The author is an expert in the field of multi-asset trading.
Top 10 Forex Trading Mistakes to Avoid
Now that you know what type of trader you are and know a little more about basic trader psychology, you can learn about the top 10 mistakes forex traders make, and how to avoid committing them yourself. These are by far not all the pitfalls traders fall into, but they are some of the most common ones and learning what they are can help you be more prudent. After all, an informed trader is a better trader. Here are the top 10 forex trading mistakes to avoid
Lack of a risk & capital management plan
One of the biggest mistakes is not having a risk management plan or system to manage returns. You should have a clear plan that shows how much money you can risk from your capital and set ratios. You need to understand that breaking any of these rules means breaking all of them, since they are all related and fall under the same psychological factor. Make sure you look at the Top 10 Rules of Risk Management infographic to learn more.
Trading too much and having lots of deals
Many traders always have a desire to be active in the market at all times and are constantly searching for opportunities, but trading too much is one of the biggest causes of loss in inexperienced traders. It’s often misplaced psychological motivation that drives the trader to enter the market prematurely, rather than an existence of an actual opportunity based on researched market vision or specific trading strategy.
Risking a large amount of your capital
You should never allow your potential losses on any trade or group of trades to exceed your acceptable loss amount. Risking a larger amount means that the psychological factor of wishing to return the larger than acceptable losses will interfere with your trading plan. You will look for any opportunity to re-enter the market and potentially make the wrong decisions under duress, because it will come from emotion rather than good analysis.
Focusing on one currency or product
Diversify is the name of the game. You may like the US Dollar, but it is not correct to focus on one single currency or tradeable instrument, since this both increases the chances of total loss if a single currency takes a tumble, and also makes you neglect other potential opportunities that may arise. It is better to analyse many currencies and instruments at the beginning of each week and then focus on those with the most promising outlook.
Relying on emotions to make decisions
We’ve already established that following emotions isn’t the wisest decision. Approach trading with a cold rational mind, and step away when you feel like you are succumbing to emotions rather than viewing things objectively. Sitting in front of the platform and checking charts trying to find a signal to buy or sell because you are anxious to trade will make you fall into the first mistake listed here, and that is entering random deals.
Trading without a consistent strategy
When you trade without having a consistent (and tested) strategy, don’t expect the monthly results to be as expected, because you didn’t rely on clear rules but rather random trading. But if your transactions are based on a consistent strategy and clearly outlined, you will be able to analyse your monthly results and recognise the pitfalls to avoid in the future. You can test various trading strategies with a free forex demo account.
Always wanting to win and not having patience during loss
The only certainty in forex trading is that at some point you will inevitably lose. Hoping to win more means greed, which is the biggest enemy of any trader. You should have a daily/weekly/monthly target of profit, and if it is achieved don’t go after more. On the opposite end, if you have a losing deal, don’t try to immediately make it up (Mistake #4). Instead make sure that it is within the acceptable loss amount and wait for an opportunity.
Not seeing the whole picture or relying on small timeframes
Not seeing the larger picture makes you miss the trend, because you only see the short term trend and neglect the stronger trends dominating the markets. You should ensure that you see the picture from all angles to better position yourself and navigate. This will allow you to identify whether you have a strong or weak position, and make appropriate adjustments. Try to connect timeframes to establish higher accuracy.
Overconfidence after profit
Congratulations, you’ve made a successful trade or two, but that doesn’t mean that the next one will be successful as well. And if you’re following a trading strategy (which you should!), it also doesn’t mean that it will always work. The markets have a changing nature and what works during a certain trend may not work at times of volatility. Market behaviour is variable and you should adapt. Which brings us to the last mistake
Not testing a trading strategy before using it
One of the most important advantages of forex trading is the demo account. It gives you an opportunity to test your trading system and using it in generating buying and selling signals. But strategies should be tested for one month minimum to ensure that they work under various market conditions, and identify when they don’t. Open a risk-free demo account and give it a try.
Following these guidelines can help you minimise some of the risks, but not all. Always remember that forex trading carries inherent risks and may result in losses that exceed your deposits. Make sure you fully understand all the risks before trading.
Margined Forex and CFD trading are leveraged products and can result in losses that exceed deposits. The value of your contract can fall as well as rise, which could result in receiving back less than you originally deposited. Please ensure you understand the risks and be sure to manage your risk exposure effectively.