Trading Forex is risky and this is why people are always looking for a strategy that will avoid making mistakes in Forex Trading. In this article, we will showcase 9 of the most common Forex Trading Mistakes to avoid by following some simple steps.
The forex market can be full of surprises for traders with big dreams and little preparations. It is a part of the learning process to determine common mistakes, and successfully avoiding them can shape you as a professional forex trader.
The forex market involves many risk factors that a forex trader must deal with carefully to make consistent profits from the market. Every forex trader conducts some common mistakes that cost them money and stress. While some mistakes are unavoidable, knowing and avoiding those mistakes is essential to be a professional forex trader.
9 Common Forex Trading Mistakes and Investment Advice
Lack of Education
Lack of education is a common mistake that most forex traders make and lose money. Some forex traders often open or close positions as their guts suggest or may hear tips or signals from someone or somewhere.
Traders often get excited and jump on the financial market without proper learning and practice. It is essential for any forex trader to verify the tips or guts before making any initial investment decision.
So a forex trader must achieve a precise understanding of the forex or stock market through sufficient education and research to avoid this mistake and become a successful professional. Besides, you must understand your personality to find which trading strategy would suit you from thousands of methods.
Technical analysis and fundamental analysis are core parts of financial trading, and investors should focus on finding reliable trades using these methods.
Trading Without A Trading Plan
Trading without a proper plan is another significant mistake that most beginner traders make. Every forex trader needs to follow an appropriate method of trading. If you are trading in the forex market without a trading plan, it is time you should get one by starting to think about why you are in the financial market.
Do you want to be a full-time trader or want to make some extra bucks?
Do you seek to make a career in the forex market or just like the challenge?
Whatever your goal is, a plan always helps to achieve that. Most forex traders lose money for being in the market without proper strategies, so you must have appropriate plans to deal with the market movement.
So what should novice traders do?
First, identify your object from the market. Before taking a trade, calculate how much risk you are taking and what your reward should be. Later on, plan what you will do if the trade goes against you. You also have to manage your emotions if you face losing trades.
Forex traders make another common mistake of opening positions driven by emotion. Novice forex traders get good feelings when executing a series of successful trades and may think they have become professional or mastered the market, which is a wrong concept.
The market may be in your favor for a particular period, or may your forex trading strategies give you winning trades, but there is no guarantee that you will make the right decision every time. There are no issues with getting excited and being confident about trading, but don’t let emotion push trade decisions that you may typically not participate in.
Avoid this mistake and must look at your trades objectively. Does opening that position support your strategy? or maybe what will be the outcome or your reaction if the price goes against your trade?
Not Using Stop-Loss
Trading forex without using stop-loss is similar to driving a car with no breaks. It is too dangerous for any financial trader that can lead you to painful losses. Many forex traders still do not use this useful tool, which often causes avoidable and unnecessary losses.
When you can define your stop-loss level correctly, you can avoid significant losses. You can use a “soft” or “hard” stop-loss for your open positions. For example, you may open a long position, and the price may reach a new peak.
In that case, you can shift your stop-loss level to near the break-even level or above as a part of trade management. Wide or “soft” stop-loss is more suitable for successful traders or professional forex traders with sufficient skill and experience.
Example of stop loss
Taking Too Big Positions
Undoubtedly, every financial trader can have big dreams to make massive profits. Many traders have the temptation to open prominent positions to make significant profits. Money management is mandatory for traders to keep them in the market.
There is no guarantee that the market will move in your trade direction, so opening too big positions can be risky. The market can go in any direction, so if you open a position risking maybe 40-50% of your capital in a single trade and the market may turn against your trade, you can lose a significant portion of your capital. Therefore, every trader should calculate the risk per trade before proceeding to leveraged trading.
Moreover, it can take a psychological toll when you open too big positions related to your capital.
Trading Too Much, Too Soon
Novice forex traders, in most cases, push their limit to get quickly rich. So often, these traders open too many positions or get into the market too early, costing them mental stress and losses.
If you overreact and the market moves against your trades, you may bounce yourself out from the market before settling in. Many new traders blow their first account to be a millionaire within a short period, which you must avoid.
The reality is the marketplace is not where you may throw a bit of money and get untold money in return. It takes lots of patience and skill to achieve that goal of financial industry freedom through trading.
You have to get rich steadily and slowly. Test your capability by demo trading first; if that forex trading strategy works out, invest in the live market.
Misusing leverage or margin trading is another common mistake of new traders. Using leverage makes the financial market more attractive for many products like forex trading, CFD trading, commodity trading, crypto trading, etc.
The leverage concept allows new traders to open prominent positions with their tiny investment amounts. Forex brokers enable changing leverages at any time you prefer ranging from 1:1-1:999. When you are doing good at trading, forex trading skills will increase with your trading experience.
Remember, successful forex traders were the same as you or any other beginners. Many professionals define “leverage” as a double-edged sword that can amplify both your winnings and losing.
Successful trading starts with low leverage; once you get comfortable with trading using leverage, you may increase the leverage gradually.
Letting Emotions Take Control of You
Many financial traders lose money by letting emotions take control over trading decisions. Emotional trading can be the reason that you may open a position by guessing or may lead you to revenge trading.
It is a significant mistake that every trader must avoid in making money consistently. When you let emotions control you, it leads traders to make wrong investment decisions. Revenge trading is another result of emotional trading that often brings more pain than any gain.
So it is better to avoid letting emotions take control of you in your trading journey. For emotional trading, you can turn your profitable trades into unsuccessful trades.
Choosing Wrong Broker
The selection of a good forex broker is a vital part of trading. Many traders lose money due to choosing the wrong brokers. Brokers are an essential part of trading as it links the market to traders, allowing them to purchase bonds, currencies, indices, commodities, stocks, etc.
A wrong broker can dump your investment into a mess, so any trader should conduct sufficient research when choosing a broker before making a deposit. They can mislead you into making wrong decisions, not being available as they should be, or failing to provide desirable investment services.
So, it is essential to conduct sufficient research while choosing the broker as an assurance that your money is in safe hands.
Moreover, good brokers help traders to be professional by providing educational content and webinars. Again, avoiding the wrong brokers can save you from hassles with trading, withdrawals, or transferring funds.
So it is better to research and comparison while choosing your broker in terms of fees and other factors.
Finally, every trader makes common trading mistakes, which are the top nine mistakes traders make while joining the financial market. Many other mistakes can be harmful to traders.
We suggest avoiding all those common trading mistakes and spending more time researching to prepare yourself for being a professional. Learn to accept the loss and don’t always follow the crowd or tips for making trade decisions. When you can identify your mistakes, it becomes easier to overcome.
First, you need to note your mistakes, review our list, and write it down whenever you make one. When you can determine the negative things of your trading, it will become easier to avoid them.
What Forex Trading Mistakes To Avoid When Trading Stocks?
Most of these forex trading mistakes in our list carry over to stocks, but there are other common mistakes to avoid when trading stocks. These include buying low-volume stocks, trusting stock promoters, and trading difficult and unclear chart patterns.
What Should Be The Risk-Reward Ratio Of Forex Trading?
Traders usually express the risk-reward ratio as a figure. While the number varies, most successful traders or professionals recommend having a risk ratio between 3:1 and 2:1 to determine a worthy investment. When the risk ratio is 2:1 means you are risking $1 and expecting $2 in return from that investment.