In this overview, we will discuss ten common mistakes made by Forex traders. Knowing these mistakes in the face, you can try to avoid them and enhance your trading.
1. Bad preparation
Quite a common mistake among beginners is trading without a due level of preparation. Having listened to some basic course about trading or having read some literature on their own, a trader rushes at real trading in the hope to start making money at once. As a rule, the market punishes them for the haste, and they waste their deposit.
Theoretical preparations give only the basic understanding of how Forex works and how to trade in it. To learn how to make money, you need practice. In my opinion, you need no less than a year of practice (preferably under the guidance of an experienced trader) on a demo or small real account before you start applying your knowledge to serious sums.
2. Unsystematic trading
A trading system is the main instrument of a trader that makes his advantage in the market and helps them earn money stably. In other words, this is a certain set of proven trading rules that helps to make a profit. Any system, of course, can cause losing trades but the overall result (during a month, quarter, year) must be profitable.
However, if a trader does not have a neat, clear, and proven trading system, and they make trades chaotically, sooner or later they will lose their deposit. Forex never forgives careless trading: if you trade without a system, there are more chances that you will lose than gain. You still can make a profit on random trades but your luck will come to an end once. In the long run, you can only succeed with the help of a reliable trading system.
3. Following other people’s advice
Another mistake of beginners might be following other people’s advice blindly. There are plenty of advisers on the net that will always tell you how to invest “correctly”. However, not all of them are necessarily successful trades, and anyway, you will not last long on other people’s wit, you need to have your opinion.
This does not mean you must not learn from others. However, you should understand the gist of a trading idea and check if it suits your trading system. Be critical to other people’s advice and use only that which complies with your trading system. A strategy that works well in the hands of one trader can be absolutely useless in the hand of another.
4. Using large leverage
When you use leverage, you open a position for a larger sum than you have on your deposit with the help of marginal trading. In essence, leverage is the relation of your capital to the borrowed money. In Forex, leverage is provided by your broker, and normally, it is rather highs – from 1:100. The larger your leverage, the bigger position you can open.
Trading with large leverage entails increased risks. Sharp surges in the quotations might take away a large part or the whole of your deposit if you are using leverage. Hence, I recommend beginners to start with small leverage, say, 1:10. Later you will be able to increase it and control your risks by money management rules (altering lot size and placing Stop Losses).
5. Trading without Stop Losses
The next mistake is trading without Stop Losses. A Stop Loss order limits your possible losses in a trade. In almost all courses, students are frequently advised to use Stop Losses.
However, a beginner often faces a situation when their SL is triggered by market noise but the price goes in the forecast direction. Then they decide to give up using SLs at once instead of correcting their ways of using them. They might even be lucky enough to close several trades with a profit. Sooner or later, however, they will encounter such a reversal that one trade will eat up the whole of their deposit.
Trading is not investing; to succeed, you need to limit possible losses in every trade. Before opening a position, you need to decide where and how you will close it if the price reverses against you. You can place an SL at once or keep it in mind and close the position manually when the “red line” is crossed – whatever the way, the main idea is to control your risks.
6. Regaining money
An idea to try and regain their money often visits traders after a series of losing trades. This is an emotional decision of a disappointed market player who is craving for getting their money back. Emotional trading after a loss usually entails even larger losses. Emotional trades are usually opened chaotically, thoughtlessly, against all trading rules, and only bring more losses.
If you want to succeed in trading, you must learn to stay calm even after serious damages to your deposit. Avoid emotional decisions and focus on looking for good trustworthy trades. Some experts even stop trading at all for some time after a large loss. This way they can think over the situation and get back to trading with a clear mind.