The foreign exchange gives everyone a chance to succeed. Skilled traders enjoy a steady income, but spectacular results take time. Forex is not a ‘get rich fast’ scheme. It is a special field of financial expertise, which rewards those who learn and hone their strategies. Sadly, newbies keep slipping into the same pitfalls. Learn about the most common types of Forex trading mistakes.
These blunders may seem ridiculous when you read about them. However, as humans are irrational creatures, we make the most stupid errors on the spur of the moment.
This does not mean that experts are infallible, either. Even gurus can fail once in a while. Still, the more you work, the less likely you are to commit these five deadly sins.
1. Forgetting About Stop Loss
Risk management should be every beginner’s mantra. The currency market is swayed by multiple factors, from domestic fiscal changes to international diplomacy. While forecasting is possible, force majeure does happen. If the market moves against you and you have failed to limit the damage, there is no one else to blame. This deadly sin is one of the most common mistakes in Forex trading.
Forgetting about Stop Loss is a fundamental flaw that can prove costly. Why risk having your account wiped? Of course, it is possible to make profitable trades without Stop Loss, but these cases should be perceived as exceptions and good luck. Do not let your sloppiness develop into a habit. After all, setting a Stop Loss costs you nothing. It is a free insurance policy!
If you are generally forgetful, take stock of your shortcomings. First, analyze the situations when you failed to use Stop Loss. Why has this happened? Most commonly, participants get swept up in the excitement of trading. For instance, you spot what you think is a unique opportunity and rush to seize it. This is natural human behavior. We are not perfect – strong distractions may cause all sorts of harm.
On the other hand, forgetfulness may be a sign of bigger issues. If you generally base your decisions on emotional impulses, you are doomed. Emotions are every trader’s arch enemy. Decisions that are generally irrational pave your road to failure. And in the realm of currency trades, failure is expensive. It is crucial to have a controlled approach to the market. Your foundation must include cold facts and figures.
So, what should you do given the fast-paced nature of trading? Begin by slowing down. Analyze your own decisions and motives behind them. Keep a trading journal. The idea may sound old-fashioned, but it is extremely powerful.
Evaluate each trade in terms of its general parameters (size, prices, volatility, etc.) and describe your decision-making process. This will allow you to trade mindfully and prevent emotional triggers from clouding your judgment.
2. Reckless Use of Leverage
We cannot deny it: leverage is extremely attractive. Moreover, it is often irresistible. The broker will boost your buying power, enabling you to trade with more than you can afford. The benefits are clear, but the risks are often neglected. However, they rise hand-in-hand with potential profits.
This is exactly how the leverage must be perceived: as an extremely risky tool. Newbies are advised to steer clear of it until they gain sufficient experience. A single flawed trade may empty out your account. Thus, leave it to professionals.
There are multiple reasons why rookies should not trade on margin. First, they are only starting their journey. Losing an entire deposit in a flash can be both costly and traumatizing. Secondly, they may lack the knowledge to use the tool properly. Leverage is not suitable for any trade: there are certain moments when it may be applied.
To figure out when to use or not to use leverage, you need to consider different aspects of a position. How likely is a profit and how big will it be? Positions that may deliver 10 pips only are hardly worth boosting. In this case, you will only be increasing risk, which is totally unnecessary.
Finally, many rookies have zero understanding of the basic principles of leverage. Do you really know how it works? The key takeaway should be: avoid leverage until you have gained adequate experience. Otherwise, you will be playing with fire.
3. Digressing From the Trading Plan
Your plan is the cornerstone of your success. If you do not have it or allow yourself to improvise, long-term consequences are dire. A trading plan requires significant amounts of time and analytical effort. However, its existence is not enough. Many newbies abandon their initial course of action, even if they spent days crafting it. This may happen due to external or internal factors.
So, if you have put a lot of effort into your strategy, why abandon it? Your behavior should be motivated by the notion of sunken cost, rather than some impulses. You have already spent hours putting together your plan, so keep at it.
This does not mean your plan must be static. On the contrary, it should be reviewed and revised on a regular basis. If you notice that your strategy brings consistent failures, you should better change it. The key to Forex success is a gradual development.
A plan must be chosen in accordance with your personal style and available resources. Planning facilitates prediction. It is thus a prerequisite for success. You cannot (and should not) trade on a hunch. You may be lucky a couple of times at most.
Now, let’s look into most common motives for digression. Usually, it is the promise of a little more money. The motivation is understandable, but it looks reasonable only in the shortest term. In the long run, your meanderings in ‘uncharted waters’ will be harmful.
Another common culprit is fear. A faint-hearted trader may open a position and get cold feet afterwards. As a result, they back out of their plan. What does this lead to? Most often, such trades are closed at unfavorable price levels. There is a possibility that they will be profitable, but it is only a possibility.
In such situations, traders may also reflect on what could have happened if they had acted otherwise. Unplanned trades may cause moderate or substantial harm. In either case, you will feel frustrated. And what if the market suddenly shoots after your closing? If you had waited just a bit longer, you may have reaped impressive gains.
Such thoughts will be plaguing you for days. Eventually, they may even cause you to quit Forex altogether. Thus, develop a thoughtful plan and stick to it. Only if you find it hard to adapt after a while, and results are unsatisfactory, consider making amendments.
4. Listening to Unreliable Advice
It is always good to have an experienced mentor. A seasoned professional can provide invaluable insights. However, few beginners have this luxury. To make matters worse, they may heed the wrong advice.
Do not take everything other traders tell you on faith. Discussions of trades are normal and often fruitful but think critically. Some things you hear may be inaccurate or outright misleading. This does not mean you will be lied to. However, extreme situations may be misconstrued as generalizations. Not everyone is a talented explainer! Finally, everyone makes mistakes, even experts!
At the same time, a lot depends on personal trading strategies. These differences must be factored in. What works for your peers does not necessarily work for you. Thus, be wary of advisors who suggest a ready-made strategy, claiming it is lucrative in 100% of cases. Analyze the source. What are their conclusions drawn from? Are they trustworthy? And most importantly, how likely are you to fail?
Listening to other people can be dangerous. Do you want an example? Jesse Livermore is one of the greatest Forex traders in history. He has a perfect illustration for this point. Once, he was advised to bet on cotton trade. The move backfired, wiping out 90% of his assets.
Thus, if someone gives advice, evaluate it critically. Weathered traders may be trusted sources, but even they may be wrong sometimes. Test every suggestion before applying it in practice. If your gut is telling you a tip is fishy, it may be fishy. Do not be lazy and conduct your own research to confirm others’ assumptions.
5. Chasing One’s Losses
Some mistakes Forex traders make are entirely due to their psychology. This term describes gamblers who desperately try to make up for their losses. While Forex is not a casino, the same thinking accounts for major trading blunders.
Here is how it works. A trader makes a loss and feels frustrated. Contrary to common sense, he keeps on trading, hoping to gain more on subsequent positions than was lost initially. Will this approach work? Definitely not.
Once you close a losing trade, take time to analyze the failure. This is not a disaster: instead, it is a learning opportunity. What sets winners aside from losers is their attitude to unprofitable decisions. While losers will chase losses, winners will analyze their actions to act wisely in the future. You should prevent more losses from happening, instead of trying to remedy them straight away.
Losers do not do this. They increase the size of their positions without any prior analysis. As a result, they lose even more. This is a serious problem, and it may be exacerbated with leverage. Eventually, you start acting like an addicted gambler.
Consider the example of Nick Leeson. He worked as a derivatives trader for Barings bank in Singapore. In the early 1990s, he made repeated losses. Instead of stopping, he tried to conceal the damage and make up for it in secret. As a result, the damage ballooned, and the bank went bankrupt. Now, Nick is mentioned in trading textbooks. But who would want this kind of notoriety?
Chasing losses turns trading into gambling. This means the house will always win, leaving you with nothing. Have you ever found yourself trying to cover losses as soon as possible? This is a sign of a dangerous behavioral pattern.
Chasing losses is not a strategy. Instead, it is an impulsive reaction to undesirable results. Strategies, on the other hand, rely on indicators, price history and other objective data. They are used for informed and unbiased decision-making. This must be your goal.
Putting It All Together
Knowledge of typical errors is a vital part of your education as a Forex trader. It is cheaper to learn from the mistakes of others, rather than pay for your own shameful errors. The next time you trade, analyze your behavior. Are you prone to the same foolish actions?
- Failure to set Stop Loss is no minor flaw. It is particularly silly, as the tool is your free insurance against drastic losses. Learn to identify the best points for Stop Loss and apply it to every trade. This must become your habit.
- Leverage is appealing, but it is also a double-edged tool. It is not relevant for every trade, and risks are boosted along with potential profit. Every trader dreams of massive returns, but do not let this desire cloud your judgment. Steer clear of leverage unless you are a seasoned professional.
- Take time to develop a meticulous trading plan. Whatever happens on the market, this system must be followed religiously. Sometimes, you may want to make just a little more profit by straying away from the initial strategy. Do not do it. However, if the results are consistently unsatisfactory, you may want to amend the strategy.
- When given advice, evaluate the source. Is it worth trusting? Every trader has their own strategy, and there are no universal recipes for spectacular profit. Finally, if you feel the urge to chase losing trades, think twice.
These should be your key takeaways from this article. Forex is not gambling. Your financial results depend on the soundness of your strategy, and the depth of critical thinking. Do not let stupid mistakes hamper your progress. Trade mindfully, and profits will become steady.