Eight Common Trading Mistakes and How to Avoid Them
Of the many, many people that try their hand at trading the financial markets, only a select few will proceed to be successful. That is not to say that these select few never make trading mistakes, everybody does. However, in order to succeed in the financial markets, you must learn from your mistakes and avoid making the same ones again in the future.
One of the differences between a successful trader and an unsuccessful one is being aware of, and avoiding, the common trading mistakes that many fall prey to. In this article, we will identify eight of the most common Forex trading mistakes which, once you know, you will be able to avoid making.
Common Trading Mistakes
A Lack of Education
The financial markets are a complex place, with both large and subtle differences between the individual markets and instruments. One of the most common trading mistakes committed by beginners is to not educating themselves properly before getting started.
Trading with a lack of education is a guaranteed way of setting yourself up for failure and, these days, it really doesn’t have to be this way. Thanks to the internet, there is an enormous amount of easily accessible material out there designed specifically to teach beginners how to start trading.
With all this information at your fingertips, it is well worth taking the time to study hard and educate yourself on your chosen market and how to trade it. At Admirals, we have a large library of educational articles, free Forex trading courses and regular webinars designed to help you start your trading journey on the right foot.
No Trading Plan
Another of the most common trading mistakes is to start trading without firstly creating a trading plan.
Too many beginner traders are too eager to dive in and start making trades without any planning beforehand. This is a big mistake. Part of being a successful trader is maintaining your discipline and sticking to your trading strategy; this is hard to do if you have no overall plan.
But what does a successful trading plan look like?
One of the first things to consider is why are you trading in the first place? What are your goals? Are you just looking for a new challenge to pass the evenings or a new career? Being clear in what your goals are will help shape your trading plan, which should answer questions such as:
- What type of trader are you going to be?
- How much time will you dedicate to trading?
- What are your market entry and exit requirements?
- How much profit will you target per trade?
- How much will you risk per trade?
- What is the maximum amount you can afford to lose?
Write these answers down and, once your trading plan is complete, stick to it!
Starting Too Big
As we mentioned at the beginning of the article, everybody makes trading mistakes and these mistakes will lead to losses.
Beginner traders will inevitably make more mistakes than those who are more experienced, so don’t go risk too much money on your initial trades. Start small and slowly work your way up to larger trades.
In fact, before risking anything, you should practise your trading strategy on a risk-free demo trading account in order to perfect it as much as possible prior to transitioning to the live markets.
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Letting Your Emotions Rule You
Whilst trading, it is perfectly normal to go through a rollercoaster of emotions; fear, greed, ecstasy, grief and anger, to name a few. Part of being a successful trader is learning to control these emotions.
You will never be able to rid yourself entirely of emotion and, besides, you wouldn’t want to. Sometimes you need to be fearful when trading, just as, other times, it is rewarding to feel the satisfaction of a successful trade.
However, one of the biggest Forex trading mistakes is to allow these emotions to control you and dictate your decision-making process. This is where having a clear trading plan will really help you maintain your discipline.
Don´t let your fear make you lose out on a winning trade and don’t let your greed make you enter the market when you shouldn’t. Try and always approach each trade as rationally as possible and always ask yourself before entering the market: “Does this trade satisfy my trading plan and strategy? Or am I letting my emotions influence my decision?”.
Overconfidence and Revenge Trading
These trading mistakes occur when traders let their emotions get the better of them. However, as these scenarios are so common, they deserve their own section.
After a few successful trades, it is easy and natural to fall into the trap of feeling overconfident in your ability. The elation you feel after winning a trade can cloud your judgement and cause you to deviate from your trading strategy or re-enter the market without carrying out the proper analysis.
Don’t make the mistake of thinking that winning a few trades makes you invincible!
At the other end of the spectrum of trading mistakes is revenge trading, which, again, is a perfectly natural temptation but one which should be avoided at all costs.
Revenge trading refers to the desire to get straight back into the market after a loss to try and recoup your lost capital. Just as with feeling overconfident after successful trades, revenge trading after unsuccessful ones can compromise your decision-making process and will often lead to further losses.
Always try and remain objective when trading. Often, after a string of losses, the best thing you can do is take a step back; take a break from trading and analyse what went wrong before risking further losses.
Not Cutting Your Losses
The next on our list of common trading mistakes is a big one and is responsible for a large amount of money lost by traders, particularly beginners.
The reason it is such a common mistake is that it involves traders admitting they are wrong and – despite what people may say, as humans - the majority of us sometimes have difficultly acknowledging this.
Nobody likes admitting they are wrong, but this is where traders can stand to lose a lot of money. Once it becomes apparent that a trade is moving against you, cut your losses and exit the market before you lose even more. Don’t ever become too attached to any single trade.
With trading, as with anything in life, you are never going to be right 100% of the time. You will often be wrong. It is important to recognise when you are wrong, admit it and cut your losses while you still can.
Risking Too Much Per Trade
This may seem like an obvious point, but you would be surprised how many traders are guilty of committing this trading mistake.
Many traders find themselves seduced by the prospect of that big win and give in to the temptation of taking a big position to facilitate this. This can be one of the biggest and most costly trading mistakes you can make.
No matter how confident you are about a position, the markets are often unpredictable and there is always the risk that they will turn against you. If you risk a large proportion of your trading capital and then lose it, it can drastically damage your future chances of success. Moreover, the psychological impact can be difficult to recover from.
Always be aware of your position size and never risk too much of your total trading account balance on a single trade.
Not Keeping a Trading Journal
This is perhaps one of the less obvious trading mistakes committed by many beginner traders, but it is a very important part of growing as a trader.
You should keep a record of all your trades, both good and bad, and the more detail which you record, the better. Some of the questions you should address are:
- When was the trade entered?
- When was it exited?
- What instrument were you trading?
- Why did you enter the trade? What was your rationale?
- What was the outcome of the trade?
- What are your thoughts about it?
- What could you have done better?
A detailed trading journal will help you learn not just from your mistakes, but also from your successes and, in doing so, help you develop you trading skills and fine tune your trading strategy.
Becoming a successful trader is a long and difficult journey but, by identifying and avoiding some of the most common trading mistakes, you will find yourself better positioned than many.
You should always remember that trading mistakes are a natural part of learning and even the most successful traders in the world still make mistakes from time to time. Therefore, don’t be afraid of making mistakes or too disheartened when they occur. What’s important is learning from your mistakes and taking steps to avoid making them again in the future.
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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.