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Top Mistakes in Forex Trading
07/17/2015 9:00 am EST
Only a handful of forex traders are truly successful, so Haresh Menghani, at Admiral Markets, gives an overview of the most common mistakes traders make, since it's important to learn what not to do long before you even think about what to do.
Trading in the forex market can be really exciting and with the widespread use of the Internet, it is very easy for anyone to open a trading account and start trading in the largest financial market in the World. However, only a handful of forex traders are truly successful as most traders tend to commit similar mistakes that should be avoided while trading.
This article will give an overview of the most common mistakes made by traders as noticed by Admiral Markets.
- Using Extreme Leverage—Leverage in the forex market could extend up to a proportion of 1:500. Although leverage provides an opportunity to trade more money on the market keeping risk capital at the minimum, which leads to a massive gain, it can also amplify the potential to incur significant losses if the market starts moving in an unintended direction. Using too much leverage could result in large losses even if there is only a small move against the trader’s position.
- Overtrading—Trying to grab too many trading opportunities using extreme leverage increases the chances of making a mistake that will resulting an eventual loss. Overtrading can lead to poorly executed trades and gives less time to react, especially when trading losses are piling up.
- Not Having a Trading Plan—Having a pre-determined trading plan is an important key to success, and if followed strictly, it can help in managing the risk involved with forex trading. Trading without any specific plan is like Planning to Fail.
- Using Automated Trading Software—Many traders, especially beginners, tend to search for software, which aims at perfectly predicting future trends. There are a lot of companies earning money by selling such software, but, in reality, they would never give their secrets away...if the software really worked.
- Trading Against the Trend—Short-term trading movements, which could be random in nature, do not indicate the overall trend. Hence, trying to pick the tops and bottoms or trading short-term movements as a long-term strategy in anticipation of a reversal is trading against the trend. You can lose your entire equity with countertrend trading. Remember “Trend is your friend until the end when it bends” and always let momentum guide your trades.
- Trading Without Training or Experience—The most effective way to become a successful trader is to learn trading skills by practicing trading strategies on a demo account. Demo trading is recommended to get familiar with trading and to understand the functionality of the trading platform. Trading with real money with little or no experience (without understanding what it is like to trade live) could increase the probability of committing mistakes, resulting in an eventual loss of money.
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- Emotional Trading—One of the most common mistakes made in forex trading is getting emotionally involved in trading decisions. Emotional trading leads to wrong decisions, which is the reason why traders lose money in the forex market. Trading within a pre-determined trading plan helps in controlling emotions and focusing on long-term goals.
- Lack of Patience and Discipline—Many times traders jump into an impulse trade anticipating trade set-up, without waiting patiently for a set-up to develop and complete or before a trade is triggered. Anticipating trades in this way is like diverting from a pre-defined trading strategy or plan, and even a profitable strategy is useless without discipline. Most traders fail due to the lack of discipline, not due to the lack of knowledge. Learning to be patient and disciplined would drastically improve the proportion of profitable trades.
- Trading Without Appropriate Stop-Loss and (or) Take-Profit—Trading without a stop-loss is like letting your losses run indefinitely and trading without profit targets could quickly reverse a winning trade into a losing trade. Using stop-loss and profit targets is sensible. However, keeping a very small stop-loss could be risky and it is likely to be taken-out by market volatility even in case of a good trade set-up and not having a profit goal or hoping for larger profits could result in giving up the earned profits.
- Trading the News—Trading during the news announcements requires additional trading skills, especially if a trader doesn’t understand the impact of the news. Furthermore, trading after the news announcement makes the news release less relevant since the market would have already discounted the news into the price and the trader might end up initiating a wrong trade. Moreover, while trading during the news announcements, traders might experience slippage and would probably enter a trade far away from the intended price.
- Repeating Mistakes—One thing that must be done to trade professionally and be a successful trader is learning from your mistakes. However, traders fail to take advantage of their mistakes and keep repeating the same mistakes. Always take advantage of your losses and improve your knowledge of the market.
There could be many other factors that might hinder you from becoming a successful trader. However, it is important to acquire the proper knowledge and avoid committing common mistakes before venturing into the field of forex trading.
By Haresh Menghani, Senior Market Analyst, Admiral Markets
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