There is a raft of mistakes lying in wait for the novice trader. If you wish to lose that persona, you are reading the right piece. Inexperience, overconfidence, little knowledge – and a whole lot of impulses and misjudgments give an unhappy trader.
Too Much Reliance on History-Based Indicators
Moving averages, MACDs, and stochastics have, in reality, limited predictive power. The trader, due to inexperience, is unable to detect all the inexplicable false signals. They are in truth no reliable guide to up and downtrends.
Underestimating the Ruthlessness of The FX Market
Sometimes, you overestimate yourself. No matter how you manipulate, however, there’s no getting that long term profit. Take profit and stop loss are sometimes especially difficult to do.
Unclear about Currency Pairs
The failure to recognize that there are actually two bets in one for every trade that is not in your native currency. If you are British and trade EURJPY, there is an implicit EURGBP and GBPJPY going simultaneously. Then you should have positive signals in both pairs.
Risking It All
Do not risk all of your savings on FX. Don’t invest money you cannot afford to lose. Risking more than 1% of your account per trade is a mistake. A good risk management plan comes real handy here.
Do not give free rein to emotions the FX market does not forgive emotionality. Temper your outlook with cool, clear logic always. Do not rush things when patience is called for. Do not give in to fear or anxiety.
Absence of a Good Strategy
You should have a well-defined strategy. Once you find out what suits you best, you should stick to it. Do not be tempted or swayed by factors external to your interests.
Unnecessary Following in Others’ Steps
Do not ape others. Do not think you can duplicate what others achieved. What worked for them might not work for you. The circumstance of the markets, and your own personality, interact to give a unique result. Know what you can do, and stick to your plan. Do not try to rush headlong into success.
Lacking a Good Education
A little knowledge is a dangerous thing. This is particularly true with respect to forex trading. Losing money I forex is akin to losing money going into a business you know little about. When you do not practice enough, you put your neck in the noose! FX trading skills are arrived at after years of practice. Do not flinch from drilling with that demo account. Education will teach you the ropes, wishful thinking will not.
The Absence of a Clear Trading Plan
The trading plan is derived from the trader’s trading strategy and her money management strategy. The amalgamation looks something like this: delineating particular market conditions for entering a trade; deciding upon the amount of money to risk in a trade; when to exit when you are wrong (stop loss); when to exit when you are right (take profit); the time the market will take to reach the target you wish to attain; recording all that goes on in FX.
Undermining Money Management
High leverage has to align with money management strategies. Otherwise, novice traders are set to lose. There’s plenty of good reason demo accounts play out your strategies. Thereby, you form your clarity regarding the balance between loss and profit. Even scenarios where you might actually lose more than gain work out better. A lot of trial and error is involved in the journey to the truth of what’s best for you.
A starting trader ought to distance himself from the concept of money. In the early stages of his career, he is just learning the processes of the FX markets. If he starts worrying about money, he will lose focus and a disastrous performance would follow.
The wrong path goes down: overtrading, an overanalyzing. High volumes with regard to account balance spell disaster, as does the opening of orders too often.
When You Keep Losing, Stop Trading
Look out for: the win rate, and the risk-reward ratio. The win rate is the number of trades you win, in percentages. A day trader should always seek a win rate of 50%. The reward risk ratio is a measure of how much you win in relation to the extent to which you lose. When your average losing trades are GBP 50 and your winning trades are GBP 75, the reward risk ratio is GBP75/GBP50 = 1.5.
It is still possible to be profitable when the win rate is a bit lower and the reward risk is a bit higher.
Adding a Losing Day Trade
Acting on the mistaken belief that the trend will reverse, averaging down is adding to the position as the price moves against you. The loss could grow exponentially, the price moving on against you for longer than you can expect.
The remedy is trading with the right position size, ad setting a stop loss on the trade.
Winning It All Back
There will be times when you will bite off more than you can chew. What happens when you do not put the brakes on a winning streak, seeking to compensate for all those losses in the past. The 1% risk per trade rule and the 3% risk per day rule are the norms. Do not ignore these rules.
Education and awareness are the keys to avoiding the worst mistakes when trading forex. A cool head and detachment from greed go a long way in making a wise trader. Demo accounts provide simulations, and play money can get you into the habit of never having to lose real money. You have to stay aware of your own evolution. Different times will require different strategies. Look at each situation as a learning experience. And – there’s no such thing as too much practice!