Sunday, June 22, 2008

Forex Trading, Not Knowing When to Place Trades

I have been helping teach a female friend of mine forex trading since January this year. The chart on the right shows short (sell) trades on the EUR/USD that was placed by her a few months ago when she had absolutely no idea what she was doing - thankfully this is not the case today! But I wanted to post it here to illustrate one common mistake beginners make when placing their entry positions. In this chart, you see that three trades were opened within a five-minute time frame towards the end of a fall in prices.

Of course, when the trades were placed, she did not realize that there was an end to the fall in prices. Her rationale was simple - prior to opening the positions, she noticed that the prices were falling markedly. She did not want to miss an opportunity to get in on the action, so she quickly placed the three trades.

That was common beginner mistake number one; ie, rushing to place the orders without first studying the chart because you are afraid of missing a big move. It is never wise to place trades when a big move (in this case, a fall in prices) is already in motion. Instead, it is better to wait and see what happens. If she had waited, he would have seen that the prices were starting to make a turn upwards!

The second mistake made in this trade was that she sold right when the prices were on (or near) the lower blue line (the 24 bollinger bands). Typically, buyers are waiting to buy at the lower blue line. If someone wanted to sell, the best place to have done that would be at the gray line (the one in between the two blue lines). But by the time the price went to the gray line, it would have become obvious that the price had already reversed directions, and was now heading up!
The take-home lesson in this example would be to not enter a position when a big move is already in play. Be patient and wait for the next opportunity.

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