Top forex trading mistakes; and how to avoid them

Forex mistakes

Cutting errors from your forex trading is essential if you’re to make progress, but first, you need to identify potential mistakes and either eradicate or prevent them.

Here we’ll discuss the most obvious mistakes traders make. Some of which, if left unchallenged, can have a devastating and adverse effect on your results.

The good news is that all these mistakes are obvious to the experienced and successful forex trader. So, we’re giving you the benefit of that experience to make sure you won’t fall into the same traps.

If you’re a novice trader or new to the industry and you abide by a simple set of rules this article provides, you’ll be giving yourself a great head start.

Trading forex from an undercapitalised account

It’s tricky to rank the mistakes in the order of magnitude, but trading from an undercapitalised account would be right up there if we did.

Let’s bust a few myths right now before we move on. First, you will not trade $100 into $10,000 inside a few months. Such a streak of luck would be so unlikely it’s not worth debating.

Besides, with the margin and leverage restrictions in place, your broker wouldn’t allow you to take the risk to achieve such fantasy returns. So, let’s keep it realistic from the get-go.

If you grow your forex account by 1% a week/50% per annum, you’d be way up there in terms of alpha returns. So much so if you showed your track record of consistent gains to a hedge fund manager or investment bank, they’d be interested in talking you into a job if you could scale up your method and strategy.

Trade within your means. If you do, so much else will fall into place. For instance, you’re far less likely to let emotions get in the way or overtrade if you have realistic ambitions. Also, and don’t underestimate this aspect of FX trading; you might have fun and enjoy the learning experience if the pressure is off.

Overtrading and revenge trading

The subject of under capitalisation neatly leads us to two other damaging habits, overtrading and revenge trading. Fact, you don’t make more by trading more; you only increase your trading costs.

Consider this; if you’re a day trader taking thirty trades a week costing one pip spread, that’s thirty pips of charges. Now, compare it to taking one swing trade in the week. Not only do you incur the spread costs with the day trading example, but you also have a greater chance of poor fills and slippage the more trades you take.

Keeping tight control of your overheads is a maxim of any successful business. Trading FX is no different. In your early days, it’s tempting to overtrade because you think it equates with more chances of winning. But, unfortunately, the maths of risk and probability don’t recognise that twisted logic.

You also need to accept one absolute in trading; you will have losing trades, and you will have losing days; best get ready now to deal with the losers financially and emotionally. The one thing you can’t do is somehow magically trade yourself back into profit on the days when your method and strategy aren’t working.

If you’re only risking a small percentage of your account on every trade, then the losing day shouldn’t hit your P&L too much. For example, let’s say you lose 1% during the day’s sessions; that isn’t irrecoverable over later sessions. But losing 10% in a day because you over-traded or revenge traded could take weeks to get back to break-even.

Trading without a plan

You must create a trading plan as soon as possible, even if you’re new to the industry and only demo-trading. The project-plan doesn’t have to be the length of a novel; it only requires the key elements.

Consider the forex trading plan a blueprint and a set of rules that underpins all your decision making. We often refer to the disciplined trader succeeding, and such a trader will have a game plan they never violate.

Here’s a suggested list of inclusions. Of course, you might want to add some of your own.

  • What FX currency pairs to trade
  • What times of day (sessions) to trade?
  • What account percentage risk per trade
  • What total market risk to have at any one time?
  • What platform to trade on
  • What broker to trade through
  • What method and strategy to employ?
  • How long to persist with a losing method/strategy?

You can jot down your rules in a Word or Google doc, even on a basic notepad, if you reckon you’ll refer to something tangible and physical more often.

A section of the plan can also act as your diary to record your results and note your emotional control.

Changing strategy before evaluation

In the trading plan section above, we mentioned that you need to set a time or monetary value to your experimentation with a method/strategy. One common forex trading mistake is to hop from strategy to strategy without giving enough time to evaluate the performance.

You need to set some time and monetary parameters to decide if your current strategy is failing. For example, perhaps put a limit of X per cent loss over Y number of trades.

However, the number of trades you take is proportionate to the style you employ. For example, if you day trade, you’ll take more trades than swing trading, so you might need to consider that aspect.

Lack of emotional control

Let’s now look at several emotional hurdles that you can put in your way.

  • Impatience
  • Fear of missing out
  • Searching for a Holy Grail
  • Unrealistic ambitions
  • Holding onto winners and losers too long

When you discover forex trading, it’s only natural that you want to progress and quickly bank profit. But you must temper this impatience and enthusiasm.

As mentioned above, taking more trades doesn’t translate into more profitable forex trades.

Why not compare yourself to an angler? You set up your bait on the hook and patiently wait on the riverbank for the fish to come to you.

Some days you might not get a nibble. Other times the fish will bite, and no matter how you try to figure out the distribution of winning and losing days, you can’t because it’s random.

Do not fear missing out; the market will be there during the next trading day. Opportunities will always arise if you’re using the same modified strategy each session.

There is no holy grail of trading, and there is no 100% non-losing trading strategy. You have to accept losing trades and losing days. If you have a 55-45 per cent winning system that has worked over perhaps a year, you’ve found your holy grail. You need to accept that for every 5.5 winners; you’ll have 4.5 losing trades. Can your psyche cope with that?

As previously mentioned, you won’t turn $100 into $10,000 inside a year, and you won’t turn $10,000 into $1,000,000; it’s just never going to happen. So, if you want to gamble, try the lottery.

Holding onto winners and losers can have a devastating effect on your overall trading outcomes. Instead, use stops and limits to cut your losses and cap your winning trades. Never let a winning position turn into a significant loss.

Selecting inappropriate currency pairs to trade

Initially, it would be best if you traded major currency pairs only.

  • They have the best spreads.
  • The fills are more likely to be in line with the quotes you see because the slippage is less.
  • The price action is more defined because such pairs react more to essential macroeconomic news.

Also, if you look for price action on major currency pairs, you’ll begin to get to grips with the phenomena of currency correlations and put natural limits on your trading.

Not understanding risk management

We all like to think we’re in control of most aspects of our lives; we refuse to acknowledge the impact risk and probability has. Trading is no different.

You don’t move the markets, and neither does the 10% of FX trading done by retail traders. So, you can only make predictions based on probability and earlier patterns as to what will happen next.

Limiting your risk per trade and per session allows you to capitalise every session and every day. In addition, managing your risk has the knock-on effect of helping manage emotions.

It would help if you learned how to use forex tools like margin pip calculators, stop-loss orders and take profit limit orders to limit your risks.

It would be best if you also educated yourself about margin and leverage too. Using too much trading leverage and trading close to the edge of margin can throttle your chances of trading success.

Too much belief in technical indicator-based trading systems

Lastly, it’s time to talk and bust a few myths wide open about technical indicators.

They are not an antidote, and they are not bulletproof plan to bank riches. However, you can use them skilfully because there’s a clue in the name indicator; they show where the security’s price has been and indicate where it might be going next.

Some forex trading indicators illustrate momentum, others trend, some volume and volatility. Taking one from each group to build a trading method and strategy isn’t the worst approach, but even this could be overkill.

All indicators lag: they don’t lead. Instead, they indicate what’s happened. No indicator can guarantee what will happen next in the market. But if you read them well, you might get a good handle on what might happen. That’s as good as it gets.

Most traders endure a familiar journey. First, they discover indicators, then put just about everyone on their charts. They then wait for the signals to align to make a trading decision.

But, again, an indicator-based trading system shouldn’t be derided because, if nothing else, it encourages disciplined trading. And the “what gets you in gets you out” approach has advantages in terms of consistency.

Price is arguably the only leading indicator on your chart that you’ll ever need. If that price and market action suddenly move, then there’s a reason for it.

Focus your energy and concentration on developing a method/strategy to identify and capitalise on price action. You won't go wrong if you learn to read price action and avoid and remove all the mistakes we’ve discussed here.

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