Chapter 19
New Forex Trader Mistakes
With such low barriers to entry, the Forex markets attract a lot of new traders.
This is especially true as this market is open globally around the clock – giving these new traders greater flexibility regarding when to trade. Initial capital requirements are attractive as well – thanks to the high leverage offered by most brokers, you can get started with just a few hundred dollars.
However, this experience often turns out to be more difficult than anticipated.
We’ve been there and seen it all before – new traders often make the same mistakes, over and over. If you can eliminate these six mistakes from your trading you’re significantly increasing your chances of success.
Mistake 1: Starting without any education
The most common Forex trading mistake to avoid is believing you can succeed without any experience or trading education. You’d be amazed at how many new traders think they are somehow special and can make money from day one. These fantasies are often short-lived and expensive!
Trading is a skill and like any other skill on the planet, it takes time to get good at it. And, like any other skill, you either develop it through trial and error or you can cut your learning curve by learning from an expert. In practice, you need both.
The problem with trading is newcomers can often confuse luck with expertise. Everyone has almost a 50:50 chance of having a winning first trade, no matter their skill level! You’d never get this with a skill like chess, painting or football – where half the newcomers got the impression they were experts after their first go at it. However, the fact is over the long term performance reverts to the trader’s mean skill level (their edge).
Investing in a trading education that can truly help you understand how the markets and trading works is indispensable if you want to outperform the masses of other Forex beginners. We hope it is with My Trading Skills, but if we’re not for you then please try to educate yourself elsewhere.
Don’t run before you can walk! Learn the basics first, start out small and slowly, and forget about being successful with “get-rich-quick schemes”.
Investing time and money to get a good Forex trading education is investing in yourself.
- Learn more, take our premium course: Trading for Beginners
Mistake 2: Trading without a plan
Because most traders are trying so hard to make the most of the trading opportunities that the markets offer, they forget to follow their trading plan – if they even have one!
This, by the way, is what differentiates a professional trader from a beginner: the way they approach their daily trading.
Beginner traders will mostly go from trade to trade without a plan and trade on feelings and whims, while more experienced traders will follow a trading plan and a routine that they spend energy and time to develop.
But having a trading plan isn’t enough – you need to stick to it. This will help you become a more experienced trader, especially when things aren’t going your way.
- Your knowledge of trading, the markets, economics
- Your strengths and weaknesses
- The reasons why you’re trading
- Your financial goals
- How to deal with big profits/losses
- Your initial trading capital
- How much money you can afford to lose
- The kind of analysis you’ll use to spot your trade setups: technical analysis, fundamental analysis
- Which kind of currency pairs you will mostly trade in: majors, minors, exotics
- The leverage you’ll use
- The money and risk management rules you’ll follow
Mistake 3: Trading without any money and risk management rules
Most beginner Forex traders forget to use a stop-loss order, which is an automatic order that says to your broker to close your position after it reaches a certain level of loss.
If you do not use stop-loss orders, it means that you have an open-ended risk, as your positions can freely fluctuate depending on the market’s price movements. Thus, there is a greater risk of exaggerated losses if things aren’t going your way, because you’re not limiting your losing positions to a certain level, leaving you vulnerable to big swings against your position.
But having money and risk management rules to follow isn’t just about using stop-loss orders to cap your losses, there are other things to take into consideration.
Here are some money and risk management pointers:
- Always use stop-loss and take-profit orders to know in advance how much money you can lose and make on a single trade.
- Set a maximum loss per week, and immediately stop trading if you reach it
- Follow a risk/reward ratio of at least 1:2 if you’re an intraday trader, 1:3 if you’re a swing or position trader.
- Use proper position sizing – only risk a maximum of 1% of your total trading capital on a single trade.
- Don’t change your risk level as soon as you’re making money – keep it constant.
- Don’t average up/down when the market goes against you.
Read: Awesome Forex Risk Management Strategies to Save You Money
Mistake 4: Averaging down (or up) to redeem losing positions
You might have heard the saying before:
Well, when losing money, the prudent thing to do is to cut your losses. However, many traders fail to do so. On the contrary, they hang onto their losing positions in hopes that they reverse, or put up even more money into their losing positions.
Why would beginner traders do that?
Because they hope that the market will evolve in their direction again, and that their current losing positions will turn profitable and make even more money. In most cases, however, their losses are compounded, with prices moving against them longer than expected.
While this common mistake could be slightly less risky if you’re a long-term investor, it’s too dangerous when you’re a day trader in a volatile market such as Forex using lots of leverage.
So, never add to your losing positions!
Open a position with the proper size and use a stop-loss to avoid the temptation of averaging up (or down).
Mistake 5: Using excessive leverage
Not understanding and overusing leverage is probably the most costly mistake new traders make. There was a good reason why ESMA stepped in and capped it for retail traders in the EU – it is very poorly understood.
Leverage and margin trading are amazing tools that help you trade more money than you have in your trading account, allowing you greater market exposure. But this only benefits you if you have a consistently profitable strategy with positive expectation.
Leverage can just as easily magnify your losses as well as your profits, so if you don’t have a winning strategy it ends up amplifying losses and mistakes.
For this reason, excessive use of leverage can wipe out your trading capital quickly if not understood and properly managed.
There is also a psychological aspect to take into consideration, as traders often act less rationally when they deal with outsized positions. While using high leverage, there is a greater individual risk on a single trade, amplifying the psychological pressure you have to deal with when trading.
- Learn more, take our premium course: Trading for Beginners
Mistake 6: Having unrealistic expectations
Many beginners start trading currencies with the goal of becoming rich very quickly, which often pushes them into making mistakes.
To implement significant changes in your trading, you should use the SMART method, so then your goals are Specific, Measurable, Attainable, Relevant and Timely.
This method will help you to bring structure and manageability into your financial goals.
Summary
Of course, trading is a risky activity, but there are things you can do to avoid increasing your risk.
Being able to overcome the pitfalls and mistakes when trading Forex outlined above should help you trade in a more structured and positive manner towards your trading goals.
Learning how to trade is necessary if you want to improve your results, so you should take the time and effort to regularly improve your trading knowledge.
Don’t forget that a trading strategy with strict money and risk management rules evolve with time, as market conditions, your trading experience, and your capital also change. To best follow your progression, you should keep a trading journal.
Also before you start your trading day, be sure to be in the right state-of-mind, to read once again your trading plan, and to remember to respect your money and risk management rules. Don’t trade in an impulsive manner and don’t do revenge trading – always control your emotions!
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