Today, I want to share my views about the deadly sins of trading that can make you fall into a spiral of doom and despair. Luckily enough, you have us here to guide you through the fatal waters of Forex trading.
There are insane profits to be made in the Forex market, but this blog post will focus on how to avoid losing money. In the decade I have been trading commodities, I have made every possible mistake... at least three times. The most common mistakes are what I call the deadly sins of trading Forex. Here we go!
Lack of a Trading Plan
I have intentionally put this in the first place on my list of deadly trading sins. I have had extensive email or webinar communication with both experienced and novice traders, and it never fails to amaze me that year after year, trade after trade, their approach remains the same. A trader who thinks the market is about to start rallying will usually say something like, "I think the EUR/USD is going up to 1.1200. Where do you think I should buy it?" My usual response is, "Well, where are you going to get out if you are wrong? ". Often, there is silence, or, perhaps, the next question is "Well, if it doesn't go up, what are you going to do then?". More than 95% of the traders that I have come in contact with have no trading plan. This means they do not know what to do if they are wrong or what to do if they are right.
Fear and Greed
At certain times in your trading career, these emotions can make you completely and utterly irrational, oblivious to what is really happening. Fear is a compelling emotion, but is also essential as a survival response.
It can make you rely on hope, hope that the market will do what you want it to do because it must! Markets will still do whatever they want no matter what your fear. A good friend of fear is greed. Greed is the excessive desire for money, and it is an irrational expectation to make a quick profit from a trade. It often manifests as looking at your open profit on a deal and thinking about how much you've made and about how much more you 'could' make by keeping the trade open.
Contrary to novice traders, I personally know a lot of experienced traders who are overconfident. It has happened to me many times before. It causes people to overestimate their knowledge, underestimate risks, and exaggerate their ability to control events. Being an overconfident trader will make you overtrade and make revenge trades, which also is one of the deadly trading sins.
Revenge trading usually occurs when after losing a trade, you immediately enter another one. Most of the time, your second trade (revenge trade) is not a valid trade based on your method but rather an emotional/impulse trade. This happens since you have lost money on your first trade and now you want to take revenge on the market and take your money back as quickly as possible. Usually what happens is that your second trade is terrible and either it goes against you or you close it prematurely as you are afraid of losing more.
Chasing the Market
Let me ask you something. How many times have you entered a trade after the trend had already been established? Entering longs at the tops or hitting the sell button when the market is bottoming? Well, if you have answered yes to either of the questions, that means you have chased the market. That is a dangerous practice as it is just a matter of time before such trades make a very negative impact on your account. The market is like a shadow – if you try to catch it, you will never succeed. But if you let the shadow come to you, you will embrace it.
I am always amazed at the massive number of Forex traders who have no concept of money management. I have heard many stories about traders making 20% per month consistently and making a mockery of traders who are able to make "only" 2-5% per month.
Money management is controlling your risk through the use of stops while balancing your potential for loss against your potential for profit. Unless you realise that money management is crucial for long-term success, you will experience few periods of luck, while being unsuccessful over the longer term (1-5 years).
Small Profits and Big Losses
A widespread mistake among Forex traders is taking small profits and letting losses run. After one or two losing trades, they are very likely to make a small profit on the next trade, even though that trade could have turned into a massive profit-maker. After entering a market, you might be scared and don't know where to get out. Once your account starts dropping, what usually happens is letting your losses increase as you hope that the market might turn in your favour which won't happen and you will be sucked into a spiral of doom.
First and foremost – make a trading plan. In the process of creating a trading plan, you will need to cover all the essential elements. The process itself requires:
- Trading strategy,
- Trading journal,
- Written guidelines of what you will do and look for in the markets,
- Clearly defined risk.
I will tell you the truth – I couldn't have learnt from my mistakes if I hadn't known what I was doing wrong. Reviewing all of my trades has helped me identify the problem areas. Markets are changing continuously and reviewing your trades is especially important when the markets turn.
Cheers and safe trading,
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.