In this review, we will break down ten common mistakes traders make while trading. Knowing about these mistakes, you can try to avoid them in order to increase the effectiveness of your trading and become a successful trader.
1. Poor preparation
A fairly common mistake among novice traders is trading without a serious level of training. After completing any basic training course without further serious practice, or having read various trading literature on his own, a trader rushes to start real trading in the hope of immediately starting to make money. As a rule, the market very quickly punishes for such haste – the deposit is drained.
Theoretical training provides only the foundation, basic knowledge of how Forex works and how to trade on it. It takes practice to learn how to make money. In my opinion, you need to practice for at least a year (preferably under the guidance of an experienced trader) and hone your skills on a demo account or on a small real account before starting serious trading.
2. Trading without a system
The trading system is the main tool of the trader that gives him an advantage in the market, which allows him to consistently make a profit. In other words, this is a certain set of trading rules, tested in practice, with the help of which a trader works profitably. In any system, there are, of course, unprofitable trades, but the total result for a certain period of time (month, quarter, year) should show profit.
If a trader does not have a clear, understandable and proven trading system, and he makes transactions chaotically, then sooner or later the deposit will be drained. Forex does not forgive frivolous trading – trading without a system is much more likely to lose money than to earn. It is possible to profit from random trades, but sooner or later the streak will end. Long-term success can only be achieved with a proven trading system.
3. Following other people’s advice
Another common mistake novice traders make is blindly following other people’s advice. There are always a lot of different advisors in the network who will tell you how to trade “correctly”. But, firstly, not all of them are successful traders, and secondly, you cannot go far on other people’s advice, you need to have your own head on your shoulders.
This does not mean that you should not learn from others. The important thing is that you must understand the essence of the trading idea and consider whether it fits your trading rules. Take other people’s advice critically and use only those ideas that fit organically into your trading. A strategy that works well for one trader may be completely inappropriate for another.
4. Trade with high leverage
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 a 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 quotes in the market when using a large leverage can lead to serious losses or even to the loss of all funds. Therefore, novice traders are advised to use a small leverage, for example, 1:10. In the future, it will be possible to increase the leverage and control risks using the risk management rules (by adjusting the lot size and setting Stops).
5. Trading without Stops
Trading without Stops is another common mistake among traders. 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 beginner trader is faced with a situation where his Stop is knocked out by the market noise, and then the price moves in the direction he predicted. Then, instead of adjusting the rules for setting Stops, he decides to abandon them altogether. 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 deal 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 in advance 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.
6. Desire to win back
A trader often wants to recoup after a series of several losing trades. This desire is driven by emotions when a trader is upset by a series of losses, and he has an obsessive desire to quickly win back losses. Emotional trading immediately after a big loss often leads to even bigger losses. Trades on emotions are opened, as a rule, recklessly, chaotically, in violation of trading rules, and only bring additional losses.
If you want to be a successful trader, you need to learn how to stay calm even after the worst losses. Avoid emotional decisions and focus on finding good, thoughtful deals. Some experienced traders stop trading altogether for a while after a big loss. This way, they can start over, analyze mistakes and return to trading with a clear mind.
7. 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 will now easily 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 does not 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, do not let overconfidence cloud your mind, trade carefully and deliberately, even after a series of successful trades.
Overtrading is the execution of too many trades, many of which do not have a carefully prepared trading plan. In fact, this is an emotional trading, when a trader gets too carried away with the process and tries to catch all the market movements. As a result, not only the costs of a large number of transactions grow, but trading rules are violated, which leads to losses.
In the slang of card players, there is such a thing as “tilt” – a psychological state when a player loses control over his actions. A trader can also enter this state, and overtrading is a signal that the trader has lost self-control. If you notice that you are overtrading, you need to pause, stop trading for at least one day and bring your psycho-emotional state back to normal.
9. Trading in extreme conditions
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 (downward) and Stop size (upward), taking into account increased volatility.
10. Adding to losing positions
This method is sometimes used to avoid losses, but it usually leads to the opposite – losses multiply. The most common ways to add to losing positions are “averaging” and “martingale”.
- Averaging – this is adding to a losing position with the same volume in order to get an improved average price for open positions.
- Martingale – this is adding to a losing position with an increased volume (for example, 2 times) in order to get an even better average price.
The calculation is based on the fact that at some point in time the price will reverse and adjust to the average price for unprofitable positions, which will allow them to close at 0 or even with a profit. This tactic can work for long-term investment without leverage. But when trading Forex with high leverage, such a strategy will inevitably lead to the loss of the deposit.
A trader can make a profit for a while using “averaging” or “martingale”. But in the end, he will find himself on a strong unidirectional market movement, and if he does not use the limitation of losses, but only adds to the unprofitable positions, his deposit will be drained. The only option to stay in the black is to have time to earn and withdraw profit in excess of the size of the deposit before it is lost. But this is more of a casino game than trading.
In this article, we have looked at some of the common mistakes novice 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.