Liquidity pools - where are the orders

Many beginner traders make key mistakes that cost them time and money.

1. Incorrectly setting stop losses: Let's say you invest 10,000 PLN in a currency pair. You set a stop loss too close to the current price, at a level of 1%. The price temporarily drops, activating the stop loss, and you lose 100 PLN. Then the price returns to the original level or higher, which means that if the stop loss had been set further away, you would have avoided the capital loss.

2. Ignoring slippage: You enter the market with a buy order, seeing an attractive price, but due to low liquidity or high volatility, your order is executed at a less favorable price. With an assumed investment of 15,000 PLN, a slippage of 0.5% costs you an additional 75 PLN.

3. Unaware trading during high spread: When the spread is large, the difference between the buy and sell price can significantly impact the profitability of the transaction. Buying for 10,000 PLN with a 1% spread means you lose 100 PLN just on the price difference.

These errors lead to significant losses because they do not take into account market mechanisms.

• Stop loss and stop hunts: Traders often set stop losses at obvious support and resistance levels, which are targets for large players. The latter may deliberately 'break through' these levels to trigger stop hunts and collect orders from smaller investors.

• Slippage and spread: Price slippage and large spreads increase the cost of transactions, as any unfavorable price change or high spread means that a greater price movement in your direction is required for the transaction to be profitable.

Errors related to improper order management can quickly add up, especially with frequent trading.

• Improper stop losses: With a capital of 15,000 PLN, losing an average of 100 PLN per transaction due to a bad stop loss, after 10 transactions your losses can amount to 1,000 PLN, which corresponds to 6.67% of your capital.

• Slippage: For each transaction, you lose 75 PLN, which over 10 transactions amounts to 750 PLN, or 5% of your capital.

• Large spread: Assuming a loss of 100 PLN per transaction due to a large spread, that's another 1,000 PLN, or 6.67%.

In total, these errors can lead to a loss of over 2,750 PLN, which is close to 18.34% of your capital.

To avoid these mistakes, it is worth making a few changes to your approach:

1. Managing stop losses: Set stop losses more flexibly and in less obvious places. Use technical analysis to identify unusual support and resistance levels.

2. Understanding liquidity: Avoid trading during periods of low liquidity when price slippage is more likely. Monitor charts to identify moments of greater market activity.

3. Monitoring the spread: Check current spreads before each transaction. Choose moments with lower spreads to minimize transaction costs.

4. Education: Continuously develop your knowledge of market mechanisms to better understand order dynamics.

Start keeping track of your trades to identify patterns and avoid repeating the same mistakes.