5 Forex Day Trading Mistakes to Avoid

8/2/2019 5 Forex Day Trading Mistakes to Avoid

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5 Forex Day Trading Mistakes To AvoidPosted: Aug 3, 2011 | Reprints

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FILED UNDER

DAY TRADING

FOREX

FOREX TRADING STRATEGIES

FOREX-BEGINNER

SWING TRADING

VOLATILITY

Cory MitchellContact |Author BioARTICLE HIGHLIGHTS

These five potentially devastating mistakes can be avoided.

Holding losing positions costs time and money.

In the highleveragegame of retail forexday trading, there are certain practices that, if

used regularly, are likely to lose a trader all he has. There are five common mistakes that

day traders often make in an attempt to ramp up returns, but that end up resulting in

lower returns. These five potentially devastating mistakes can be avoided with

knowledge, discipline and an alternative approach. (For more strategies that you can

use, check outStrategies For Part-Time Forex Traders.)

TUTORIAL:Forex
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Averaging Down

Traders often stumble acrossaveraging down. It is not something they intended to do

when they began trading, but most traders have ended up doing it. There are several

problems with averaging down.

The main problem is that a losing position is being held - not only potentially sacrificing

money, but also time. This time and money could be placed in something else that is

proving itself to be a better position.

Also, for capital that is lost, a larger return is needed on remaining capital to get it back.

If a trader loses 50% of her capital, it will take a 100% return to bring her back to the

original capital level. Losing large chunks of money on single trades or on single days of

trading can cripple capital growth for long periods of time.

While it may work a few times, averaging down will inevitably lead to a large loss or

margin call, as a trend can sustain itself longer than a trader can stayliquid- especially if

more capital is being added as the position moves further out of the money.

Day traders are especially sensitive to these issues. The short time frame for trades

means opportunities must be capitalized on when they occur and bad trades must be

exited quickly. (To learn more on averaging down, check outBuying Stocks When The

Price Goes Down: Big Mistake?)

Pre-Positioning for News

Traders know the news events that will move the market, yet the direction is not known

in advance. A trader may even be fairly confident what a news announcement may be -

for instance that the Federal Reserve will or will not raise interest rates - but even so

cannot predict how the market will react to this expected news. Often there are

additional statements, figures or forward looking indications provided by news

announcements that can make movements extremely illogical.

There is also the simple fact that asvolatilitysurges and all sorts of orders hit the

market, stops are triggered on both sides of the market. This often results in whip-saw

like action before a trend emerges (if one emerges in the near term at all).

For all these reasons, taking a position before a news announcement can seriously

jeopardize a trader's chances of success. There is no easy money here; those who believe

there is may face larger than usual losses.
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Trading Right after News

A news headline hits the markets and then the market starts to move aggressively. It

seems like easy money to hop on board and grab somepips. If this is done in a non-

regimented and untested way without a solid trading plan behind it, it can be just as

devastating as placing a gamble before the news comes out.

News announcements often cause whipsaw-like action because of a lack of liquidity and

hair-pin turns in the market assessment of the report. Even a trade that is in the money

can turn quickly, bringing large losses as large swings occur back and forth. Stops during

these times are dependent on liquidity that may not be there, which means losses could

potentially be much more than calculated.

Day traders should wait for volatility to subside and for a definitive trend to develop afternews announcements. By doing so there is likely to be fewer liquidity concerns, risk can

be managed more effectively and a more stable price direction is likely. (For more on

trading with news releases, readHow To Trade Forex On News Releases.)

Risking More Than 1% of Capital

Excessive risk does not equal excessive returns. Almost all traders who risk large

amounts ofcapitalon single trades will eventually lose in the long run. A common rule is

that a trader should risk (in terms of the difference between entry and stop price) no

more than 1% of capital on any single trade. Professional traders will often risk far less

than 1% of capital.

Day trading also deserves some extra attention in this area. A daily risk maximum should

also be implemented. This daily risk maximum can be 1% (or less) of capital, or

equivalent to the average daily profit over a 30 day period. For example, a trader with a

$50,000 account (leverage not included) could lose a maximum of $500 per day.

Alternatively, this number could be altered so it is more in line with the average daily

gain - if a trader makes $100 on positive days, she keeps losing days close to $100 orless.

The purpose of this method is to make sure no single trade or single day of trading hurts

the traders account significantly. By adopting a risk maximum that is equivalent to the

average daily gain over a 30 day period, the trader knows that he will not lose more in a

single trade/day than he can make back on another. (To understand the risks involved in

the forex market, seeForex Leverage: A Double-Edged Sword.)

Unrealistic ExpectationsUnrealistic expectations come from many sources, but often result in all of the above
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problems. Our own trading expectations are often imposed on the market, leaving us

expecting it to act according our desires and trade direction. The market doesn't care

what you want. Traders must accept that the market can be illogical. It can be choppy,

volatile and trending all in short, medium and long-term cycles. Isolating each move and

profiting from it is not possible, and believing so will result in frustration and errors in

judgment.

The best way to avoid unrealistic expectations is formulate atrading planand then trade

it. If it yields steady results, then don't change it - with forex leverage, even a small gain

can become large. Accept this as what the market gives you. As capital grows over time,

the position size can be increased to bring in higher dollar returns. Also, new strategies

can be implemented and tested with minimal capital at first. Then, if positive results are

seen, more capital can be put into the strategy.

Intra-day, a trader must also accept what the market provides at different parts of the

day. Near the open, the markets are more volatile. Specific strategies can be used during

the market open that may not work later in the day. As the day progresses, it may

become quieter and a different strategy can be used. Towards the close, there may be a

pickup in action and yet another strategy can be used. Accept what is given at each point

in the day and don't expect more from a system than what it is providing.

Bottom Line

Traders get trapped in five common forex day trading mistakes. These must be avoided

at all costs by developing an alternative approach. For averaging down, traders must not

add to positions but rather exit losers quickly with a pre-planned exit strategy. Traders

should sit back and watch news announcements until the volatility has subsided. Risk

must be kept in check, with no single trade or day losing more than what can be easily

made back on another. Expectations must be managed, and what the market gives must

be accepted. By understanding the pitfalls and how to avoid to them, traders are more

likely to find success in trading. (To help you become successful in the forex market,check out10 Ways To Avoid Losing Money In Forex.)byCory Mitchell

Cory Mitchell is an independent trader specializing in short- to medium-term technical strategies. He is thefounder ofwww.vantagepointtrading.com, a website dedicated to free trader education and discussion. Aftergraduating with a business degree, Mitchell has spent the last five years trading multiple markets and educatingtraders. He has been widely published and is a member of the Canadian Society of Technical Analysts and theMarket Technicians Association.

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The Canadian Dollar: What Every ForexTrader Needs To KnowPosted: Jun 29, 2011 | Reprints

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FILED UNDER

CURRENCIES

FOREX

FOREX FUNDAMENTALS

FOREX THEORY

INTERNATIONAL MARKETS

Stephen D. Simpson, CFAContact |Author BioARTICLE HIGHLIGHTS

The Canadian dollar is the sixth-most held currency as a reserve.

In terms of GDP (measured in U.S. dollars), Canada is the 10th-largest economy.

The Canadian dollar is uniquely tied to the health of the U.S. economy.

Foreign exchange, orforex, trading is an increasingly popular option for speculators. Ads

boast of "commission-free" trading, 24-hour market access and huge potential gains, and

it is easy to set up simulated trading accounts to allow people to practice their trading

techniques.

TUTORIAL:The Ultimate Forex Guide
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With that easy access comesrisk. It is true that forex trading is a huge market, but it also

true that every single wannabe forex trader is going up against thousands of professions

working for major banks and funds. The foreign exchange market is a 24-hour market

and there is no exchange trades take place between individual banks, brokers, fund

managers, and other market participants but 10 firms dominate nearly 75% of the

volume.

It is not a market for the unprepared, and investors would do well to do their homework

beforehand. In particular, would-be traders need to understand the economic

underpinnings of the major currencies in the market and the special or unique drivers

that influence their value.

Introduction to the Canadian DollarJust seven currencies account for over 80% of the volume of the forex market, and the

Canadian dollar (often called the "loonie" because of the appearance of a loon on the

back of the C$1 coin) is one of these major currencies and is the sixth-most held currency

as a reserve. (Whether you're puzzled by pips or curious about carry trades, your queries

are answered here. For more, seeTop 7 Questions About Currency Trading Answered.)

This is somewhat of an anomaly, as Canada's economy (in terms of U.S. dollars ofGDP)

is actually number 10 in the world. Canada is also relatively low on the list of major

economies in terms of population, but it does stand at ninth in the world in terms of its

dollar-value exports. Anomalies are somewhat par for the course with the loonie, though.

The Canadian dollar was not part of the originalBretton Woods system, and so it floated

freely until 1962 when extensive depreciation toppled a government and Canada went

with a fixed rate until 1970 when high inflation prompted the government to move back

to a floating system.

All of the major currencies in the forex market have central banks behind them. In the

case of the Canadian dollar it is theBank of Canada. Like all central banks, the Bank ofCanada tries to find a balance between policies that will promote employment and

economic growth while containing inflation. Despite the significance of foreign trade to

Canada's economy (and the influence that currency can have on that), the Bank of

Canada does not intervene in the currency the last intervention was in 1998, when the

government decided that intervention was ineffective and pointless. (For more, seeGet

To Know The Major Central Banks.)

The Economy Behind the Canadian Dollar

In terms of GDP (measured in U.S. dollars), Canada is the 10th-largest economy. Canada
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has enjoyed relatively strong growth over the last 20 years, with two relatively brief

periods ofrecessionin the early 1990s and 2009. Canada had persistently

highinflationrates, but better fiscal policy and an improved current account balance

have led to lower budget deficits, lower inflation and lower inflation rates.

In analyzing the economic situation in Canada, it is also important to consider Canada's

exposure tocommodities. Canada is a meaningful producer of petroleum, minerals,

wood products and grains, and the trade flows from those exports (nearly 60% of the

country's total exports) can influence investor sentiment regarding the loonie. As is the

case for virtually all developed economies, this data can be readily found on the internet

through sources like theAgriculture and Agri-Food Canada website. (For related

reading, seeEconomic Factors That Affect The Forex Market.)

Although the average age of Canada's population is high relative to global standards,

Canada is relatively younger than most other developed economies. Canada has a

relatively liberal immigration policy, though, and Canada'sdemographicsare not

especially troubling for the long-term economic outlook.

Because of the tight trading relationship between Canada and the United States (they

both make up over half of the other's import/export market), traders of the Canadian

dollar have to keep an eye on events in the United States as well. While Canada has

pursued very different economic policies, the reality is that conditions in the U.S.

inevitably spill over into Canada to some extent. (It also influences other economic

phenomena such as inflation. For more, seeHow The U.S. Government Formulates

Monetary Policy.)

What is particularly interesting about that relationship is how conditions can diverge.

The structure of Canada's financial market helped the country avoid many of the

problems with bad mortgages that affected the U.S. On the other hand, the lesser

significance of technology companies to Canada's economy led to relative weakness inthe Canadian dollar during the techboomin the U.S. in the 1990s. On the other hand,

the commodity boom of the 2000s (particularly in oil) led to outperformance for the

loonie. (For more, see5 Steps Of A Bubble.)

Drivers Of The Canadian Dollar

Economic models designed to calculate the "right" foreign currency exchange rates are

notoriously inaccurate when compared to real market rates, due in part to the fact that

economic models are typically based on a very small number of economic variables

(sometimes just a single variable like interest rates). Traders, however, incorporate a
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much larger range of economic data into their trading decisions and

theirspeculativeoutlooks can themselves move rates just as investor optimism or

pessimism can move a stock above or below the value its fundamentals suggest. (For

more, see4 Ways To Forecast Currency Changes.)

Major economic data includes the release of GDP, retail sales, industrial production,

inflation, and trade balances. These come out at regular intervals and many brokers, as

well as many financial information sources like the Wall Street Journal and Bloomberg,

make this information freely available. Investors should also take note of information on

employment, interest rates (including scheduled meetings of the central bank), and the

daily news flow natural disasters, elections, and new government policies can all have

significant impacts on exchange rates.

As is often the case with countries that rely on commodities for a sizable portion of their

exports, performance of the Canadian dollar is often related to the movement of

commodity prices. In the case of Canada, the price of oil seems to be especially

significant in currency moves and it generally seems to pay off to go long loonies and

short oil importers (like Japan, for instance) when oil prices are moving up. Along

similar lines, there is some impact on the loonie from fiscal and trade policy in countries

like China countries that are major importers of Canadian materials. (For more,

seeCanada's Commodity Currency: Oil And The Loonie.)

Capital inflows can also drive action in the loonie. During periods of higher commodity

prices there is often increased interest in investing in Canadian assets, and that influx of

capital can impact exchange rates. That said, thecarry tradeis usually not so significant

for the Canadian dollar.

Unique Factors for the Canadian Dollar

Given the relative economic health of Canada, the country has a relatively high interest

rate among developed economies. Canada also enjoys a relatively newly-won reputationfor balanced fiscal management and finding a workable middle path between a state-

dominated economy and a more hands-off approach. That can become more relevant

during periods of global economic uncertainty though not areserve currencylike the

U.S. dollar, the Canadian dollar is seen as something of a global safe haven. (For more,

seeThe U.S. Dollar's Unofficial Status as World Currency.)

In point of fact, though, while the Canadian dollar is not a reserve currency like the U.S.

dollar, that is changing. Canada is now the sixth most commonly held reserve currency

and those holdings are increasing.
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The Canadian dollar is also uniquely tied to the health of the U.S. economy. Though it

would be a mistake for traders to assume a one-to-one relationship, the U.S. is a huge

trade partner for Canada and U.S. policies can have significant influence over the course

of trading in the Canadian dollar.

The Bottom Line

Currency rates are notoriously difficult to predict, and most models seldom work for

more than brief periods of time. While economics-based models are seldom useful to

short-term traders, economic conditions do shape long-term trends.

Though Canada is not an especially large country and is not among the very largest

exporters of manufactured goods, the country's economic vitals are stable and the

country has found a good balance between profiting from its natural resource wealth andrisking "Dutch disease" from over-reliance on these goods. As Canada becomes an

increasingly viable alternative to the U.S. dollar, traders should not be surprised to see

the loonie become more important in the forex market. (For related reading, see3

Factors That Drive The U.S. Dollar.)

byStephen D. Simpson, CFA

Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equityanalyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen'sconsulting work has focused primarily upon the healthcare sector, while he has also written extensively forpublication on topics pertaining to investments, security analysis, and healthcare. Simpson operates theKratisto

Investingblog, and can be reached there.

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How gold affect currencies?Posted: Jun 30, 2011 | Reprints

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FOREX THEORY

Kalen SmithContact |Author BioARTICLE HIGHLIGHTS

Gold was once used to back up fiat currencies.

Gold is used to hedge against inflation.

Gold purchases tend to reduce the value of the currency used to purchase it.

Gold is one of the most widely discussed metals due to its prominent role in both the

investment and consumer world. Even though gold is no longer used as a primary form

of currency indevelopednations, it continues to have a strong impact on the value of

those currencies. Moreover, there is a strong correlation between its value and the

strength of currencies trading on foreign exchanges. (For related reading, seeGold: The

Other Currency.)

TUTORIAL:Commodities Introduction
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To help illustrate this relationship between gold and foreign exchange trading, consider

these five important aspects:

1. Gold was once used to back up fiat currencies.

As early as the Byzantine Empire, gold was used to supportfiatcurrencies, or the various

currencies considered legal tender in their nation of origin. Gold was also used as the

worldreserve currencyup through most of the 20th century; the United States used

thegold standarduntil 1971 when President Nixon discontinued it. (For more, seeThe

Gold Standard Revisited.)

One of the reasons for its use is that it limited the amount of money nations were allowed

to print. This is because, then as now, countries had limited gold supplies on hand. Until

the gold standard was abandoned, countries couldn't simply print their fiat currencies adnauseum unless they possessed an equal amount of gold. Although the gold standard is

no longer used in the developed world, some economists feel we should return to it due

to the volatility of the U.S. dollar and other currencies.

2. Gold is used to hedge against inflation.

Investors typically buy large quantities of gold when their country is experiencing high

levels of inflation. The demand for gold increases during inflationary times due to its

inherent value and limitedsupply. As it cannot be diluted, gold is able to retain value

much better than other forms of currency. (For related reading, seeThe Great Inflation

Of The 1970s.)

For example, in April 2011, investors feared declining values of fiat currency and the

price of gold was driven to a staggering $1,500 an ounce. This indicates there was little

confidence in the currencies on the world market and that expectations of future

economic stability were grim.

3. The price of gold affects countries that import and export it.

The value of a nation's currency is strongly tied to the value of its imports and exports.

When a country imports more than it exports, the value of its currency will decline. On

the other hand, the value of its currency will increase when a country is a net exporter.

Thus, a country that exports gold or has access to gold reserves will see an increase in the

strength of its currency when gold prices increase, since this increases the value of the

country's total exports. (For related reading, seeWhat Is Wrong With Gold?)

In other words, an increase in the price of gold can create atrade surplusor help offset a

trade deficit. Conversely, countries that are large importers of gold will inevitably end uphaving a weaker currency when the price of gold rises. For example, countries that
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specialize in producing products made with gold, but lack their own gold reserves, will be

large importers of gold. Thus, they will be particularly susceptible to increases in the

price of gold.

4. Gold purchases tend to reduce the value of the currency used to purchase

it.

Whencentral bankspurchase gold, it affects the supply and demand of the domestic

currency and may result in inflation. This is largely due to the fact that banks rely on

printing more money to buy gold, and thereby create an excess supply of the fiat

currency. (This metal's rich history stems from its ability to maintain value over the long

term. For more, see8 Reasons To Own Gold.)

5. Gold prices are often used to measure the value of a local currency, butthere are exceptions.

Many people mistakenly use gold as a definitive proxy for valuing a country's currency.

Although there is undoubtedly a relationship between gold prices and the value of a fiat

currency, it is not always an inverse relationship as many people assume.

For example, if there is high demand from an industry that requires gold for production,

this will cause gold prices to rise. But this will say nothing about the local currency,

which may very well be highly valued at the same time. Thus, while the price of gold can

often be used as a reflection of the value of the U.S. dollar, conditions need to be

analyzed to determine if an inverse relationship is indeed appropriate.

The Bottom Line

Gold has a profound impact on the value of world currencies. Even though the gold

standard has been abandoned, gold as acommoditycan act as a substitute for fiat

currencies and be used as an effective hedge against inflation. There is no doubt that

gold will continue to play an integral role in the foreign exchange markets. Therefore, it

is an important metal to follow and analyze for its unique ability to represent the healthof both local and international economies. (This article explores the past, present and

future of gold. For more, seeThe Midas Touch For Gold Investors.)

byKalen Smith

Kalen Smith is a frequent contributor to theMoney Crasherspersonal finance blog and writes about financialtopics like investing in the stock market, insurance options, saving for retirement, and behavioral finance theory.Kalen holds an Master of Business Administration degree in finance from Clark University in Worcester, Mass.

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