5 of the most common mistakes beginner Forex traders make
Mistake 1) Over-Leveraging
Mistake 2) Trading without a Stop-Loss
Mistake 3) Getting swayed by emotions
Mistake 4) Not keeping up with real-time events and news
Mistake 5) Trading without a plan
There are multiple factors as to why such a large number of retail Forex traders lose money. Let’s have a deeper look into what these mistakes really entail and how you can avoid making them in the future.
Mistake 1: Over-Leveraging
Over-leveraging is trading a too large a position size in respect to your available margin. Any negative move in the markets to your position may have massive implications to your margin due to an ‘over-leveraged’ position.
Many Forex brokers offer very generous leverages; such as 50:1, 200:1, 300:1, etc. This can and has resulted in many amateur traders losing a lot of equity very fast when the market moves slightly negative to their position. In some circumstances (depending on who you trade with) this can even generating a negative equity – creating a debt owed to the broker.
The good news for many amateur traders is the recent ESMA regulations that came in to effect in early 2018. This resulted in many regulated brokers having to cap their leverages for retail clients at 30:1. However, many non-regulated brokers and professional accounts with regulated brokers will still have the ability to trade on massive leverages.
Therefore, you should never base your position size on your maximum available position. Instead, as a more knowledgeable trader you should base your position size on trade-specific factors such as proximity to technical levels or your confidence in your trading strategy.
Mistake 2: Trading without a Stop-Loss
One of the most difficult and skilled concepts in Forex trading is the management of ‘stopping’ orders. Whether that be a stop-loss or a take-profit.
As the name suggests, a stop-loss order is an order that closes your trading position when your losses on that trade reach a certain amount. This is an order that you can initiate either before you make the trade or when the trade is active. However, most trading strategies suggest that you should initiate a stop-loss prior to opening a trade position.
Stop-loss orders are crucial for trading success and longevity. Failure to implement them is one of the worst and most common mistakes that can be made by a novice trader. Implementing a tight stop-loss will result in the losses becoming capped before they become noticeably sizeable. However, there is a risk that stop orders on long positions may be implemented at levels way below where the long-term benefits would have a much greater possibility than the current risks.
A common trading mistake that is related to stop-losses is when a trader cancels a stop order on a losing trade just before it can be triggered, because they believe that the market is reaching a point where it will reverse course imminently and enable the trade to still be successful. This leads us onto the common trading mistake…
Mistake 3: Getting swayed by emotions
Losses are a natural part of your trading life. It is the art of how you respond to these losses which will determine the success and longevity of your trading career. Equally, when your trades are running well you need to keep a balanced mind and an eye to your long-term goals – as many novice traders get caught up in the moment.
Emotions are a massive factor when trading and can easily get the best of you, affecting your judgement. It is important to always remember your trading plan. Your trading plan represents your best judgement, which in turn will be the best guidance in achieving your trading goals.
One interesting fact is that most traders do very well on demo accounts, but then when they start trading real money they do horribly. The reason for this is that in demo trading there is virtually no emotion involved since your real money is not on the line. This goes to show the effects of emotions on trading, and the importance of keeping a balanced mind whilst trading, always revolving your basis of decisions around your original trading plan.
Mistake 4: Not keeping up to-date with real-time events and news
Currency pairs are closely linked to national economies and are therefore affected by many relating factors. National news outlets, events and sanctions have big impacts on rates with respected currency pairs and the market psychology as a whole.
Before entering a trade, make sure you do your homework. Not only should you be aware of upcoming events that could affect your trade (for example news relating to Brexit), but you also need to forecast which way these events could swing the markets. Pay attention to what your technical indicators are telling you and how they compare to your fundamental event analysis.
Mistake 5: Trading without a plan
Every point mentioned so far is in some way related to having a premade plan before trading. Opening up a trade without a concrete plan is a foolish mistake that could cost you deerly. As already stated the leveraging of your position should be decided, stop orders should already be known and implemented, emotions shouldn’t play a part in deciding your trades, and planning how real-life events and news can affect the markets.
It is important to resist the urge to trade spontaneously based on your instincts alone without a clearly defined risk-management plan. If you have a strong view, go with it, but do the legwork in advance so you have a workable trading plan that specifies where to enter and where to exit respected positions.
- It’s important to really take your time to learn how Forex trading works.
- Understand other mistakes that novice traders make and how you can avoid making them yourself.