6 trading mistakes new forex traders must avoid
One of the unique features of trading forex is that it is relatively easy to obtain leverage. Together with the proliferation of online trading platforms in recent years, and the ease of opening an account with a forex broker, it has consequently attracted a lot of retail investors.
But while leverage somehow appears to ‘magically’ magnify profits, the downside of leverage is far too often forgotten! Even the most seasoned financial professionals and hedge fund managers can mysteriously overlook the potential damage to their financial health of too much leverage.
Yet everyone knows, or should know, that borrowing too much money is not a brilliant idea. In the worst case scenario, what starts out as simply the wrong bet on a particular currency, results in a complete ‘blow-up’, such that the account or fund is wiped out by the accumulated losses. In this article, we go through six of the most common mistakes made by forex trading Newbies, including overuse of leverage, and explain how to avoid them.
Mistake no. 1: Not having a trading plan
Many punters start trading forex in the erroneous belief that it is an easy way to make money. If you are lucky, you might make some money at the beginning. However, unless you are an expert (and you will not be reading this article if you are), your success will almost certainly be down to luck and randomness. Inevitably, mean reversion will guarantee that your wins will turn to losses if you do not have a trading plan with a clear set of guidelines for your trading activity.
Having a trading plan not only assists you to manage your leverage, but also gives you some well-defined rules for entry and exit of positions. Moreover, it helps you stay focused on your trading decisions. Without a plan in place, you are almost certainly more vulnerable to the influence of your own emotions, which is never a good thing.
Sticking to your plan, should ensure that you maintain discipline whenever you are trading. The plan should include recording all your trades, profits and losses. and having frequent reviews to tweak and improve your trading strategy. You will thereby be enabled to consistently track your performance over the long term.
Mistake no. 2: Neglecting risk management
Simply put, risk management involves controlling your level of risk per each single trade. Seasoned traders understand that it takes only one over-leveraged trade going against you, to wipe out all your winnings.
First, you will need to calculate the maximum amount of money you can afford to lose on any one trade. A simple way to do this is to never risk more than 1% of the amount in your trading account on a single trade. So for example, if you are trading with a $15,000 account, you should consider risking no more than $150 on any one trade.
Another simple risk control step to take is to always set a stop-loss to limit your losses. And keep in mind that taking on more leverage does not guarantee you will make greater returns.
Mistake no. 3: Failing to cut Losing positions
It may sound counter-intuitive, but this mistake can be devastating. Most traders will become emotional about getting their trades ‘wrong’, and will hope for a turnaround when the charts head south. A highly emotional state is very negative from a trading perspective. Hence the automatic use of stop-loss is so necessary.
Although the reverse situation of taking profits far too early on a winning position is equally common, it is not nearly as damaging to your financial health as failing to cut losses.
Mistake no. 4: Over-obsessing about short term movements
New traders will frequently spend hours staring into their screens, because they do not want to miss any opportunity to make a profitable trade. Having a stop-loss in place will help you overcome this unhealthy and ultimately unhelpful trading behaviour. Day-trading is hard to sustain over the long term, and trading in a more relaxed manner can be ultimately more rewarding.
Mistake no. 5: Averaging down
Averaging down may be a useful strategy in fundamental stock investment, but traders in the forex market should be adopting such a strategy very infrequently, or not at all. The main problem with the strategy is the potential to double down on losses, which can be especially damaging when leverage is involved.
Mistake no. 6: Failing to keep on top of market-moving news
Forex traders need to focus on macroeconomic news, which tends to have an outsized influence on currency trends. Most Forex traders employ technical indicators to help them make trading decisions. However, currency markets can easily change direction due to decisions and announcements by central banks and governments, and surprises coming from the release of key economic data.
These days, it is a fairly simple process to have an alert or tracking function incorporated into your calendar or trading platform – use it!