Trading is a tough business and it’s easy to make mistakes, especially if you are just starting out. In this article, we are going to discuss some of the most common mistakes made by new Forex traders. We will look at five specific areas that novice traders are known to have trouble with and discuss how to avoid making these mistakes.
“Of course, if a man is both wise and lucky, he will not make the same mistake twice. But he will make any one of the ten thousand brothers or cousins of the original. The mistake family is so large that there is always one of them around when you want to see what you can do in the fool-play line.” Jesse Livermore
I have benefitted from the experience and wisdom and advice of many senior traders. I’m happy to pass along some of what I’ve learned to those starting out in this field.
Letting Losses Run Too Long
One of the most common mistakes we always see is traders letting losses run too long. Sometimes it’s difficult to admit that you’ve made a bad trading decision even when the losses are staring you in the face. It’s important to be able to step back, look at the data objectively, and react quickly in order to cut the losses as short as possible.
This is where stop-loss orders might come in. These are designed to limit an investor’s loss by automatically liquidating the positions when the stop level is hit. It’s not easy to admit failure, but not all trades can be successful. It’s vital to be able to recognize a lost trade and exit with minimal losses. Letting losses run too long is one of the worst mistakes that can be made by a new Forex trader.
Trading With Emotions
The biggest obstacle to your financial success is not your head but your heart. Emotions tend to get in the way of cool logic. They can interfere with our ability to make a rational trading decision if we let them.
One of the major differences between a novice Forex trader and a pro trader is that the professional trader has experience and systems in place to take emotions out of the decision making process. They recognize those moments when emotions threaten to interfere in their trading decision and make a conscious decision to act based on facts and not feelings. A basic trading plan with simple trading rules will help you use your head rather than your heart.
Trading without a Plan
Another huge issue that the novice trader can have is not having a trading plan or not sticking to one. Trading is among the hardest and most demanding jobs in the world, and like any business you need to have a well-defined plan for success.
Most experienced traders will have a clear thesis for a trade, time frame, a profit target, and a stop level. It is important to record this information in a trading journal as well to keep you honest.When you are in the heat of the trading battle, your trading plan will be the roadmap you can follow that will help you make the best trading decision. A good trading plan is essentially in ensuring your profitability and longevity in forex trading.
Choosing the Wrong Forex Broker
One of the first steps you’ll take in your trading journey is choosing your Forex broker. There are many different forex brokers, especially outside of the US. There are many countries outside of North America and Europe which do not have strong forex regulation. Newcomers can be subject to unscrupulous trade execution practices and even out right scams if they don’t know what to look for. Sites like ConnectFX.Org offer free information on broker regulation, as well as objective broker rankings and reviews.
Different forex brokers each which offer different types of instruments, markets, trading platforms, fee structures and services. Some brokers will pass through your trades to large liquidity providers and act as an intermediary. Others will be our direct counter party and act as a market maker providing you quotes from their own trading desk.
Leverage and margin terms can vary widely as well. Some offer automated trading, social trading, managed accounts while others do not. Levels of customer service can vary widely as well. Some brokers will have 24/5 multi-lingual phone support and even personal account reps for large accounts. Others only offer an online ticketing system.
Brokers offer a variety of trading software as well. Although the industry standard trading software is Metatrader 4, it is probably not the best forex platform for beginners. While Metatrader has a lot of advanced functionality, the user interface not very user friendly. Beginners might be better off with simple user friendly web trader platforms instead.
Trading with Excessive Leverage
The sad reality is that 90% of retail Forex traders are not successful and most accounts are wiped out in under six months. The number one reason why the lifespan of a trader is so short is because of the use of excessive leverage.
Leverage is a double-edged sword as it magnifies both your gains and losses. You can risk of losing your entire account if you use too much leverage. If you trade with a lot of leverage, a slight downward movement can lead your broker to make a margin call. If you’re unable to meet the margin call, your position will be liquidated. If you use less leverage, your trading portfolio will be able to sustain a greater level of volatility in the long term.
How Do We Overcome Mistakes?
How do we move on after making some mistakes that have negatively impacted the trading business? The most important thing is to learn from mistakes made and avoid repeating them in the future. Trading can be a lucrative business as long as you’re willing to recognize and acknowledge your mistakes, learn from missteps, and try to avoid them next time. One of the most effective ways of doing this is by keeping a trading journal where you record and review daily trades. This will make it easier to track your progress and quickly identify mistakes.