May 25 2020 | AtoZ Markets – Every day thousands of trader’s flock to the Forex markets in hopes of making it big. And for good reason, there is certainly a lot of money that can be made trading the fx markets.
However, just like everything else in life, you must be at the top of your game in order to succeed. In this article, I will discuss 10 common mistakes that new traders should be aware of during their trading journey so that they can take the necessary steps to overcome them.
Top 10 common trading mistakes that new traders make
Prior to committing to Forex trading, consider these 10 common trading mistakes you must avoid as they contribute to a large proportion of unsuccessful trades.
Mistake 1: No trading plan
Traders without a trading plan tend to be haphazard in their approach because there is no consistency in strategy. Trading strategies have predefined guidelines and approaches to every trade. This prevents traders from making irrational decisions due to adverse movements. But what exactly is a trading plan?
A trading plan is a strict set of rules, half of which a trader draws from their trading strategy, and the other half is derived from their money management strategy.
Here is what it might look like:
- Specific market conditions for entering a trade
- The amount of money to risk in a trade
- Specific market conditions for getting out if you are wrong (stop-loss)
- Specific market conditions for getting out if you are right (take-profit)
- Approximate time for the market to reach your target
- Note down and record everything
Devoting to a trading strategy is key because veering away may lead to traders plunging themselves into unchartered territory with regards to trading style. This eventually results in trading mistakes due to unfamiliarity. You can test your trading strategies on a demo account. Once you are comfortable and understand the strategy, you can move to a live account.
Mistake 2: Over leveraging
Margin/leverage refers to the use of loaned money to open forex positions. While this feature requires less personal capital per trade, the possibility of enhanced loss is real. The use of leverage magnifies gains and losses, so managing the amount of leverage is key. Learn more about what is leverage in the forex market.
Brokers play an important role in protecting their customers. Many brokers offer unnecessarily large leverage levels such as 1000:1 which puts novice and experienced traders at significant risk. Regulated brokers will cap leverage to appropriate levels guided by respected financial authorities. This should be taken into consideration when selecting a fitting broker.
Mistake 3: Lack of time horizon
Time investment works hand in hand with the trading strategy being implemented. Each trading approach aligns itself to varying time horizons, therefore understanding the strategy will lead to gauging the estimated time frame used per trade. For example, a scalper will target shorter time frames whilst positions traders favor the longer time frames. Explore the forex strategies for varying time horizons.
Mistake 4: Not doing sufficient research
Forex traders are required to invest in proper research to employ and execute a specific trading strategy. Studying the market as it should be, will bring light to market trends, the timing of entry/exit points, and fundamental influences as well. The more time dedicated to the market, the greater the understanding of the product itself. Within the forex market, there are subtle nuances between the different pairs and how they work. These differences need a thorough examination to succeed in the market of choice.
Reacting to media and baseless advice should be avoided without verification from the employed strategy and analysis. This is a common occurrence with traders. This does not mean these tips and media releases should not be considered, but rather investigated systematically prior to acting on the information.
Mistake 5: Poor risk management
Risk and rewards go hand in hand in any market. The truth is that Forex beginners don't pay much attention to this. Risk management is an essential part that will define your success in trading Forex. You cannot expect to make profits by blindly following a trading strategy, or by solely using an expert advisor or an automated trading solution. When you manage your risk effectively, achieving rewards becomes a reality and not just a possibility.
Risk only the capital you can afford to lose, and nothing more. Believe it or not, there are numerous Forex beginners who trade with capital that they cannot afford to lose. This can be disastrous because the Forex markets, just like most other markets, such as equities or fixed income, are notoriously risky. There are no guarantees that you will always make money. Losses in trading are part and parcel of Forex trading.
There is also additional pressure when you trade with money that you cannot afford to lose. It prompts you to make wrongful trading decisions, so try to avoid this if possible.
Mistake 6: Poor risk-to-reward ratios
Positive risk-to-reward ratios is another Forex trading mistake often overlooked by traders which can result in poor risk management. A positive risk-to-reward ratio such as 1:2 refers to potential profit being double the potential loss on the trade.
The chart below shows a long EUR/USD traded with a 1:2 risk-to-reward ratio. The trade was opened at a level of 1.12698 with a stop at 1.12598 (10 pips) and a limit of 1.12898 (20 pips). An effective indicator to help identify stop and limit levels in forex is the Average True Range (ATR) which uses market volatility to base entry and exit points.
Having a ratio in mind helps to manage expectations of traders, this is important because, after much research by DailyFX, improper risk management has proven to be the number one mistake made by traders.
EUR/USD 1:2 risk-to-reward ratio:
Mistake 7: Letting emotions impair decision-making
Emotional trading often leads to irrational and unsuccessful trading. Traders frequently open additional positions after losing trades to compensate for the previous loss. These trades usually have no educational backing either technically or fundamentally. Trading plans are there to avoid this type of trading therefore, it is imperative that the plan is followed closely.
Mistake 8: Inconsistent trading size
Trading size is crucial to every trading strategy. Many traders trade unsuitable sizes in relation to their account size. Risk then increases and could potentially erase account balances. AtoZ Markets recommends risking a maximum of 2% of the total account size.
For example, if the account contains $10,000 then a maximum of $200 of risk is suggested per trade. If traders observe this general rule, the pressure of overexposing the account will be removed. The inherent risk of overexposing the account on a particular market is extremely dangerous.
Mistake 9: Trading on numerous markets
Trading on a few markets lets traders gain the necessary experience to become proficient at these markets without scratching the surface of a few markets. Many novice forex traders look to trade on multiple markets without success due to lack of understanding.
This is something that should be done on a demo account if need be. Noise trading (irrational trading) often leads traders to place trades without the proper fundamental/technical justification on varying markets. For example, the Bitcoin craze of 2018 sucked in a lot of noise traders at the wrong time. Unfortunately, many traders entered the ‘FOMO or Euphoria’ stage of the market cycle which resulted in significant losses.
Mistake #10: Not reviewing trades
Frequent use of a trading journal will allow traders to identify possible strategic flaws along with successful facets. This will enhance the traders' overall understanding of the market and strategy for the future. Reviewing trades not only highlight errors, but beneficial aspects as well which must be reinforced on a constant basis.
Bonus - Forex trading mistake #11: Selecting an unsuitable broker
There are numerous CFD brokers globally, so choosing the right one can be difficult. Financial stability and proper regulation are essential before opening an account with a broker. This information should be readily available on the brokers' website. Many brokers are regulated in countries where guidelines are weak, to circumvent regulations in stricter jurisdictions such as the US (Commodity Exchange Act), the UK (FCA)., and Cyprus (CySEC).
Safety is the primary focus; however, a comfortable platform and ease of execution are also central to choosing a broker. Take your time to become familiar with the platform and costing prior to trading with live funds.
Meanwhile, you can check out our indebt AtoZ Markets Forex broker reviews from real traders.
Take away
Studying, researching, planning, following your trading plans, taking notes of your progress, and doing all of that while protecting your investments, are some of the best steps you can take to avoid making Forex trading mistakes. Not following these simple techniques is the biggest mistake Forex traders can make. It goes without saying that you should practice as much as possible, before you implement your strategies.