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For a variety of reasons, traders flock to the foreign exchange market (forex). It’s very liquid – on average, more than $US5 trillion is traded every day – and stable enough for brokers to offer leverage (meaning traders can borrow more against their cash) on trades. It is, nevertheless, a highly sophisticated market, and traders who enter it too quickly risk making costly blunders. Let’s take a look at five of the most common mistakes rookie forex day traders make:
Forex Trades: Averaging Down
The process of purchasing further shares of an asset or financial instrument (such as Forex or commodities) at prices lower than the original purchase price is known as averaging down or down-averaging. This lowers the investor’s average price paid for all of their purchased items. As a result, it is a strategy for lowering the average cost in a market that has dropped in value.
Traders frequently come across the concept of averaging down. Although it is rarely done on purpose, many traders have found themselves in this situation. In forex markets, averaging down has a number of drawbacks.
The fundamental issue is that a losing position is being maintained, potentially resulting in not only financial but also time losses. As a result, this time and money could be better spent.
Second, a higher return on your remaining capital is required to recover any capital lost in the initial losing trade. It will take a 100% return to bring a trader back to their original capital level if they lose 50% of their capital. Losing a substantial sum of money on a single deal or on a single trading day might stifle capital growth for a long time.
A trend might last longer than a trader can stay liquid, therefore averaging down will surely result in a significant loss or margin call, especially if new money is added as the position accumulates losses.
These issues are especially important to day traders. Because trades have such a short timescale, opportunities are fleeting and bad investments must be exited quickly.
learn more about top 5 forex trading mistakes to avoid
Forex Trades: Averaging Down
The process of purchasing further shares of an asset or financial instrument (such as Forex or commodities) at prices lower than the original purchase price is known as averaging down or down-averaging. This lowers the investor’s average price paid for all of their purchased items. As a result, it is a strategy for lowering the average cost in a market that has dropped in value.
Traders frequently come across the concept of averaging down. Although it is rarely done on purpose, many traders have found themselves in this situation. In forex markets, averaging down has a number of drawbacks.
The fundamental issue is that a losing position is being maintained, potentially resulting in not only financial but also time losses. As a result, this time and money could be better spent.
Second, a higher return on your remaining capital is required to recover any capital lost in the initial losing trade. It will take a 100% return to bring a trader back to their original capital level if they lose 50% of their capital. Losing a substantial sum of money on a single deal or on a single trading day might stifle capital growth for a long time.
A trend might last longer than a trader can stay liquid, therefore averaging down will surely result in a significant loss or margin call, especially if new money is added as the position accumulates losses.
These issues are especially important to day traders. Because trades have such a short timescale, opportunities are fleeting and bad investments must be exited quickly.
learn more about top 5 forex trading mistakes to avoid