Forex is the biggest financial market in the world, and thanks to its low barrier to entry, it attracts a lot of new investors. With a computer and access to the internet, you only require a few bucks to start trading. But how many forex traders are truly successful? Well, not so many. A low barrier to entry is not a promise of sure or quick profit. Mistakes in forex trading are made by everyone, from beginners to veteran traders. We learn from mistakes, but it is even wiser to learn from other people’s mistakes.
Here the biggest mistakes in forex trading.
Lack of trading education
Starting trading without any education on forex trading is a common and the biggest mistake by new traders. Many beginners think that a good trading strategy is all they need to start trading. Trading education is necessary if you want to succeed.
Let’s say your friend needs surgery. Watching lengthy and detailed surgery documentaries will not enable you perform surgery on your friend. Of course not! Only a surgeon can help. Just like surgeons invest in education, forex traders should invest in trading education. Most newcomers only read a few articles and books about trading before they begin trading. Additionally, they don’t practice enough.
Learn to walk before you can run.
Learn the basics first before thinking about getting rich quickly. Forex trading is complex and requires time to master. Invest in good trading education. Study hard, attend trading seminars, watch webinars, and practice on a demo account. If you don’t have time to learn, find ways to create time. It will not only help you earn profits but also save money in the long run by understanding the markets better and adopting good trading habits.
Trading without a plan
Failing to plan is planning to fail. Almost everything requires planning; otherwise, it becomes difficult. Trading without a plan is not difficult; it is impossible. Lacking a trading strategy is like telling the market to take your money.
A trading plan consists of rules that you strictly follow, as well as money management strategies. How will you cut your losses if the market moves against you? When will you take the profit if the market moves in your favor? It would be best if you determined such levels in advance.
Trading is important only when followed to the letter. You see, almost every trader has a trading plan. The problem is most traders don’t follow their trading plans. Most will start with a trading plan but eventually end up trading based on emotions and instincts. Strong views are okay, but knowing where to enter and exit is important.
Choosing the wrong broker
Depositing your money with any forex broker, you come across online could be a grave mistake. Depositing that money with a broker is the biggest trade you make in forex trading. You could lose it all if your broker is a scam, is in financial trouble, or your money is poorly managed.
Take time to compare forex brokers before choosing one. Consider what you want to accomplish, the services a forex broker offers, and use reliable sources for forex brokers referrals.
Trading without a Stop Loss
Even though sometimes you might be sure of your profit targets, it is good to set a Stop Loss. Forex market is very volatile, and sudden news can have a big impact. A Stop Loss is where your trading strategy is invalidated. A Stop Loss gets you out of a trade if the price moves against you by a specified amount.
Using extreme leverage
Margin trading and leverage are amazing tools that help you invest more money than you have in your forex account and potentially earn more profit. It amplifies your earnings. But it is a double-edged sword as it also amplifies your losses if the market moves in an unintended direction. Using excessive leverage can easily wipe out your trading capital even in case of a small movement against your position.
Taking several trades that are correlated
Diversification is good, and taking multiple day trades is a good way to spread the risk. What many traders forget is that those pairs may be correlated, so they end up increasing risk instead of spreading it. If you notice a similar setup in several pairs, chances are they are correlated. This implies that the pairs move together. You can, therefore, lose or win all of them at the same time. If you believe in diversification, make sure the pairs move independently.
Risking more than you can afford to lose
Risk management strategies are important in forex trading. You must not risk more than you can afford to lose. A Stop Loss is not the only thing you need to cap your losses. There are other things to consider:
- Use Stop Loss and Take Profit orders. This way, you know in advance the money you can lose or earn in a trade.
- Even with a Stop Loss order, you can still lose a significant amount of capital on a bad day. For this reason, you should set a maximum loss per week.
- Never change your risk level immediately you start earning profit.
- Never average up/down when the market moves against your position
- Never risk more than 2% of your trading capital on a single trade
Keep on trading even when you keep losing
You should stop trading when your win-rate is below 50%. A win-rate is the number of times you win expressed as a percentage. Let’s say you win 55 trades out of 100. Your win-rate is 55%. If you keep losing and your win-rate falls below 50%, close your shop for the day and wait for the next day.
You will definitely make mistakes when trading. However, if you can avoid the above common mistakes, you are likely to become successful quickly. More importantly, learn from your mistakes.
Image Source: Simple Forex, via Flickr.