Introduction Forex Trading
Trading in the forex market would unanimously agree on the fact that finding long-term success is a challenging task. Even experienced traders have to work hard to retain their success and make consistent profits. We can already guess how hard it will be for a complete beginner trying to break into the volatile and unpredictable currency market. Being a beginner means mistakes are bound to happen no matter how much you prepare in advance. But these unavoidable mistakes teach valuable lessons that can make you a better trader in the future.
Still, you should avoid some common mistakes that cost you a lot as a first-time trader.
So, let’s have a look at the worst trading mistakes that can be prevented.
Trading Without A Definite Plan
Trading in the frequently fluctuating forex market has its fair share of difficulties to deal with and you will feel overwhelmed at times even when you have a well-defined plan to follow. So, trading without a plan can give you panic attacks as going with the flow is not the best approach in forex trading. There has to be a structure and rule-based system as the risk cannot be overlooked. Planning and precision will be the prerequisites that protect you from this risk and put you in a better position to pass the challenges.
That’s why you need to devise a personalized and precise plan along with a solid strategy to find trading opportunities by forecasting potential price changes. Since the exchange rate fluctuations determine the prices of forex currency pairs and different currencies have different values, the standard unit of measurement is Percentage In Point or Pip. Hence, pip calculations are important to create your trading plan and you can click here to use a pip calculator to estimate pip value for your trades and plan your trades based on that.
Just having a plan is not sufficient as you should also follow it well throughout your trading journey. Some traders do have a plan in their mind but it is very vague and confusing. The chances of succeeding in forex with an unclear and ambiguous trading plan are slim if not zero. When your plan is not rule-based, you will not be able to follow it well. Deviating from your trading plan is a grave mistake in itself and many beginners commit it as they become greedy or emotional while making trading decisions.
Breaking The Rules and Over-Trading
The second common mistake that many forex traders make is breaking the rules that they have set to manage the risk of trading. You have to remember the fact that trading is inherently risky and you must set some rules to limit the account drawdown by minimizing the potential losses. But beginners who lack discipline end up violating these rules when they are under stress. For instance, traders are advised to only open a small number of trades regardless of their strategy or trading style.
Even scalpers who enter and exit multiple trades in a few minutes should decide the maximum number of trades for a day in advance and stop trading once they reach the threshold. If you go beyond this limit, you will be exposed to bigger risks and may end up overtrading which causes huge losses. Hence. You should avoid placing additional trades even if you are going through a winning streak. You must not give in to the FOMO even if the market looks favorable.
Another mistake that we can connect with overtrading is not closing your winning trades in time as you keep them running to make more profits. But you might lose the profits that you already earned if the trend reverses later on. To avoid this, you should place a take-profit order after determining the potential profits of a trade with the help of a profit calculator. By doing so, you can safeguard the profits even if you are not there to exit the winning trade positions manually.
Failing To Cut Losing Trades Early
I am sure that no trader wants to increase their losses by intentionally placing a trade that you are bound to lose. Then, what is the point of holding onto a trade position that you have already lost? It’s simple logic to close a losing trade right away once your market analysis becomes invalid as the price starts moving against your expectations. But many traders become irrational as they keep the losing trades open to break even if there is a favorable market moment later on.
However, most traders regret this decision as it only results in unwanted losses. They realize they could have saved a lot of money by simply closing the trade at the right time. This is why all experts recommend placing a stop-loss order to stay on the safer side even if you lose the trade. A tight SL will surely reduce your losses to a great extent by automatically closing the trade when the specified price is reached but don’t place it too near to the entry price.
You won’t have to worry about the market turning against you when you are already prepared for the worst-case scenario. But another tip that you should follow while utilizing stop loss orders is trading with a risk/reward ratio. Because a trade being high risk without a high reward is not worth it. So, make sure that the trades you place align with your risk/reward ratio and risk tolerance. After that, place an SL to cut the losses early.
Being Over-Dependent on Market Analysts
When you are new to the market, it is natural to follow some experienced traders and expert analysis to get valuable insights about the market situation. The market analysts will share their views and opinions about the current market scenario. Some of them also share trading signals for buying and selling based on their analysis. It gives you a sense of direction in the initial phase of your trading career but you should not solely depend on these analysts for making trading decisions.
You must learn to analyze the market yourself and choose the best course of action based on your strategy. Applying your logic is important to make calculated moves based on your risk appetite which might be different from an analyst or expert trader. Just ensure you don’t make any mistakes during technical analysis as misinterpretation and miscalculation are quite common.
You should be using tools like technical indicators for confirming the analysis and to avoid manual errors in calculations, you can try out automated forex calculators that perform various functions to provide accurate information. So, instead of blindly following an analyst, follow the price action and also keep yourself updated about economic events by using an economic calendar. Trust the charts and try trading yourself.
Bottom Line
It is not possible to avoid mistakes in trading. It doesn’t matter how careful you are, mistakes will happen causing losses. Yet, you should not give up trading just because of self-doubt and fear of failure. No mistake can ruin your trading career as long as you can fix it in time. Still, we believe in ‘prevention is better than cure’ and trying to avoid common trading pitfalls leads to better results. Because you will be more cautious and will make conscious efforts to bring the best out of you.
