Common Forex trading mistakes and how to avoid them

Avoiding common Forex trading mistakes

All people that join the ranks of financial traders, Forex notwithstanding, do so with the intention of making money, however only a few end up actually being profitable.

What stops so many and what is different in the trading of the few?

Here is a list of the most common mistakes Forex traders make.

Lacking education

This will be a short one, since it's is quite obvious and there is not much to discuss. Study like there is no tomorrow, getting good Forex education is extremely important!

Beginners read way too few books and way too few articles. They practise too little, forgetting that they are messing with an occupation that takes years to master!

In fact, beginner traders know so little about financial trading that they often don't even know where to start.

How not to make this the most obvious and the biggest Forex trading mistakes of them all? Study, read, watch webinars, attend seminars, practice on a demo account. Whatever it takes. If you don't have the time, make the time! You never know which one will be the eureka moment or how many will it take for you to reach consistent profitability.

Skipping on the trading plan

You must have heard something in the duration of your lifetime about the positive effects of having a plan. Well, trading financial markets is no exception and not having a trading plan is one the most widespread mistakes that Forex traders make.

Possibly, the reason for this is not having a clear understanding what a trading plan looks like at all.

A trading plan is a strict set of rules, the half of which a trader draws from his trading strategy and the other one from his money management strategy. The plan may be then complemented by as many more points as the trader sees fit. Up to him.

A trading plan, is much like a don't-do-when-you-are-drunk list. Don't drive, don't climb tall structures, don't call your ex and don't make stupid bets that end up with you being arrested for running around the town naked. Everybody's got their own list in life and so they should have one when it comes to trading.

Here is what it might look like for example:

  • Specific market conditions for entering a trade
  • The amount of money 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
  • Note down and record everything!

Write this list down as postulates and have it front of you before, after and during your trading. Frame it and nail it to the wall, set it as a desktop wallpaper.

You might be thinking you don't really need a plan but that is a mistake many Forex traders made.

Undermining money management

Things might get hectic in Forex trading quickly because Forex brokers are allowed a lot of freedom in terms of leveraging their trading account, while beginner traders lag behind in money management discipline. A combination of these two leads to high risk, hazard trading.

Here is a couple things a trader needs to ask himself to avoid making this one of the most important Forex trading mistakes:

  • Am I investing only my risk capital? (Can I afford to lose this money?)
  • What is the maximum % of my total investment I am ready 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?

A small remark regarding the last point. This is where money management might get tricky, because it is strategy dependent. In some cases you are better off with a strategy that promises a potential loss of $1k and potential win of $500, that works eight times out of ten. While some other times you are better off with a strategy that promises a $500 loss to a $1k profit, but works two times out of five.

Check our top 10 Forex money management tips which you might find quite useful.

Setting the wrong goals

Which is a healthier approach in trading: doing things the right way even if it potentially means making less money or doing things in whichever way as long as it potentially promises more money?

It's a tricky question, because what is healthier for both the trader and his account balance is to stop thinking about the money altogether.

If making money is the trader's only goal, especially at the early stages of his trading career, chasing the money will soon become the very reason for failure.

Chasing money leads to breaking the rules of your trading plan. In rare specific trades breaking these rules will lead to a higher yield. In the long run, however, which is hopefully your plan for financial trading, it always leads to an empty account balance.

This may happen in one of the following ways or via their combination: over-trading, over-analyzing.

Overtrading, as one of the mistakes many Forex traders make, may come from insufficient capitalization, resulting in a trader using too high volumes, relative to his account balance, or it may come from a trading addiction, resulting in a trader opening orders too often.

Let's start with insufficient capitalization.

Forex trading comes on highly leveraged accounts as it is. Not having enough money to manage only improves the chances for a disaster. It was mentioned earlier in the money management section that a trader is should always decide just how much money he is willing to risk per trade beforehand. What about the traders that make it? How much do they risk? Do they use a 100%, or 50%, or even 10% of their account balance in a trade? Neither. Just 1%. 2% is the absolute ceiling you can go for. And how much of their capital can be involved at a time, all trades combined? 5-7%. Such careful money management will win you some room for Forex mistakes you will inevitably make simply as a part of your learning process.

Well how much is enough then? Here is an example.

If trading 0.01 lot (1000 units of currency), which is the minimum Forex trading volume any broker can offer, you would need at least a one thousand US Dollars investment on an account with 1:100 leverage to afford opening a single position at a time. And for that position you can't set a higher stop-loss than just 50 to 60 pips, because that would make your 5-7% total. And we are talking about a fixed stop-loss, not a mental one, because as soon as the price goes through a mental one, a trader starts re-rationalizing his decisions, further diverting from a fixed trading plan. Never avert from the trading plan!

How to avoid undercapitalization without breaking the risk capital rule? Save money! You can do it. Warren Buffett saved up to around $10k during his college years by doing low paid miscellaneous jobs. Worked out for him just fine even without the luxury of a 1:100 leverage.

Overtrading problem number two - trading addiction.

Trading financial markets, especially on short-term intervals can be a very exciting activity. The markets move, the money flow is real and it is in real-time. An exhilarating experience indeed. It is almost as if the market wants to be traded. This delusion should not, however, dictate your trading. You have a plan to follow, remember?

Chasing money takes it's toll. Looking to increase one's profits, a trader bends his strategy just ever so slightly, entering where he should be patient and exiting where he should be tranquil. Over-analysing comes hand in hand with over-trading.

Possibly one of the biggest mistakes by Forex traders is thinking they have control over the market. They don't. Successful trading is much like fishing, where the fisherman has no control over the fish. There is not much you can do until the fish has caught your bait. Once it has, act. Once the market price is just where you want it, you trade. Before it is, all you can do is sit still. Your strategy tells you exactly what market conditions you should wait for. If they are not there, there are just not there. Not because you missed them, not because you should check for them on a smaller timeframes, not because there is a hole in your strategy. The sooner you start thinking about waiting for a market to set up right as saving money rather than losing it, the better off you are going to be.

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Confusion of purpose

This may come as a surprise and to many rookies it does, but trading financial markets is a business, while most treat it as an entertainment or a hobby. Confusing why you want to be involved in trading is one of the Forex trading mistakes to avoid.

First of all that influences the level of your commitment to trading. Secondly, that defines your attitude toward the money you invest.

Entertainment is to have fun. Business is to make money.

Trading is not a hobby, its work. Poker is a hobby. You do it on Fridays, it's entertaining, you might win some money, but mostly you don't. Let's face it. Most gambling people know they probably won't win, they are just testing their luck, having a good time in the process. Regardless of whether they win or lose, it is money well spent.

In financial trading you invest money to make money, which makes trading a business. Fun is of no relevance whatsoever. If you ever hope to make money on a consistent basis in Forex trading, act like a businessman.

Studying, researching, planning and following your plans, taking notes of your progress, while protecting your investments are your best friends. Not following these simple techniques is the biggest mistake Forex traders can make

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