There is a widespread belief that the Forex trader’s greatest enemy is himself and that the root of most problems is the human factor. In short, the main reason why Forex traders lose money is very obvious: it is the traders themselves.
Traders, like all humans, tend to make mistakes while trading. At the same time, someone learns from others’ mistakes, starting to trade more efficiently, but such, unfortunately, are a minority, and someone cannot learn from their mistakes, stepping on the same rake several times.
This article summarizes the 10 most common mistakes of Forex market traders, after reading which a trader will be able to take a more self-critical look at his own activities, which, of course, will have a positive impact on the results of his trading operations. Being aware of these mistakes can help traders become more successful and efficient. If you realize that you’re making some of these mistakes, you can take the proper steps to fix them.
1. Trading Without a Plan
The vast majority of traders start trading without a plan. Regardless of whether you want to make money regularly or prefer a passive source of income, creating a trading plan plays an important role. Otherwise, investment and speculation turn into unprofitable gambling.
To gain independence in the Forex market, the first thing you need is to have a trading plan. The trading plan should be structured with the listed key points:
• Preferred Trading Style: scalping, intraday trading, swing trading, or long-term investing;
• Analysis Method: technical or fundamental;
• Selection of Trading Platforms:
• Risk Management: determination of the maximum risk per trade, the allowable drawdown on the deposit per month, the ratio of profit to risk for one position;
• Rules for Entering a Trade and Other Aspects.
Following a trading plan allows you to make deals systematically and deliberately. Skills will improve over time, increasing trading efficiency. You will learn to understand if you made a mistake or the market just behaved differently than in most cases.
2. Excessive Self-Confidence
Excessive self-confidence can appear in a trader after a series of successful trades. After making a profit on several trades, a trader may get the false impression that he has already fully understood the market and now it will be easy to make a profit on each trade. The result of such an illusion is the execution of rash transactions with violation of trading rules and increased risks.
The trader begins to bet higher on his trading forecast, believing that the market “should” go in his direction. But the market always goes in its own direction, it doesn’t care about your forecasts. And the self-confident trader gives up his illusions along with the previously received profit, or even with the entire deposit at once. Therefore, don’t let overconfidence cloud your mind, trade carefully and deliberately, even after a series of successful trades.
3. High Leverage Trading
Trading with leverage involves opening a position for a larger amount than you have in your account using margin lending. Essentially, leverage is the ratio of your equity to your borrowed funds. On Forex, leverage is provided by a broker, usually, fairly high leverage is used, ranging from 1: 100 or more. The higher the leverage, the larger a position a trader can open in the Forex market.
Trading with high leverage carries an increased level of risk. Sharp changes in market prices when using large leverage can lead to serious losses or even to the loss of all funds. That is what we always call Leverage – a double-edged sword. As attractive it can be in the beginning, one should always consider the consequences high leverage can carry in case the market moved against your forecasts.
4. Trading Without Stops
Trading without Stops is another common mistake among traders. The stop is a Stop Loss order placed that limits potential losses. With the help of the established Stop Loss order, the trader limits his losses in one trade. In almost all trading training courses, it is strongly recommended to always use stops.
But often a novice trader is faced with a situation where his Stop is knocked out by the market noise, and then the price goes in the direction he predicted. Then, instead of adjusting the rules for setting Stops, he decides to completely abandon them. For a while, a trader can be lucky, and he will make several profitable trades. But sooner or later he will find himself in a market reversal, and as a result, this one transaction will “eat up” his entire deposit.
Trading is not an investment, here, in order to achieve success; it is necessary to limit possible losses in each transaction. Before opening a position, a trader should foresee where and how he will close the position if the price goes against him. You can immediately place a Stop Loss order, you can simply keep the Stop “in your head” and close the position manually when the “red line” is reached – it does not matter. The main thing is always to control possible losses. You lose nothing by using a stop-loss. Think of it as an insurance policy.
5. Following Other People’s Advice
Trading in extreme market conditions can be another reason for market losses. Significant events in the world economy and politics can provoke extreme conditions in the market: the release of important economic indicators, presidential elections, political and economic crises, decisions of Central Banks on monetary policy, and so on.
In extreme conditions, volatility rises sharply, quotes can make sharp movements in one direction or another. It becomes much more difficult to predict market behavior in such conditions. Trading systems that perform well in normal market conditions lose their effectiveness.
You can either refrain from trading in extreme conditions altogether, or trade very carefully. Careful trading implies adjusting the size of an open position and Stop size taking into account increased volatility.
7. More Risk – More Money
The higher the risk, the higher the earning potential. But the flip side of the coin is that as the risk increases, so does the potential loss. It is not for nothing that experienced traders usually allocate no more than 1-5% of the total capital to one position. Positive risk-to-reward ratios are often overlooked by traders which can result in poor risk management. A positive risk-to-reward ratio such as 1:2 refers to potential profit being double the potential loss on the trade.
The maximum risk can be justified only in one case – when “accelerating” the deposit. Due to the full use of the “leverage”, a professional trader increases the risk to the limit and maintains it at the maximum level to multiply a small deposit to an acceptable size. At the same time, during the period of “acceleration” of the deposit, even a slight unfavorable price change entails serious losses, up to the loss of all capital. Therefore, the strategy can be used exclusively by experienced speculators who were able to show good financial results with a low level of risk for a long time (from a year).
8. Emotions-Based Trading
Your mental state has a significant impact on the decisions you make, particularly if you are new to trading, and keeping a calm demeanor is important for consistent trading. Emotional trading usually leads to irrational decisions ending up in unsuccessful positions. Traders often open additional positions after losing trades in order to compensate for the previous loss. Such positions opened on emotions without any fundamental or technical analysis, research, tend to end up in losses.
Emotional intelligence, defined as one’s ability to understand and manage their emotions, can have a detrimental effect on decision-making. Therefore, while trading always try to get your emotions under control and do not make any irrational decisions depending on such emotions.
9. Having Unrealistic Expectations
Many traders start their trading career with the goal of becoming rich very quickly, which often pushes them into making mistakes. That is one of the reasons beginners lose their motivation after the first unsuccessful trade.
However, in order to stay motivated and disciplined, you need to work on how to set realistic goals. If you’re not setting goals that are actually achievable, then all that they’ll be is a source of frustration and disappointment, rather than a challenging yet reachable target. Have patience and treat trading Forex like any other career – first, you learn, get experience, and as time passes you get a promotion – earning more and more.
10. Selecting an Unsuitable Broker
There is a huge variety of brokers worldwide, so of course, choosing the most suitable one for you may be challenging. Nevertheless, you should do proper research before making your final choice. The right broker has to be regulated by a reputable authority; have great customer support that will help you with the problems you might have; have a comfortable trading platform; the foremost characteristic that a good broker must have is a high level of security; tight spreads and so on.
For instance, FTD Limited focuses primarily on customer satisfaction. It is regulated by one of the most reputable authorities – BVI FSC (British Virgin Islands Financial Services Commission). We offer tight spreads, fast execution, customer service, and an IT team that is always available to help our customers; our priority is to give the feeling of safety to our customers so they can mainly focus on their trading career rather than worrying about anything else. We provide the most convenient and popular trading platform – MetaTrader5 available both on mobile and desktop, making trading as comfortable as possible. With the demo account provided with instant 100.000$ sent to your account, you can start trading and testing your strategies now with just one click.
In this article, we have looked at some of the common mistakes traders make when trading Forex. Everyone makes mistakes, this is normal, the main thing is to draw the right conclusions from them and not step on the same “rake” in the future. It takes time, practice, and work on your mistakes to achieve consistent trading success.
By following these 10 rules, the chances of success are greatly increased. If you start to love trading, spending enough time on systemic trading and error analysis, then sooner or later you will find your own path to profit.
We hope this article was helpful in analyzing your mistakes. Wishing you all a good and profitable week!