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).
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.
7. Excessive confidence
Excessive confidence might appear after a series of profitable trades. The trader might get the impression that they have understood all the secrets of the market and will have each trade profitable from now on. This results in thoughtless trades that breaks the rules of the trading system and cause excessive risks.
The trader starts relying too much on their forecasts being sure that the market “must” go in their direction. But the market does not care about your forecasts – and an excessively confident trader gets rid of their illusions alongside the profit they have made or the whole deposit altogether. Hence, do not let a series of profitable trades blur your mind, always trade carefully and thoughtfully.
8. Trading excessively
This means you make too many trades, a large part of which does not even have a trading plan. This is also emotional trading when the trader gets too excited with the process and tries to catch all market movements. It results in not only an increase in expenses due to a large number of trades but also in breaking your trading rules, which augments risks.
Gamblers use such a word as “tilt” to describe a state of mind when one loses control over their actions. A trader can also face this, and excessive trading is a symptom. If you notice it in yourself, pause for a day, at least, and get back to normal.
9. Trading in extreme conditions
Another reason for losses might be trading in extreme market conditions. Such conditions can be provoked by global economic and political events, such as the publications of important indices, presidential elections, political and economic crises, decisions of Central banks on credit and monetary policy, etc.
In extreme conditions, volatility leaps up, and quotations might make surges. Market behavior becomes hard to forecast. Trading systems that work well in normal conditions lose efficacy.
You can either abstain from trading in extreme conditions or do it very cautiously. Cautious trading means correcting your lot size (decreasing it) and SL size (increasing it) with regard to the increased volatility.
10. Adding up to losing positions
This method is often used to avoid losses but often leads to the opposite thing – it increases losses many times. The most widespread ways of adding-up are Martingale and averaging:
- Averaging means that you add the same volume to your losing position to get a better average price of open positions;
- Martingale is adding-up by increased volume (for example, 2 times) to get an even better average price.
The idea is that at some point the price will reverse and correct to the average price of losing positions, allowing you to close it without a loss or even with a profit. This might work for long-term investments without leverage. However, in Forex, with large leverage, this will lead to losing your deposit inevitably.
A trader might be making a profit with averaging and Martingale for some time. But in the end, they get into a lengthy market movement in one direction, and if they do not limit losses but add up to losing positions, they will waste their deposit for good. The only way to make a profit is to withdraw it in a size bigger than your deposit before it is lost, but this is gambling, not trading.
In his article, we have discussed some common mistakes made by beginners in Forex. Everyone makes mistakes, this is normal, but you should come to certain conclusions and avoid the same faults in the future. To trade stably, you need time, practice, and correction of mistakes.