With such a low barrier to entry, the Forex market attracts a lot of new investors.
This is especially true as this market is open around the clock – giving these new investors 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.
Check out these six common pitfalls by beginner Forex traders.
1. Starting without any trading education
The most important Forex trading mistake to avoid is to believe that you can succeed without any trading education.
Let’s say you need surgery. Does watching a long and detailed documentary on how to perform surgery mean that you can now perform on yourself?
Of course not!
If you want the best results, you ask a professional with experience to do it.
It’s the same with Forex trading.
Invest in a trading education that can truly help you understand how the markets and trading work is indispensable if you want to outperform the masses of other forex beginners.
Don’t run before you can walk!
Learn the basics first, and forget about being successful with “get-rich-quick schemes”.
Investing time and money to get a stellar Forex trading education such as at My Trading Skills is investing in yourself. Not only will it make you earn more money, but it will also allow you to save money in the long run thanks to a better understanding of the markets and by adopting good trading habits.
2. Investing without a trading 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.
A trading method should always be part of your trading, allowing you to make money in a more consistent manner. It allows you to better spot trading opportunities, and better manage your open positions than traders that do not have one.
So now you understand why trading decisions should follow a well-established process according to an effective trading strategy, preferably one that has been back tested.
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.
Think about the following when deciding on your trading approach:
- 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, sentiment analysis
- Which kind of currency pairs you will mostly invest in: majors, minors, exotics
- The leverage you’ll use
- The money and risk management rules you’ll follow
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 positions after it reaches a certain level of loss.
If you do not use stop orders, it means that you do not control your risk at all, as your positions can freely fluctuate depending on the market’s price movements. Thus, there is a greater risk of loss 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.
If you want your winning trades to be greater than your losing trades, you need to have money and risk management rules written in your trading plan.
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 the most commonly used guidelines about money and risk management:
- Always use stop-loss and take-profit orders to know in advance how much money you can lose and earn 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 1:3 to set up your stop-loss and take-profit orders
- Use proper position sizing – Only risk between 1 and 2% of your total trading capital on a single position
- Limit your total invested capital to 50% of your total capital
- 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
4. Averaging down (or up) to redeem losing positions
You might have heard the saying before: “Cut your losses and let your profits run”.
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 invest 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 investing in a volatile market such as Forex.
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).
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- The Mind, Money, Method by My Trading Skills
5. Using excessive leverage
Leverage and margin trading are amazing tools that help you invest more money than what you have in your trading account, allowing you greater market exposure.
However, it is a double-edge sword, as this can just as easily magnify your losses as well as your wins.
For this reason, an excessive use of leverage can wipe out your trading capital in a flash.
Read more about how margin trading works.
Watch: Leverage: A Trader’s Friend?:
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 greater individual risk on a single trade, amplifying the psychological pressure you have to deal with when trading.
6. Having unrealistic expectations about Forex trading
Many beginners start trading currencies with the goal of becoming rich very quickly, which often pushes them into making mistakes.
To stay motivated and disciplined, you need to work on how to set realistic goals. If you’re not setting goals that are actually achievable, then all that they’ll be is a source of frustration and disappointment, rather than a challenging yet reachable target.
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.
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 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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CHAPTER QUICK LINKS
- 2.Why is Forex Popular?
- 3.Why Forex is (or isn’t) for You
- 4.How Does Forex Work?
- 5.Popular Traded Currencies
- 6.History of Forex Market
- 7.FX cash, CFD or Spread Bet?
- 8.How Margin Trading Works
- 9.Best Time of Day to Trade
- 10.Forex Regulation And Protection
- 11.Forex Trading Examples
- 12.Making a Living Trading Forex
- 13.Mind, Money, Method
- 14.Forex Risk Management Strategies
- 15.Winning Forex Strategies
- 16.Technical vs. Fundamental Analysis
- 18.Dangers of Forex Trading
- 19.Next steps