Within the last few decades, trading in the financial markets has seen a sharp increase in popularity, which has led to a boom in the number of newbie traders signing up for trading accounts all over the world. While trading can be a great way to make money from home or even as a full-time job, many of these beginners start out with no real idea of what they should be doing.
After losing a little bit of money (or blowing their account balance), they feel discouraged and give up. In reality, most of these failed trading attempts can be contributed to common trading mistakes that could have easily been avoided if the novice traders were aware of them. If you don’t want to suffer the same fate, we have good news, as you’ll simply need to read this article so you’ll be aware of these mistakes.
Mistake #1: Trading Without a Strategy
Ask yourself these questions:
- “What instruments do I plan to trade?” For example, you might answer something like “Major currency pairs, minors, and some CFD options.”
- “What evidence will I look for to tell me to enter a trade?” Some traders might answer that they are looking at fundamental data, while others are looking at technical data or a combination of the two.
- “How much am I willing to risk on each trade?” This answer varies based on personal preference; however, a smart choice would be around 1% of your total account balance.
Your answers might look a lot different than our suggestions, but the point is that you should have some type of answer to these types of questions. If you do, then you’ve been doing your homework and likely have an idea of a trading plan and strategy. If you couldn’t come up with an answer, then you’ll need to develop a plan so that you can start well-prepared. One of the beautiful things about the forex market is that while nothing is guaranteed, traders do have the chance to significantly improve their chances of making money by educating themselves and sticking to their trading plan. One of the biggest mistakes beginners make is opening a trading account with no real plan, which is essentially the same as just gambling. A bit of preparation will go a long way if you simply invest time into your plan and follow it.
All you’ll need to do is develop a solid trading plan and choose a strategy that will work for you. This will take some research and work, but it is one of the most crucial steps to trading success from the very beginning.
Mistake #2: Not Testing Your Plan
Once your trading plan and strategy is in place, you may be feeling very eager to jump in and get started trading. Unfortunately, there may be some problems that you didn’t oversee. This can be very costly if you’re trading on a live account and it could even drain your account balance altogether. Many traders reach this point, feel discouraged, and decide to give up before their trading career ever even got a chance to take off. Keep in mind that your plan may sound great on paper, but you still need to test it in a real setting to make sure that it lives up to expectations.
The good news is that you can avoid this problem by signing up for a free demo account through your broker. You may already know about demo accounts, but if you don’t, you simply need to know that these simulation accounts allow you to practice trading in a live environment while using virtual funds. Since there is no financial risk, you can test your plan to your heart’s content until you’re confident that your strategy is profitable beforehand.
Mistake #3: Lacking Discipline
If you’ve ever read about trading psychology, you probably have some idea of the ways that emotions can affect our trading decisions. Sadly, some traders skip over this category completely when they’re learning about trading, which leaves them unprepared in the event that their emotions do start to cause problems. Every trader needs to know that feelings of greed, resentment, overconfidence, anxiety, and other emotions can cause you to make avoidable mistakes like risking too much money, deviating from your trading plan, overtrading, and more. If you don’t know this, then it can catch you off guard.
You’ll likely feel some type of emotion at some point, but the best way to avoid this problem is to stay disciplined and remember to always stick to your trading plan. Reading about trading psychology so that you can identify and remedy any related problems is another important step. If you’re ever feeling overly emotional and you can’t calm down, the best thing to do is to take a short break from trading until you feel more level-headed in order to avoid making emotion-driven mistakes.
Mistake #4: Having Unrealistic Expectations
Whenever someone opens their first trading account, they have some kind of picture in their mind about how things will go. Many beginners start with unrealistic expectations about how much money they’ll make. Oftentimes, this is because those traders have heard about the success of others, possibly even people they know, and they assume that they can reach the same level of profitability from the beginning. In reality, you may be working with a much smaller deposit and you won’t have the experience those investors possess at the beginning, which can lead to disappointment.
From the beginning, you’ll need to set more realistic goals that focus on positive notes like improving yourself as trading, losing less money each month, sticking to your trading plan, and so on. It isn’t a good idea to set exact monetary goals, as it can be difficult to predict how much money you’ll make due to the market’s unpredictability, especially from the beginning.
Mistake #5: Not Understanding the Market
All traders need to understand the market and what causes prices to change in order to make smart trading decisions. There’s a lot to learn on the subject, as microeconomics and certain events like elections or pandemics can really shake up the market. Many beginners are in a rush to get started and may briefly glance over this topic before moving on, only to realize that they don’t really know what’s going on once they get started.
Before you open a trading account, you should spend an ample amount of time researching these topics so that you’ll be more aware of the factors that affect the market. If you’ve already opened an account and you’re confused, consider taking some time off to brush up on your knowledge of these subjects. Some of this knowledge will also be gained through experience as you make trades and live through certain events.
Mistake #6: Overusing Leverage
Leverage can be both good and bad for traders, as it can help you to make large profits, or it can help you to wipe your account clean when used incorrectly. Many beginners don’t entirely understand leverage and might think that it is best to use the maximum leverage cap offered by their broker to make the most profits. You might make a lot of money doing this, but you’ll likely be risking a lot more money than you’re willing to lose in doing so.
Start by ensuring that you understand what leverage is and how it works, then you can incorporate leverage limits into your trading plan. Don’t assume that you should use the highest leverage available, especially if it is more than 1:100. As you gain practice over time, you can adjust your plan and trade with higher leverage with a better chance of using it correctly.