How to Avoid Currency Traders' Biggest Mistakes
Strategies abound for trading currencies, but here are some key mistakes you can avoid.
Currency markets have been wild and crazy lately, but through it all, traders seem to have put on more money-making trades than the opposite.
All good, right? Not exactly.
According to a new analysis using data from the broker FXCM*, traders are losing more money on the losing trades than they are making money on the winners. One example: euro-dollar trades through FXCM were profitable 59% of the time - but traders pocketed an average of only 65 pips on the ones that made money, and lost 127 pips, on average, on losing trades. Investors fared even worse trading the British pound against the yen: the winners gained only 52 pips, and the losers lost an average of 122 pips.
"While traders were correct more than half the time, they lost nearly twice as much on their losing trades as they won on winning trades losing money overall," says David Rodriguez, a quantitative strategist at Daily FX.
How do you keep from making the same mistakes? For starters, follow the classic trading advice: keep profitable trades going, get out early when you're on the losing end - and always seek out trades that you believe offer more potential reward than potential loss.
This is simpler than it sounds in the currency markets, where you can easily use stop-loss orders at the outset of every trade. That's what Rodriguez recommends. Other tips: make sure your profit target is at least as far away as your stop - and don't change the stop unless you're moving it in your favor to lock in profits.
Now, get busy.
*FXCM is a sponsor of Money In Motion.
Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm and repeats on Saturdays at 7pm.
Learn more: The essential vocabulary for currency trading is on Key Currency Terms. Top currency strategies are broken down for you in Currency Class.
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