When it comes to trading forex, one of the most common questions that traders ask is why their trades start lower than expected. This phenomenon can be frustrating, especially for new traders who are still trying to get a handle on the market. In this article, we will explore the reasons why this happens and what you can do to mitigate the risks.
Firstly, it’s important to understand that forex trading is a highly volatile market. The price of currency pairs is constantly fluctuating, and at times, it can be difficult to predict which way the market will move. This is why traders use technical analysis and fundamental analysis to try and identify patterns and trends that can help them make informed trading decisions.
However, even with all the analysis in the world, there are times when the market can surprise you. This is because there are many factors that can impact the forex market, including economic data releases, political events, and global news events. When something unexpected happens, it can cause a sudden shift in the market that can catch traders off guard.
Another reason why trades can start lower is due to the bid-ask spread. The bid-ask spread is the difference between the highest price that a buyer is willing to pay for a currency pair (the bid price) and the lowest price that a seller is willing to accept (the ask price). This spread is determined by the liquidity of the market and can vary depending on the size of the trade.
When a trader enters a trade, they will typically buy at the ask price and sell at the bid price. This means that they will be starting their trade at a slight disadvantage because they are buying at a higher price than the current market price. This difference in price is known as the spread cost, and it can eat into the trader’s profits if they are not careful.
To mitigate the risks of starting a trade lower, there are several strategies that traders can use. One approach is to use limit orders to enter trades. A limit order allows traders to set a specific price at which they want to buy or sell a currency pair. This means that they can wait for the market to reach their desired price before entering a trade, which can help to reduce their risk.
Another strategy is to use stop-loss orders. A stop-loss order is an instruction to close a trade if the market moves against the trader by a certain amount. This can help to limit the trader’s losses if the market suddenly moves in the opposite direction.
In conclusion, there are several reasons why trades can start lower when trading forex. These include unexpected market events, bid-ask spreads, and the volatility of the market. However, traders can mitigate the risks by using limit orders and stop-loss orders to enter and exit trades. By being aware of these factors and using the right trading strategies, traders can improve their chances of making profitable trades in the forex market.
