The 6 Most Common Forex Trading Mistakes
The forex market offers an exciting opportunity to trade the world’s largest financial market. Instant forex funding means that it’s accessible to anyone with a small amount of capital and a computer. The markets are open virtually 24/7, so it’s also possible to fit trading in around your day job.
There is a lot to learn if you want to become a successful trader, and it takes time, dedication, and patience. Finding a strategy that works for you can be a process of trial and error, and in fact, even experienced forex traders are always learning from mistakes and adapting their techniques to improve their results.
However, there are some common mistakes which a lot of newbie traders make, and sometimes even more experienced ones. Here are the biggest forex mistakes and how to avoid them.
- Not doing enough research
Forex traders need to be able to read the financial markets to inform their decisions. Beginners often underestimate the scale and complexity of this task. The good news is, there is a wealth of information online so you don’t have to spend long hours slogging through a college course to become reasonably well informed.
You may have heard of fundamental analysis, which is all about learning how macroeconomic events influence the forex markets. This is never more important than right now, when the financial world is experiencing a lot of change and turmoil. Follow the economic data releases for events such as interest rate rises and inflation levels.
Bear in mind that even if you are not including the US dollar in your trading pair, it is the currency that has the biggest impact on the forex market by far. Therefore, expect any new data relating to the US to lead to movements in the direction of trade, either positive or negative.
Keep on top of current affairs and geopolitical events, such as wars, natural disasters, pandemics, and so on. In fact, any social, political, or economic news which is likely to affect supply and demand of currencies and commodities should be carefully monitored.
The seasons can also have an influence, as trade for consumer goods picks up in the run up to December, while fuel tends to be more in demand in the summer when people take their holidays. If there has been unseasonable weather, such as floods which have affected the harvest, then the currency price of the affected countries may go down.
It is also important to understand some technical analysis tools to help you identify key price levels at which to enter the market or sell a currency pair. To do this effectively, you should learn how to interpret line charts and bar charts at the very minimum.
This will show you the historic price pattern of your currency pair within a given time frame, and enable you to understand the probable future direction of the trend.
- Not putting a strategy together
Failing to plan is planning to fail, as they say, and this is never truer than with forex trading. It is imperative to have a clear strategy together before you begin to trade, otherwise you will be doing little more than gambling. The trading plan will be individual to you, depending on your financial situation and profit targets.
How much time you have to devote to your trading will also influence your approach. For example, if you are fitting trading in around your day job, for example, then you may want to avoid short term trading, which demands close and intense periods of concentration. Long trading over a period of weeks or even months may be more manageable.
You should also have a clear entry and exit strategy, to prevent the temptation of hanging on to a losing trade too long, or exiting from a profitable one too early. Every move that you make should be informed by your plan, which in turn should be backed up by a daily trading routine.
A solid strategy helps you avoid building up unrealistic expectations, and clarifies your achievable goals and profit targets.
- Not knowing your risk tolerance
Many new forex brokers make the mistake of starting to trade with large amounts in the hope of maximising profits. However, it is crucial to manage your finances responsibly, so that you are not risking the loss of more money than you can afford.
Be honest about how much you can comfortably risk on each trade without incurring damaging losses to your personal finances. This will depend on how much capital you have available to put into your forex account, which won’t affect your ability to pay your mortgage and cover all your other essential outgoings.
- Not using a demo account
It is understandable that if you have got a strategy together and you have spent weeks or even months doing careful research into forex trading, you want to dive straight into live trading. However, this is a serious mistake. Even very experienced forex traders will use a demo account before they test a new strategy, or a new platform.
Part of the reason for this is simply to help you understand how the trading platform works, and that you know your way around the layout. This will make you faster and more confident, should you have to make fast decisions in your live trading. The last thing you want to do is delay making a sale because you can’t find the right feature to use.
It will also let you test out your strategy for any flaws, and allows you to make the necessary tweaks and changes. You can gain experience of setting stop losses, gauging what size of trade to make, and find out how well you perform under pressure.
- Not understanding trading psychology
Forex trading can bring about highly charged emotions in even the most placid and analytical of people. This is because you will be walking a tightrope between fear of losses, and greed for more profits. Along the way, you may experience excitement, hope, anger, disappointment, and any number of other powerful and primal emotions.
While it is not possible or desirable to rid yourself of these emotions, it is important to understand them, and how they affect your trading decisions. For example, fear can cause you to exit a trade too early, and greed can drive you to a rash decision which had no basis in research or analysis.
A few successful trades can lead to overconfidence, which may make you feel able to abandon your strategy and trade on ‘instinct.’ Whatever myths are perpetrated in film and media, successful traders work by careful risk management, and not at all by some magical intuition which gives them special powers.
On the other hand, the sting of failure after a loss could spur you on to make another trade as soon as possible, to make up your lost money. This is known as revenge trading, and it is a very dangerous road to go down. If you have had a bad failure, pause and try to work out what went wrong before you make your next move.
If you have a naturally impulsive personality or a quick temper, it may help to learn some mindfulness techniques to help you centre yourself in stressful situations. These involve listening to the rhythm of your breath, and focusing on the present moment, so that you can view your emotions in a detached and controlled manner.
- Not keeping a trading journal
If you are not regularly tracking and reviewing your progress, then you will be missing out on learning opportunities. Every mistake, as well as every success, is a chance to review your strategy and find out what works for the best.
For each trade, record your entry and exit points, the currency pairs, and time and date. Note down your motivations for making the trade, such as an interest rate rise which was expected to cause a downturn in the markets, or rising commodity prices for a country which is a major exporter of that commodity.
Note the outcome of the trade, and any other relevant details. Did it go how you expected, or was there room for improvement? This may seem like making extra work for yourself, but it’s a technique used by many successful traders, to help them strengthen and refine their strategy.
Over a few months, you will be able to pick out patterns in your most and least successful trades, which you can then employ to your advantage in the future.
Remember that even experienced forex traders make mistakes, and you will inevitably make some along your journey. The important thing is to learn from each outcome, so that you become a more effective trader as time goes on. Understand your strengths and weaknesses, and adapt the strategy to suit these best.
Your plan will become more refined over time, but it is crucial to get into the habit right from the start of sticking to your plan, and avoid making any hasty and panic-driven decisions. Successful forex traders take lots of baby steps on their journey, and they have exceptional risk management discipline.
This may not sound like the high-octane image you may have had of forex trading but it’s a sure route to success!