Many beginner forex traders charge full-throttle into the forex market with big ideas and high-profit expectations but soon find out that making money consistently is not as easy as they expected.
As a result, I want to take you through some of the biggest and most common trading mistakes traders often make.
Underestimating what it takes to be a profitable forex trader is a common mistake now, although it can be hugely rewarding.
Trading is also quite demanding. The best traders out there are the ones who committed to do whatever it takes to become a success.
That means studying at every chance or learning new trading methods in order to prep as much as possible what the market may throw their way.
Below are some of the mistakes that a beginner in forex trading is likely to make.
1. Being too Emotional
Many beginner forex traders get so emotionally involved in their trades that if the trade goes against them, and they are wrong about their position, they react badly and fail to keep their emotions in check.
It may sound easier said than done but try to remain objective at all times as you’ll find it will make you more intelligent when you’re making trading decisions, and it will also help you avoid making emotional trades.
2. Failure to Record Trades
It is strongly recommended to keep a trading journal.
For example, every time you enter a trade, print out the chart and write down why you entered the trade, whether it was fundamental, technical, or a tip.
Keeping a trading journal will help you analyze each trade, and even if you’re losing money, little by little, you’ll notice where things are going wrong.
You’ll be learning from your trading mistakes, which in time will help you become a profitable trader.
Money management and record-keeping are just as important as technical analysis when it comes to forex trading.
3. An Expectation of Easy Profits
A lot of forex traders enter the forex market assuming they will be successful while others, particularly beginner forex traders, put together unrealistic calculations of how much profit they will make on the onset.
Anticipating how much you’ll make in advance can be very dangerous. Instead, it would be wise to enter the forex market with a neutral attitude.
4. Following Mechanical Systems Blindly
Most FX traders use online trading platforms like MT4 that provide charting research and backtesting tools to help them refine their strategies.
That’s fine, but don’t rely too heavily on these tools without a full understanding of their capabilities.
Technologies such as charting software or other analysis tools are meant to assist you, not think for you.
If you are blindly following mechanical systems to buy and sell, it’s likely that you’re not 100 percent sure of what you’re doing.
It is important that you understand the underlying concepts and the reasons behind what the charts are telling you.
This will actually allow you to see the bigger picture and also avoid unnecessary trading mistakes.
5. Poor Timing
It’s very common for new traders to make timing mistakes. For example, a trader may have a good trading strategy, but they soon discover that they bought a currency pair at an unfavorable price.
Timing a trade is never an exact science, but it is important to recognize that there are times when it might actually be prudent or wise to lock in a profit or cut a loss.
In addition, waiting until a chart pattern has been fully established can also result in a missed trading opportunity since if you wait too long, it’s often too late.
6. Placing too Tight Stops
Profitable traders don’t just look for overbought or oversold conditions, but also look for extreme overbought and extreme oversold conditions by taking advantage of extremes.
This could help foreign exchange traders better manage their portfolio risk.
However, there are no guarantees that the current trend for a currency pair in an extreme situation won’t continue. Placing stop orders is one way; the easiest way to help protect yourself against taking a big loss.
However, placing the stop loss too tight can be just as disastrous.
This is something many beginner forex traders incorrectly do by placing stop orders too tight, which usually causes their position to get stopped out too early, therefore, taking them out of the action before the market has actually made a significant move.
This means they fail to capture the desired profit in the market.
You should always place stops according to what the market is telling you, such as support and resistance levels, and not according to your profit desire.
Remember how much a forex trader is willing to lose depends solely on his or her risk tolerance.
7. Failure to Calculate Risk to Reward Ratio
Most new traders do not calculate the risk to reward ratio of the inherent trade before they establish a position.
A risk/reward ratio is a relationship between an investor or trader’s desire for capital preservation at one end of the scale and a desire to maximize returns at the other end.
Determining that ratio is something that successful forex traders tend to find through their own experiences and is, therefore, according to their own comfort level.
Before you enter a trade, the first question you should ask yourself is what is the risk/reward ratio of trading that particular currency pair. If you’re a beginner in forex trading, stick to a low risk/reward ratio as this will help minimize potential losses in the market.
8. Failure to Polish on a Trading Strategy
Most successful traders are constantly studying their strategy, looking for that additional edge that may actually help them make even more informed decisions.
It is also about understanding that trading mistakes are part of the learning process, and therefore learning to reduce them can actually help you develop a more disciplined, consistent approach to trading.
9. Exiting too Late and Not Cutting Losses
Knowing when to stop and admit defeat when a trade is not going the way you had hoped is a very important skill to develop.
When you make a trading mistake, you need to know when to call time and continue on to the next trade rather than holding out and hoping that the market will turn in to your favor. Most of the time, it will continue moving against you, and you’ll end up losing even more.
This also works the other way, letting profits run is fine, but it’s very important to establish how far to let them run.
When a trade goes into your favor, and already you have made a very good profit, it’s sometimes good to take that profit and get out.
Greed is one of the biggest mistakes that a beginner in forex trading can make. Staying in the market for too long hoping for a windfall that will make them even richer all at once it’s a very common forex trading mistake
10. Over Leveraging
A good number of beginner forex traders often want to begin trading by starting off a small trading account. However, they still want to make big money.
This does not work. If you have a $500 account, you’re not going to make $5,000 per month.
I have worked with forex traders who thought it was acceptable to risk even 20% of their account on one trade.
The problem here is when faced with several losing trades in a row. Three losing trades were resulting in 60% of their trading account being lost.
Risking high percentages of your account results in account killing drawdown. Imagine if you lost 60% of your trading account, you then need to make 175% of your remaining account back to get back to where you first started.
Investment banks only risk a small percentage of their accounts per trade. Hedge funds also only risk small percentages of their funds per trade. The same thing goes with professional traders.
If you want to avoid catastrophic drawdown from your trading account, risk a lesser percentage of it at all times.
11. Over Trading
Newbie forex traders over trade in the FX market as they do not want to miss out on a trade. This is brought about by the psychological aspect of FOMO (Fear of missing out).
The constant temptation to trade causes forex traders to take too many trades, more so beginner forex traders. Taking fewer trades at a given time is advisable since we only have limited energy and attention to focus on all the trades involved.
Overtrading results in you trading even when you are not in the best state of mind. Doing this can lead to trading errors and costly mistakes.
You don’t need to go after every move in the market. The market will always be there, and there will always be opportunities.
Your priority should be focusing upon taking a selection of high-quality trades to help maximize your profits.
12. Jumping Systems
Trading systems need time to work. Most newbie traders abandon a trading system or trading strategy after a few trades if they aren’t winning a desirable percentage of trades.
A trading strategy cannot properly be evaluated if a sufficient number of trades have not been undertaken.
When trading a new system, use a small amount of leverage and risk, and give it time to work out. You can always increase the leverage at a later date.
13. Taking Unplanned Trades
Beginner forex traders tend to take unplanned trades, something that is linked to the fear of missing out.
Most of the trades are usually against one’s trading plan.
How many times have you done that?
On overall, did you attain a profit or a loss to your trading account?
Believe me, I know the answer. Had you stuck to your original trading plan, everything would have been fine. The more thinking and planning you put into your trades, the more consistent the outcomes will be.
I hope this insight on the trading mistakes that beginner forex traders make will help in your endeavor of becoming a profitable trader.