Mistakes are simply a part of life. Even so, there are times when mistakes can be completed avoided through information and education. Allow us to save you both time and money by pointing out five of the most problematic mistakes made by Forex traders.
Mistake #1: Trading Without an Education
Forex trading is great for the fact that anyone can decide to take it up, as long as said person is at least 18 years old with a few dollars or so to invest. On the downside, some traders rush into things too quickly out of eagerness to start making money as quickly as possible. Those that don’t know much about what they’re doing are bound to make mistakes and might not even realize how the mechanics of trading work, thus resulting in a loss of funds or of their entire deposit.
The good news is that many different educational resources are available online for free. One can simply search for terms like “forex trading for beginners” to get started. Once you think you’re ready, you can use more hands-on resources like quizzes that test your knowledge or try practicing on a demo account to get the best idea of where you stand.
Mistake #2: Risking too Much
Have you considered how much you want to risk on any single trade? The answer is different for everyone, but we should keep the same principals in mind. The more you risk, the more you could lose. Yes, risking more can lead to more profits, however, it’s better to trade with risk management in mind than it is to risk large amounts on a single trade. If you want to avoid this problem, it’s good to know that many experts recommend only risking 1% of your account balance on a single trade, or in some cases up to 5% at the maximum. This helps to ensure that you don’t lose too much if the market goes in an unfavorable direction. You can also accomplish risk management through other means, such as setting a stop order, trailing stop, take profit level, and so on.
Mistake #3: Emotional Trading
This mistake has a lot to do with trading psychology and the ways that your emotions can affect your trades in a negative manner. Revenge trading, overtrading, or analysis paralysis are notable examples of this problem. While this category covers a lot of ground, the results of these various emotions usually lead one to lose significant amounts of money. For example, a trader that is overconfident is more likely to take larger risks and might not base their strategy off of solid facts because they feel as though they are on a lucky streak.
Controlling your emotions can be difficult, but the first step is simply identifying that a certain emotion is affecting your trades in a negative way. From this point, you can try to deal with that specific emotion and learn to control it. Some people like to use calming techniques or might need to be reminded that it’s okay to lose sometimes. If you’re ever feeling overwhelmed, it’s also okay to take a break from trading until you can gather your thoughts.
Mistake #4: Trading Without a Plan
Having a trading plan and strategy is crucial for success because it helps to determine the whys and how’s of your trading. With specific goals in mind, you can make more informed trading decisions that are based off solid evidence like technical or fundamental analysis, or both. If you trade without a plan, you’re likely to lose money. You also don’t want to rush in and try a new strategy with your real, hard-earned money. The best way to start is by testing a new strategy on a demo account before using it on your real account. Even if you’re a more experienced trader, you should still use demo accounts to your advantage for this purpose to avoid losing real money.
Mistake #5: Not Staying Up to Date on the News
The price of currency pairs is closely related to certain economic factors and events. You need to know about news that can affect the economy in other countries as well as the one you live in so that you can be prepared for any news that might affect the markets. Often times, big news can cause market volatility. If you aren’t aware of what’s going on, then you might find yourself caught in an unfavorable market, which could result in some large losses. Since there are several countries that you need to know about, the best way to stay up to date is by using an economic calendar. Many economic calendars are even color coded so that you can see what is expected to have a high, medium, or low impact on the market. Or you can choose to avoid trading altogether if things look bleak.