Many people choose to trade foreign currencies in the market because of the number of opportunities that they provide. Considering that the Forex market is the largest and most liquid financial market, there is no shortage of how many chances you can encounter in possibly expanding your profit significantly.
However, with great opportunities often come great risks where making mistakes can cost you to lose a portion of your profit which can lead to greater losses in the future. When a person is not careful, these mistakes can increase over time which could ultimately get in the way of achieving your goal. You have to learn to trade smart so that you can succeed.
To get a better understanding of this idea, here are the top mistakes that every novice Forex trader makes:
1. Diverting from the plan or not having one in the first place
Every trader needs to create a plan that lists out their goals, strategies, and the different steps they need to accomplish by the end of the day. Having a mentor could help you with some great pro money tips or with creating a good trading plan you can easily execute. Here are the advantages of devising a strategy:
- Having a plan allows you take an established course with calculated risks
- If you’re a beginner, a plan could act as guidance so you don’t make expensive and critical mistakes in your trade
- Having a plan will make you more confident in your trades
- Establishing a plan enables you to weigh in your options and identify what are your strengths and weaknesses as a trader.
Diverting from a plan or not having a plan is one of the worst mistakes a Forex beginner can make because you will be going in blind, and could end up losing a lot of money. Regardless of whether you are new or relatively experienced, trading on the fly and heading to a live trading session without a plan can result in unexpected losses.
2. Not using stop-loss strategy
One of the most essential parts of creating a daily trading plan is to decide on the strategy you are going to adopt and stick with it. Most strategies should include an offense and a defense where the latter serves as a means to reduce and manage potential risks. One of the most popular forms of risk management is performing stop-loss orders which prevents you from incurring more losses later on. Beginners often forget to use stop-loss as a means to prevent more losses in a decline.
3. Using too much leverage
Many people find trading foreign currencies exceptionally attractive because they can trade on leverage. This method provides traders the opportunity to trade on large positions while starting out on a relatively small capital. The goal of leverage is to make the most out of a trade by putting in as little as possible which ultimately doubles your profit. However, trading on leverage can be seen as a double-edged sword because while the profits may be doubled, so will potential losses.
One solution is to scale leverage gradually instead of all at once so that you won’t be overwhelmed by the large amount of capital that you suddenly have.
4. Taking on too many trades
This often refers to the amount of trades a person does within the span of a day. The win-loss ratio of which identifies your number of wins over your number of losses which ultimately decides on whether or not your strategy was a success. When trading Forex, first-timers should limit their amount of trades to about a handful so they can keep a close watch over their positions. Otherwise, taking on too many trades can result in creating more losses later on.
5. Letting emotions get in the way
One of the most crucial aspects you need to remember about being a trader is that your humanity could count against you. Human decisions and tendencies could get in the way of making objective choices. Here are some of the problems that may obstruct your trading decisions:
- Stress from losing too much money
- Pressure to gain back money lost resulting in hasty decisions
- Tiredness from lack of sleep
- Impatience to take a win and end up making big mistakes
During trading periods, traders often encounter tense moments when a market position becomes too volatile or risky. This can lead to emotional trading which more or less comes with several risks traders often regret later on. To avoid making this mistake, experts advise everyone to keep a cool head and stick to their plan before making any rash decisions.
6. Not taking down notes
Experts believe that traders should keep down notes on their trading sessions they can identify key mistakes and to see whether or not they can make improvements on their weaknesses. The reason why it’s so important to take down notes is because successful traders in the market are hyper-aware of their mistakes and often learn from them as they continue on to do bigger and better things.
Continuous Learning is Important
Traders should be aware that when it comes to trading foreign currencies, there is about an equal amount of both opportunities and risks. While the latter cannot be avoided entirely, there are instances where beginner mistakes may be the root cause of why you aren’t succeeding in the market as you should. When one becomes aware of these mistakes, they can reflect on their own trading experiences and determine which factors they need to change first so they can become better.
To do this, it helps to keep down notes while also investing in continuous education. The latter of which refers to constantly reading tips and tricks from experts while also enhancing their own trading skills on demo accounts. This enables them to trade with ease and to not second-guess themselves even they are confronted with tense and volatile market conditions. Regardless of whatever error you’ve made, always use it as an opportunity to learn so you don’t make the same mistakes again.