The world of trading is fraught with danger. There is a risk at every corner of the market. And if you are not careful enough, it is quite easy for you to lose your precious asset in whatever marketing you are trading. The case is specially so for novice traders.
If you are a beginner, there are more threats that you could fall prey to and sustain losses. But luckily, there are ways to avoid them and steer clear of these traps and have a safe experience of trading. That is why in this article, we are going to cover 10 of the most common forex trading mistakes that beginners need to avoid.
Having no trading plan
As you might have been able to guess, one of the most grievous sins of trading is not having a plan. If you go head first into the ups and downs of the market, it is no wonder that you will sustain losses. So, it is imperative that you indeed have a well thought out trading plan.
Your trading plan will help you manage different aspects of trading, including risk and what to expect in terms of profitability. So, it will help you with managing risks and setting real expectations. It also defines your overall approach to trading.
As such you trading plan should include the following:
- Your trading strategy – whether you have opted for day trading, swing trading, etc.
- Position sizing – this means the size of your positions and how much you can stand to risk in each one
- Your strategies for risk management – including stop loss and take profit levels
- Defined goals – you need to set actual goals that you hope to achieve from the process of trading, which will help you avoid falling victim to greed
Improper risk management
Other than having no plan, which is truly a dire mistake in the forex market and other financial markets, not having a prop risk management approach can be just as detrimental and damaging to your trading assets. There are so many different aspects that are involved in risk management that will help you protect your assets in the long term, including having a clearly defined stop loss, calculating position sizes, and managing drawdown.
Your position sizes should be calculated based on your overall account balance. As a general rule of thumb, you ought not to risk more than 3% of your balance on each position. Furthermore, you need to also watch out for drawdowns. This means the total losses that your account sustains over time. Again, as a general rule, your drawdown should never exceed 15% to a maximum of 20% of your account balance.
Careless use of leverage
While leveraged trading has countless benefits, where you are able to trade with much more capital than you actually have by putting up a margin as collateral, it also comes with numerous risks and threats that you should be aware of.
Naturally, while leveraged trading multiplies the chances of profitability, it also multiplies the possibility and degree of loss. This means if you are not careful, you will lose your margin, which is simply the money you have put up from your account balance. In this situation you will receive a margin call to increase your account balance in order to be able to continue trading.
If and when you receive a margin call, then not only have you not obtained any profits, you have also lost some of your account balance as part of that original margin.
So be very careful when and how to use leverage and also the rate of leverage that you have decided to use.
Not moving on from loss
One thing you must deeply understand and accept fully is that trading will inevitably have loss. There is no such thing as trading without loss. So sooner or later you are going to sustain the first loss that you have ever encountered in the forex market. When faced with such a situation, the worst course of action would be to linger on the loss and not move on. This is because if you are not able to move on you will make attempts to make for the loss however possible. This form of erratic trading, also known as revenge trading, will surely only lead to more losses.
Not knowing when to quit
One common mistake among traders is that they might not know when to simply stop trading. Now this can be a temporary stop and taking a break from trading or simply stopping for the day. The issue can be seen more frequently in the forex market, because the forex market is active 24 hours a day for all the working week days. This can entice some traders who are being driven by the motivation to trade to actually keep on trading. But you need to know that over time your brain will get fatigued and your efficacy will be lowered. So, make sure not to over trade.
Overlooking fundamentals over technical
When beginner traders think of market analysis or price analysis, they would almost invariably only think about technical analysis. This is because technical analysis, through the use of various indicators and elaborate formulas, has etched its image into the minds of all traders and all those who want to get into trading. While this on its own is not a bad thing, because technical analysis is absolutely crucial, it does however have a negative byproduct. Because most, if not all, of the attention is paid to this form of analysis, the other form of analysis which is fundamental analysis is usually overlooked.
But you need to remember that there is not even a single market that is not affected through fundamental factors. This is simply a reality that all financial markets are impacted by the economy in which they are located. So, in the case of the forex market where traders are basically buying and selling foreign currencies, these currencies will fluctuate in value depending on different fundamental factors related to their economy. For instance, factors such as economic indicators, like GDP, inflation, unemployment rates, interest rates, and geopolitical factors like conflicts and elections will also impact the price of currencies in the forex market. This is precisely why you should never underestimate the power of fundamental factors.
Being overtaken by emotions
Another rather ordinary pitfall that entraps not only beginner traders but also those who are more professional is being overtaken by emotions. The process of trading, especially in a market as complex as the forex market, takes time and dedication. If during this process, you are influenced by your emotions, it can throw you off the straight path that leads to profitability. Among the most important emotions that can be to the detriment of the trading process, we can refer to fear and greed. Pushing in the opposite direction, they can totally change the outcome of any trade. If you are pushed by fear, then you would stand to lose on potential profitability. On the other hand, if you are driven by greed then you can fall prey to over-trading and be exposed to unnecessary risks of loss.
Do not neglect training and demo trading
Before taking your money to the real market where it would be exposed to real threats, it is better to train and hone your skills as best as you can. This process of honing your skills can be done with the help of a demo account. In demo trading, you are put in a simulation with virtual currency. The data is taken from the market in real time with some latency naturally to be expected. This way, you can virtually trade with the real conditions of the market but in the safety of the demo trading environment. So if you are new to trading in the forex market, always make sure to start by demo trading.
Not keeping records or a trading journal
Another mistake that can be made by trading is not keeping a thorough enough record of their trading activity. Otherwise known as a trading journal, this manner of record keeping will go a long way in helping you manage many different aspects of trading in the forex market. Trading journal can help you go over your trades and analyze the decisions you have made. So in this way, you will keep a rational mindset in the process of trading and also be able to remain consistent and disciplined.
Unrealistic trading goals
Last but not least, another mistake that novice traders can make in the process of trading in forex is having unrealistic goals for trading. You need to know exactly what to expect from your trades. This means you need to calculate exactly the margin of profitability depending on many factors including your total trading capital and more importantly based on your own trading expertise and abilities.
