It is one of the hardest ways to make easy money, they say. Trading forex is one risky venture to the extent that, your broker will not hesitate to warn you about it. When you think twice about the risk involved, you would realize that everything else is risky; that is the reason why there are rules to follow. The rules do not eliminate the risk but they sure do minimize it. Forex trading mistakes are common with newbie and experienced traders alike.
In this very lesson, I will tell you about the basic forex trading mistakes and rules you can follow to avoid them. If you have a listening ear, it will go a long way to make your trading journey a success.
Opening a live account earlier than recommended.
When people hear about forex trading for the first time; it is all about the profits. The question is always “how much money can I make?” Owing to asking such a wrong question from the start; the disaster starts to breed. With the advent of the internet, it is very easy to learn forex but harder to actually trade, especially without a guide. A very self-motivated individual can take a little over two weeks to learn the concept of forex trading. That is so cool.
The problem arises right after getting the concept. The biggest enemy of a new trader is the first trade ending up in big profit. The newbie would not want to waste time on a demo account because the profits are not real. Such a person does not consider the bright side that the loses are also not real. In a rush to make some really quick cash, he/she opens a live account only to burn hard-earned money.
The right question to ask is, “how do I make money?” not “how much money can I make”. With this in mind, it is prudent to spend 4-6 months trading on demo and trying things out. Others say they can’t learn on demo because it is not real, but it is alright. Such people want to lose hard-earned money before earning, instead of learning to earn without risk. Opening a live account in a week or a month’s time is just one of the basic forex trading mistakes.
Overleveraging that $300 account.
Since trading is risky, the risk is minimized by managing it. Risk management is defined in such a way that you trade according to the size or balance of your account.
Another one of the basic forex trading mistakes is the irresponsible use of leverage. It is no secret that everyone is in this game to make money and it is easy to make money since a $1 profit is still money. Like fishes are baited with worms, people are baited with the ‘get rich quick’ syndrome. Getting uber rich on a $300 account is nearly impossible. You might have heard the phrase “money makes money”; it is very applicable in this game; in trading, big money makes big money and small money makes small money.
Many are the people who left this industry poorer than they came in. You might have learned that, leverage is both good and bad. It has done more bad than good because small money tried to make big money. Undercapitalization makes people flee to leverage but you’re better off discarding leverage even if you’re undercapitalized. You know why? Because if you play this game for a long time, you will be good at it by experience. That would be the time to use just a little bit of leverage.
Trading without a strategy/ trading with a strategy that does not suit your personality.
This turns out as one of the major trading mistakes. A football team goes into a match with a formation, warriors go to war with a plan; it is no different with trading. The importance of a trading strategy can never be understated. There are a variety of strategies out there, it is your duty as a trader to find one that works for you or cease to be a trader in all. This one worked for me.
It is faulty to buy and sell without any mean reason. There are various strategies that work for different people but I know about one strategy that will not work for anyone. I know because I was introduced to it in my early days. A very simple and easy one that goes like “buy when you see price going up/ sell when you see price going down”. Just like that and that is no strategy at all.
The ancient Greek aphorism, “Man, know thyself” comes into play here. Knowing who you are cuts the difficulty of finding a suitable strategy into two. Using myself as an example, It would be hard for me to trade a scalping strategy successfully because it would stress me out, plus I do not have enough time on my hands to sit behind my charts all day long.
There are tons of trading strategies that serve short term goals, medium term goals and long term goals. These come in the form of scalping, day trading, swing trading and position trading. I am more of a medium term swing trader with price action.
By all means, search for and trade with a strategy. If you find one, tweak it to favor you. If you do not find one, create one.
Of all the forex trading mistakes, I think trading based on impulse is the most damaging since it affects psychology. Impulse is based on emotions which come in the form of fear, overjoy, greed, worry and whole lot more. When you close a trade before it reaches your target, when you are super happy after a huge profit, when you can’t sleep after entering a trade, you might just be guilty of impulsive trading.
There’s a high probability that, you won’t be found trading impulsively if you spend adequate time on demo, if you never overleverage your account or if you have a strategy. I extensively show you how to overcome impulsive trading here. To avoid impulsive trading, you need to take good trades. A good trade consists of three key areas.
- A reason for an entry
- A predefined exit- A Take profit to get out when you are right.
A Stop loss to get out when you are wrong.
A trade with a plan is good even if it ends up in a loss. Rid yourself of the first three forex trading mistakes, and you might never trade impulsively.
So there you have it, these four are not the only forex trading mistakes in existence but they are very common. I’d advice that you’d pay attention to my solutions for them if you falter in any, but hey! Experience is the best teacher.
I definitely left some forex trading mistakes out because the above are what I’m limited to. I’m willing to hear from your own experience in the comment section.