Forex trading is a huge international market. And trillions of dollars get exchanged every day. Many of the traders make money from it. But a large percentage of traders fail to succeed. Let’s discuss the mistakes that newbie traders make in the market.
1. Starting to trade without a plan
- Most of the new traders enter the fx market without any plan.
- They don’t have the required knowledge and follow only their curiosity.
- You might look upon the market as an investment option or a second source of income.
- But, you should have a plan to take your trading and should not treat it as gambling.
- Following investment-advisors is an alternate option.
- But to have independence, a newbie trader should have his own trading plan.
- He should prefer a trading style like scalping, intraday, swing, or long-term trading.
- The trader should choose the analysis method, whether it is technical or fundamental.
- He should select the right trading sites and should adapt to the right risk management technique.
- Following a trading plan helps you to take out the trading systematically, and you could make informed decisions.
2. Trading without preparation
- A trader should prepare himself for forex trading before entering the market.
- You should analyze a large number of graphs and should be able to sense the movements precisely.
- You should observe the price movements and determine support and resistance levels.
- Timeframes are important to observe and you should try to find different patterns on charts.
- If you are an investor, technical analysis is also helpful for you to open or close a trade at more favorable levels.
- If you are a swing trader, you have to follow the news and its impact on trading.
- The fundamental analysis is helpful for the medium and long-term investors.
- Further, understanding the important economic indices of the whole world market would be more helpful.
3. Trading with overconfidence
- Initial success in forex trading gives a false sense of easy money-making.
- If a trader has earned a large amount, it would create more complacency.
- Consequently, a newbie trader would believe in all price movements and try to make benefits every time.
- The overconfidence they gained, makes them skip the much-needed analysis and make trades without any analysis.
- And if the position gets reversed, they would try to make up for the losses and would end up with more losses.
- Relying on some expert’s opinions and trading confidently is also not advisable. Check it for the suitability of your way of trading.
- Similarly don’t rely on various sources. Learn to do systematic trading with informed decisions.
4. Not trying to fix losses
- If the price movement is in a negative direction, you have to fix your loss in time.
- It would increase in the amount and become uncontrollable. Eventually, you have to exit from trading itself.
- When you sense the change, it is better to limit your losses instead of waiting with hope for the movement to go in a positive way.
- Similarly holding an unprofitable position with the hope of, it returning to the initial value is also not advisable.
- Placing a stop order at the time of opening a position itself is the best way to prevent your losses.
5. Going for high risk
- In trading, the higher the risk, the higher is the earning potential.
- But you should not be lured by the profit in the air because it has potential losses also.
- And so, experienced traders usually allocate only 1 to 5% of total capital for one position. In some cases, professional traders try to increase small capital by using maximum leverage.
- It is acceptable in this case and it is a way of trading. But in a normal period, while you try to increase your capital, even a small miscalculation could lead to depletion of the capital.
- On the whole, getting good returns for a long time with a low level of risk is a good strategy to follow.
6. Going against the trend
- Very often, the market is dominated by upward or downward movement.
- Opening a position against the direction of the trend is risky and a trader should try to avoid this.
- Attempts to catch the reversal of the trend fail in most cases and you can’t make profits in the long run.
- Similarly during the downtrend, if you feel that the trend will reverse, wait for the right signals on the trend reversal. Because a downtrend can run for a longer time than you expected.
- A trader has to observe the trends carefully. With experience, you would learn to predict the change of trend earlier.
7. Position averaging
- Buying additional currency pairs at a lower price is called position averaging.
- It is done with the intention of lowering the initial price a trader paid for the currency pair.
- And also, the traders try to sell the pairs at a higher price when the trend reverses.
- But it is not advisable in forex trading. Selling the losing pairs and trading with the stop losses are the right strategies to follow.
- If the losing trend continues, the potential loss will also grow. So, averaging is not a safe technique to adapt.
- Long-term traders can go for position averaging. But, they have to follow the market with complete knowledge.
- Using technical analysis would be helpful as it reveals the market sentiment. And the reason for the price reversal.
8. Unrealized profit or loss
- A trader has to realize that the value of his portfolio relates to the current market price.
- Holding a losing position and not considering it as a loss is not the right thing to do.
- Many newbie traders are of the opinion that a position not yet closed is not a loss.
- Most of the traders hesitate to close a position as they don’t accept the fact that the market moves against their prediction.
- And also various psychological factors like emotions, pride, and stubbornness prevent the traders from fixing the losses.
- It would result in the growth of losses, and the traders have to lose a considerable amount in their trading.
9. Favorite trading instruments
- Many traders mark one or more currency pairs as their favorite trading instruments.
- Having such affinity irrespective of the market study is not the right way to carry your trading.
- Because in the case of the collapse of the value of currencies, it will be difficult to get out of it without losses.
- A promising pair could reverse anytime and become unprofitable.
- And also, by focussing on a particular pair, a trader misses the chances of earning from other pairs.
10. Borrowing money
- Don’t consider forex trading as a salaried job.
- And doing trading by borrowed money causes more harm than good.
- The need to pay interest for the money exerts more pressure on the trader.
- The market doesn’t give you money on a regular basis.
- Instead, it gives you opportunities to earn money when the conditions are good.
- So, using your own capital is a safer way to do forex trading.
We have seen 10 mistakes that traders make in forex trading. If you follow the rules strictly, the chances of your success will increase sharply. Also, learn to treat failures as experience and learn from them. Because winning every time is not a possibility in forex trading.