The 5 Biggest Mistakes Forex Traders Commonly Make
The 5 Biggest Mistakes Forex Traders Commonly Make
Forex trading is a high-impact activity involving a fast-paced market and plenty of volatility. If executed correctly it has the potential to be financially rewarding, however unfortunately for many traders, the challenges far outweigh the rewards.
Succeeding at forex trading takes time, patience and determination. To be successful it is important to avoid these 5 classic mistakes:
1.Failure to maintain solid market knowledge
It goes without saying that your forex trading education is your armour on the trading platform, but all too often, traders do not commit enough time to educating themselves about the ins and outs of the market.
There are countless educational resources available to choose from including books, e-books, webinars, seminars, articles, tutorials, videos and demo accounts, and as a dedicated online trader you should never stop educating yourself and increasing your knowledge about this fascinating market. Doing your homework is critical in learning about factors such as seasonal trends, timing of data releases, trading patterns and much more, and should never be overlooked.
It is so important to get a good forex trading education but this is always going to be an ongoing endeavour, so take the time to perform in-depth research before jumping right in to initiate any trade.
2. Poor approach to risk management
Trading is a very demanding activity and it's not difficult for things to get a little out of hand, particularly because traders are allowed a lot of freedom when it comes to leveraging their trading account, while beginners often lack basic money management and risk management discipline.
Many first-time traders experience 'beginner's luck' which can lead them to believe that trading is an easy way to quick riches. However, overconfidence is extremely dangerous in an environment such as online forex trading, as it ignites complacency and encourages excessive risk-taking, which can soon lead to a trading catastrophe.
To avoid overconfidence, a sharp approach to risk management is vital to your success. You need to input carefully researched stop loss orders and well defined targets that offer a good risk-reward ratio. Only risk a certain percentage of your funds and make full use of the trading tools offered by your forex broker to apply high-quality stops and targets.
Traders who risk too much trading capital on individual trades soon experience losses. A common rule of thumb (with regards to the difference between entry and stop price) is to trade no more than 1% of capital on a single trade (even professional traders usually risk much less than 1% of capital.) Trading in this way ensures that, even if a trader experiences poor results from their individual trades, this will not have a significant impact on their account. This also ensures that a trader will not lose more in a single trade than they can make back on another.
Some important questions to ask yourself before entering a trade are:
- Can I afford to lose this money?
- What is the maximum percentage of my total investment I am willing to risk in one trade?
- What is the maximum amount of trades I can have open simultaneously?
- What is the win/loss ratio that my strategy promises?
- Does it comply with my risk/reward ratio per trade?
The final point above is largely dependent on your strategy.
Check out this article, What You need to Know About Forex Money Management, for more information.
Overtrading is one of the worst forex trading mistakes you can possibly make, whether you are a long-term trader or a novice to the industry. Once you begin overtrading your forex trading account will suffer as a result, gradually getting smaller and smaller as you battle your way through your trades with less and less luck.
It can be difficult to identify overtrading before it's too late as there is a fine line between trading regularly and trading too much. One of the easiest ways to identify overtrading is to know and understand your personal forex trading style.
If you're not sure whether or not you are overtrading, consider the points below:
- You're spending a great deal of time in front of the charts
- You find yourself resorting to low time frames all too often
- You enter into new trades just because your current trade is in profit
- You gradually begin to execute more and more trades outside of your trading strategy
- You find yourself ignoring your trading plan in lieu of the buzz of an improvised trade
- You 'forget' to maintain your trading journal
- You find yourself experiencing a whole wealth of emotions while trading
Forex trading can be a very exhilarating experience. The market is constantly ebbing and flowing, the money flow is real, and it is all happening at our fingertips. But once emotions come into play and the excitement of chasing money kicks in, then it's more than likely that you have entered the dangerous territory of overtrading and need to drag yourself out quickly before you get in too deep.
The forex market never sleeps and there are abundant opportunities to place profitable trades on the trading platform. If you have a solid forex trading strategy that you stick to unyieldingly then you should never fall into the overtrading trap, particularly if you use your trading strategy against a trading plan and a trading journal.
4. Lack of a trading plan
The ultimate way to overcome overtrading urges is to have a solid forex trading plan. Reverently following a plan activates the right-thinking, logical side of your brain which eliminates your chances of trading on a whim. It also reduces your chances of experiencing stress and other emotions on the trading platform.
A forex trading plan is a critical component of your long-term trading success. Yes, you may follow the markets avidly and perform in-depth technical analysis, but without a plan all of this easily goes out the window as you become inundated with different emotions and develop unrealistic expectations for your trades.
The best way to avoid unrealistic expectations is to create a trading plan. An effective trading plan is a stringent set of rules, half of which are created from your trading strategy, and the other half of which are created from your money management strategy.
Your plan can include some or all of the following:
- Specific market conditions to enter a trade
- The amount of money you are willing to risk in a trade
- Specific market conditions to get out if you are wrong (stop loss)
- Specific market conditions to get out if you are right (take profit)
- Approximate time for the market to reach your target
All of this should be followed meticulously and noted down in a trading journal.
5. Having unrealistic expectations
Trading with unrealistic expectations is one of the biggest reasons that traders quit after a short stint on the market. Many new traders have the mistaken belief that the trading life is flashy and highly profitable, when in fact it takes time, commitment and dedication to become a successful trader.
All too often, traders focus on their daily earnings instead of looking at their monthly or yearly earnings. While daily earnings may not look exceptional, when you trade consistently and increase your ability to strategically manage positions, your account has the potential to grow.
Are you making these common mistakes?
If your trading yields steady results, then don't be tempted to change your approach. With leverage, even the smallest gain can become large. Over time as capital grows, a position size can be increased to generate higher returns or new strategies can be implemented and tested, but don't be tempted to rush into anything. Ultimately your ability to succeed when trading forex lies in your ability to be organized, patient, educated and ready for any market condition.