Five Fixable Mistakes That Every Trader Makes
09/15/2014 9:00 am EST
When it comes to trading currencies, one mistake could cost you considerably, so Casey Stubbs of WinnersEdgeTrading.com outlines the five of the most common—but also easily fixable—mistakes that new forex traders often make and how to avoid these trading pitfalls.
Everyone is entitled to make a mistake once in a while, but when it comes to trading currencies, one mistake could cost you your entire investment capital. In some instances, it is the repeating of the same mistake multiple times that will cost you in the end. It has been said—and worth repeating—that a smart man will learn from his mistakes and a wise man will learn from others mistakes. When it comes to forex, you want to be both smart and wise.
Not Jumping Ship
This is probably the most common mistake I have seen with new traders and the most frustrating. There is absolutely no logic in holding on to a losing trade. If you weighed your risk to reward ratio and placed your stop loss order accordingly, why would you go against that?
The trend is not likely going to make a sudden shift in direction in your favor. And even if it does, it will have to continue to do so, first to your starting point if you want to at least break even, or beyond if you are still determined to make a profit.
You are wasting your time and money waiting for this to happen. Pull out and you can invest that money and your energies on a better opportunity.
It comes down to your emotions and not wanting to admit defeat. The end result, of course, being having to admit to an even bigger defeat a few more pips down the line. There are two main rules of forex to abide by if you want to avoid this common error: don’t risk more than you can afford to lose, and don’t let your emotions control your trades. Follow those, and you will always jump ship when your forex boat is not taking in any profits.
Jumping from Plan to Plan
Patience is a virtue that many traders lack and yet need if they want to be successful. You are encouraged to study charts and plan your strategies before making any moves. One or two trades into your strategy and the results are not as lucrative as you expected so you try something else, without really giving it a chance.
A strategy needs time to develop 100% before you give up on it and move it. You will have to learn how it works, or how it didn’t by looking back to see what indicators you might have missed. Before you can truly dismiss your strategy, you should give it some time to develop and tweak it as you go.
Jumping around from method to method, plan to plan will only cause you to lose focus and inevitably money. Keep your expectations reasonable and allow your plan to fully develop before you give up on it. Once you have totally mastered one, you can then apply your new knowledge into developing the next.
NEXT PAGE: Three More Easy-to-Fix Mistakes|pagebreak|
Trading Multiple Currency Pairs
Just like with your plan, you need to become the master of one currency pair before you should move on to the next. New traders have a habit of looking at the movements and then trading a handful of different currencies that they are not yet familiar with. There can be dozens of factors that affect a currency’s movement that only time and experience will teach you. Pick a pair like the EUR/USD to start and learn everything about every little burp in the market that can make it move.
Be patient and give yourself an ample amount of time to learn the ins and outs of each currency pair before you try and conquer a new one.
Using Too Much Leverage
The lure of leverage can be a big trap for a new forex trader. To avoid this mistake you must first start with your choice in a broker and understand the importance of having one who allows mini-accounts. This will give you access to leverage at a smaller scale and help you fight any temptation to use too much.
If you don’t know, leverage is a type of loan that a broker will extend that helps you hedge your trade. This is not a free service, nor does that debt just disappear if you are unfortunate in your trade.
Set yourself a limit to how much leverage you are allowed and stick with it. One false move here can wipe you out for good.
You are likely to make so many little mistakes in the beginning that it will be hard for you to remember them all. Unless, of course, you keep them written down in your trader’s journal. Having a journal and actively using it everyday will make a big difference in the way you evolve as a trader.
Here you can record all of the indicators that you used to make your trading decisions, what your thinking was and how you measured your risk to reward ratio. You can even go ahead and note the weather if you think that made any difference in the way that you traded that day. This is a personal journal meant only for you, so that you can learn not just from your mistakes, but from your successes too.
Every trader will make all of these mistakes at some point in their career, whether it be losing faith in a plan too early, or neglecting to write down why they lost faith so fast. Forex trading requires skill, but above all else you need to be patient and diligent. If you can achieve those two traits, the skill required will come naturally.
By Casey Stubbs, Founder, WinnersEdgeTrading.com