if the market moves against me. A stop loss limit is there to protect my capital. So naturally it does not make sense to enter positions without a stop loss and expose the entire capital to the market.
Markets can move very swiftly either in favor of you or against you. When there is no stoploss set and the strategy is to exit the trade manually with a market order at a certain distance or a level, the issue is the slippage and requotes. Slippage in fact could have adverse effects even when stop loss is set for trades. Nevertheless, a strategy to exit positions with market orders could prove to be a grave mistake in busy market conditions.
Whether it be as per strategy or simply to have peace of mind to know that all open positions are protected; a stoploss is crucial to be included in the entry-rules and money management.