How to stay away from Forex Trading Systems Pitfalls
Traders who use a system need to learn to preempt some of the accompanying forex system pitfalls that can seriously detract from the success of their trading business. The most important such pitfall is, perhaps, failing to properly follow the trading system under all suitable trading conditions.
The following are some common trading errors or pitfalls that may arise:
1: Not Entering a Signaled Trade
A trader may stay away from entering a trade suggested by his system because he fears to lose money or because he did not pay attention to the market or to his system’s signals.
Irrespective of what causes it, the failure to take a trading signal, particularly if this is a frequent error, can seriously threaten the success of any trading system.
A trader could be missing out on a position that could have made him remarkable gains and covered for previous losses if he fails to enter a signaled trade. And the same is true with closing opened trades.
2: Entering Trades Based on External Factors
If a trader only chooses to enter trades signaled by his system that he finds exciting or emotionally appealing to him in some way, it will further jeopardize the success of his system.
Again, if traders base their trading decisions on the opinion of others or on suggestions coming from outside their system, this may lead to poor trading results.
This is particularly dangerous when the recommendations do not include important risk management factors like Stop-Loss levels and suitable exit points when the trade is profitable.
In addition, when a trade based on external factors fails, the trader may blame the external influence, rather than himself. This can create in that trader the very poor habit of failing to take responsibility for all of his trading decisions and this can further undermine his trading career.
3: Not Placing Stop-Loss Orders
Some traders may fail to enter their Stop-Loss orders into the market but rather keep Stop-Loss levels in their mind while watching the market.
Unfortunately, these levels may be easily exceeded in fast markets, thereby leaving the trader with a worse loss than he ever anticipated or is able to take.
In any case, mental stops can be very easily missed by either forgetfulness or inattention on the part of the trader. And regardless of how brief the error is, it can have significant consequences for the trader’s account and also for his self-confidence when trading, as there will be no one to blame but himself. You can preempt this pitfall by just following your marketing plan and entering a trade whenever it signals that a Stop-Loss level is appropriate.
4: Trading Too Many Systems
Another trading pitfall that can come up when following a trading system is the attempt to trade too many systems at the same time.
There are several profitable trading systems already in existence or which are just waiting to be developed, but watching too many of them at once can easily overwhelm a trader’s ability to focus and sustain the required discipline to trade them profitably.
Again, although some systems work better in some markets, changing between multiple trading systems can also cause confusion. So, the trader should aim for simplicity as much as possible when developing his trading plan.
5: Taking Too Much Risk
It is important for traders to avoid the tendency to take positions that are too big for their risk tolerance. They should rather first assess their risk profile based on their funds available for trading and then only choose trades with a high likelihood of success based on their trading plan.
In addition, Investing too much in one trading position can affect a trader’s judgment and produce poor results if that trade results in a loss.
Following such losses, sufficient capital may not be available to take advantage of subsequent trades that would have had much better eventual outcomes.