Starting forex trading career is an exciting journey. The
mind-blowing financial challenges, economic riddles, potential sky
rocking profits and psychological effects - all assembled together in
one profession. As a new forex trader you need to recognize the
universal mistakes which can easily turn your forex trading adventure
into unnecessary, costly ride. What are the common mistakes traders make
and how can you avoid making them?
Here is the summary of slip-ups every trader should avoid:
1. Risking Too Much
There is no way of getting rich quick in forex trading. You have to
be consistent and disciplined, and by no means try to compare forex to
gambling. Every dollar you invest in forex must be a dollar you can
afford to lose, a dollar which will not leave you butt naked on a
street. Every successful forex trader protects ones capital, and
therefore instead of
risking too much and
praying for it to turn into a
goldmine, it is more important to focus on good entry techniques and
understanding of trend.
2. Over trading
Most new traders think that in order to make huge profits you have
to trade all the time. It is important to realize that forex market is
volatile and changes direction all day long. You cannot expect
profitable trades from every price movement. It is so easy to get
addicted to winnings which can lead to sloppy trading. Depending on your
trading style, the opportunity to profit strikes a few times a day and
it is your job to figure out when it happens. After each win, give
yourself a time out to ensure that you make right decisions based on
your trading plan and not on the luring crave to win again! As soon as
you learn to ignore all market swings, control your emotions and focus
on profitable movements, you will become consistently profitable trader.
3. Errors in Order Entry
There is a time in every forex trader's life when the wrong order
entry is made. Whether the clumsy fingers or lack or alertness are to
blame, awkward errors happen to all of us. To save yourself a lot of
stress, avoid heart attack and evade losing money, take two extra
seconds to check that everything is correct before you click!
4. Not Having Your Own Trading Plan
I believe that every trader is unique and requires different set of
approaches when it comes to forex trading. Just because other traders
succeed in scalping, for example, it doesn't necessary mean that it is
suitable for you. It is your responsibility to figure out what kind of
trader you are. Are you a quick thinker or rather analytical? Are you
aggressive or rather patient? Can you devote enough time to forex or you
plan to trade part-time? What is your investment capital? Do you have a
full grasp of fundamental analysis? What are your psychological
weaknesses? The sooner you figure out who you are, the faster your
trading plan will materialize and the better forex trader you will be.
5. Losing is The End of the World!
There is no such thing as forex trading system that works 100% at a
time. You can become crazy rich by being right only about 10% of a time.
Kick the perfectionist out of your mind and open mind to a larger
picture. The most important thing in forex trading is win/loss ratio. It
doesn't matter how many times you win or loose; what really matters is
how much money you gain when you win and how much money you loose when
you lose! Concentrate on monthly profits, and not on every single trade.
6. Ignoring Money Management
Money
management is very important in forex trading. The purpose of
money management is to protect you from risking too much and therefore
grow your profits in a stable, consistent manner. Without a proper money
management technique, you can empty your trading account within 5-10
clumsy trades.
7. Ignoring Psychological Issues
Psychology is a big part of forex trading. You have to train
yourself to control your emotions, deal with losses and understand that
success does not depend on every trade. Many traders keep a journal and
write down not only the trading outcome, but their feelings and emotions
during the trading hours. This can significantly help to analyze
yourself and avoid, for example, over-trading, revenge trading, greed
trading, ego trading etc.
8. Constructing Complicated Indicators
Simplicity is the best way in forex trading. You don't have to keep
adding indicators or come up with extraordinary trading plan. Many
indicators only add chaos and unnecessary information. Try not to overdo
it; the basic idea behind indicators is to give hints to direction of a
trend, support/resistance levels and buying/selling pressure.
9. Trading News
Unfortunately, in most cases even the most straightforward news
releases are used as a tool to affect the investment psychology of the
crowd. This is, in a way, a manipulation used by governments and
traders. Analyzing only the news can be quite problematic, since often a
forex market that seems extremely bullish can actually be an undercover
bear! It is close to impossible to predict how the market will react to
the news. I personally have seen markets going down more than 100 pips
in one second and rising 100 pips back up within couple of more seconds.
That's like playing a Russian roulette!
10. Using Too Much Leverage
The beauty of forex trading is the ability to use leverage or
margin, however too much leverage can be extremely harmful. Having a
small trading account and making big trades using leverage can turn into
a complete disaster whenever the market moves against your positions by
just a tiny swing.
11. Demo Trading The Amount You Don't Have
Most forex brokers offer demo account for practice. My personal
advice is to trade
demo account with the amount of money you actually
plan to invest. Usually practice account comes with hundreds thousands
of dollars, so in order to actually learn how to trade and understand
the forex market reality, it is important to demo trade the amount of
your actual capital. It doesn't make much sense to practice trading with
thousands while you plan to invest $500.
12. Switching Strategies Like Pair of Gloves
You shouldn't jump from one
strategy to another the moment you
experience couple of losses. Your forex strategy should not be discarded
the moment things get rocky. Every strategy need time to be optimized.
Changing strategy from one to another will not turn you into successful
trader. Give it time, consider losses as a down payment for the future
wins.
13. Seeking Shortcuts to Learning about Forex
There is no shortcut - you have to learn. Most successful forex
traders know exactly what is happening in forex market. You have to
read, learn, practice and analyze all the time in order to be up to date
and make profits. Forex trading is a lifelong learning career. Since
forex market is complex and very flexible, a lot of learning is needed
in order to adobt to new changes and become a skilled trader.
14. Ignoring Stop Loss
Ignoring stop loss is a no-no! You need to have a clear entry/exit
plan. Decide now many pips you want to make, what is your loss limit,
what are the reasons for entering a trade in the first place. Sometimes
you have a feeling that if you want a little more your luck will turn
around. No, this is a very bad idea. Stick to your plan and always set
stop/loss targets. There is no such thing as a "trade of a life time".
If you miss one, there Is always a set of new trades right around the
corner!
15. Deciding on Forex Broker Too Quickly
Choosing the right broker takes time - so get ready for a long ride.
There are hundreds online forex brokers today and all of them are
attractive in one way or another. It is important to figure out which
broker is most suitable for you. A
broker good for one trader might not
be the best choice for the other. There are many factors to consider,
including:
¨ Trading Platform (download, online, metatrader 4, user-friendly, graphical etc.)
¨ Regulation (regulated brokers are usually more reliable)
¨ Features (news, daily analysis, mobile trading, free seminars, bonuses etc)
¨ Technical and Customer Support (it is important to have all
the contact information for the broker including phone number, online
support and email address. I also suggest testing all of the contact
methods before making a deposit with the broker - Do forex broker
representatives answer the phones? How fast does the broker respond to
emails? Is online support proficient and professional?)
¨ Terms and Conditions (always go over terms and conditions
you agree to with a forex broker. You might find nasty hidden costs
involved or certain unprofitable trading conditions)
¨ Spreads or fixed price (the lower the better, of course!)
¨ Free Practice Account for practice and get to know the trading platform
¨ Minimum Deposit Requirements (How much are you planning to invest?)
¨ (Payment Methods (how are you planning to deposit/withdraw? Wiretransfer? Credit Card? Paypal? Moneybookers?