Oftentimes, new traders start out with their own preconceived idea of what trading is. Ideas can vary widely – some might assume that trading is easy and a quick way to earn a buck, while others might think of it in a more intimidating light. No matter what theory one has in the beginning, each beginner is likely to learn the lessons we’ve outlined below with time. Of course, you could always learn the hard way, risking real money as you go, or you could take a few minutes to take a look at our list below to avoid learning these lessons through trial and error.
Lesson #1: Stay True to your Plan
Before you start trading, you’ll need to create a trading plan that really considers the important aspects of the why’s and how’s of the way that you will trade. Many beginners read advice online that details the importance of actually making this plan, and they do start out with a trading plan. However, it’s common for beginners to deviate from their plan over time or simply forget they even made one. You might even decide that you don’t need a plan anymore once you start getting better results. Unfortunately, this can lead down the wrong path and you could actually lose money by forgetting about your tried and tested trading method. It’s a good idea to review your results once you implement your plan – if the statistics show that the plan is working, that’s reassurance that you should stick with it.
Lesson #2: Manage your Risk
With gambling, you might be tempted to take bigger risks in lieu of larger rewards. Some beginners have this mindset when they start trading, but this is a quick way to drain your account. Trading decisions should be based on hard evidence that is outlined in your trading plan, but you also need to limit the risk you take on each trade because the market is never predictable. Be sure to read up on margin, leverage, and drawdowns if you haven’t, and ensure that you are also using stop losses and the correct position sizes as well. Many beginners don’t realize how important these factors are when it comes to limiting losses and wind up taking one or more large losses that leave them with a zeroed-out account balance.
Lesson #3: Be Patient
There will be times when the best thing to do is nothing at all. If there isn’t evidence that supports making a trade based on the facts you’re looking for, you should sit back and be patient. Some beginners become addicted to the rush of trading or might even feel unproductive if they don’t do something, making them more likely to enter a trade that will go south. After all, it’s often said that the best traders do nothing 99% of the time.
Lesson #4: Don’t Compare Results
Everyone trades at their own pace, so it isn’t fair to compare your results with others. Remember that the factors affecting your results are different, as that person likely invested a different amount of money, risks a different percentage on their trades, uses a different strategy, and so on. It’s also important to remember that you shouldn’t throw your trading plan out the window to randomly adopt a plan that seems to be making someone else more money. Otherwise, you might run into problems you didn’t expect and could wind up losing more money in the long run.
The Bottom Line
Many of these lessons revolve around the importance of creating a solid trading plan and sticking with it over time, rather than abandoning one’s proven plan in favor of a sudden urge to try something else. You also need to avoid entering trades just to do so and only enter a trade if the evidence supports that it is a good move. Know when to do nothing if your trading plan doesn’t support entering a trade. Beginners also have a common problem that revolves around managing risk effectively, as some like to jump into things taking bigger risks when the reality is that a new forex trader should risk less money than someone that has been trading for a long time. If you keep these lessons in mind, they should help you to avoid losing money because of mistakes that could have easily been avoided.