Forex trading is a wide field for mistakes of a different kind but the quality and criticality of them is the thing that decides a good Forex trader from a bad one. In this article, we have put together the 5 most common mistakes that a beginner should avoid in Forex trading.
According to harsh statistics, only 10 – 15% of traders earn a stable income, while the rest often fail and lose their deposit. And the point is not that someone owns the secret of success and someone doesn't.
It is just because some traders are aware of the dangers that await them, and try to avoid them, while others are irresponsible for trading. Want Forex trading to be profitable? Then remember what prevents the trader from achieving success.
1. Bad money management
The success of the trader is not only in the ability to increase the deposit. But also in the ability to save it. Money management is an important component of trading, and here are its basic rules:
- the volume of each transaction should be no more than 2-3% of the deposit;
- stop-loss and take-profit should always be set (if the strategy allows it);
- to work with high-risk assets, allocate a small part of the trading account;
- be able to take a break in time after a series of losing trades;
- diversify funds and use different methods of earning (independent trading, algorithmic trading, investing, etc.).
2. Too big credit shoulder
Leverage is a double-edged sword. On the one hand, it helps traders even with a small deposit to enter the global market and get more profit. On the other hand, leverage proportionally increases not only profit but also the failure of traders, so you need to be very careful.
For example, with leverage of 1:100, in case of success, you will receive 100 times more income on your transaction, but if the transaction turns out to be unprofitable, then the losses will be as many times larger. By the way, many professionals, knowing about such risks, prefer a leverage of 1:2, 1:5, or 1:10.
Another pitfall of leverage is the cost of opening positions. The larger the transaction volume, the higher the value of the point, so when you trade currency pairs with a large spread, then when opening a transaction, your costs can reach 5-6% of the total deposit.
What determines the choice of shoulder size?
Mostly, it is the margin – the deposit that the trader must provide to the broker as a security in case of a possible loss. This is a kind of insurance amount that the broker requires from the trader when it provides the trader with loan funds in the form of leverage. And if a trader begins to trade at a loss, reaching the margin level, the transactions are automatically closed to save the amount of insurance.
Each broker has its margin size, but on average for the leverage of 1:20, a margin of %5 out of the deposit is applied, for a leverage of 1: 50, the margin requirement is %2, and with a leverage of 1: 100, the margin is 1%.
Of course, all the errors listed are not a complete list of the “enemies” of a successful trader, but these are the most typical causes of failure. Successful Forex trading is available to anyone who is able to avoid these dangers and will confidently go to their goal.
No matter how trite it is, but this is the main reason for most failed transactions. As soon as the trader loses self-control, gives in to emotions, and allows himself to deviate from the rules of his own strategy, he immediately makes a mistake.
The desire to recoup after failure, greed, rush, fear, excitement – these are the main enemies of the traded. Alas, there is no magic tool to trade without these harmful emotions. Only willpower, discipline, and determination will help you with this.
4. No trading plan
A trading algorithm is a clear sequence of actions. A trader needs to draw up a plan that indicates a trading strategy, according to which he works, what assets he trades, what time, under what conditions he opens, and closes deals.
The algorithm also needs to take into account the risks of Forex trading where stop orders are placed, what is the volume of each transaction such as the questions: “Where to place stop-loss?, What is the volume of each transaction?, What is the maximum drawdown per day or week?
Even an experienced trader (not to mention beginners) can find it difficult to compose an algorithm on their own, so you can and should use professional help.
5. Excessive emotionality and excitement.
Emotions in general and a healthy part of the excitement is what often drives a successful trader in principle. The instinct of a hunter, if you like. But everything has its reasonable limits and excessive emotionality is no less dangerous than its complete absence.
Forex trading is a game of numbers, which is often influenced by external factors. Traders have absolutely no control, for example, over governments. However, there are times when the market will work in favor, and sometimes you will lose.
In addition, keep in mind that there are many experienced professionals in the field of trading, and none of them will sit and watch you go with your money. So don’t let your emotions guide your decisions.
Instead, make logical choices based on variables that affect your trades. In other words, the only way to defeat professionals in their game is to do what they do. That is, make sure that you have and follow the trading strategy, and o not blindly enter the transaction.
In conclusion, I would like to say that it is natural to make mistakes, and you should not be afraid of them. You will never feel all the sharp corners of the trade until you by yourself would step on this rake. Making mistakes in trading, analyzing their causes, and correcting them, you will turn from an inexperienced newcomer to the financial markets into a real professional trader who knows how to trade and make a profit.
“Everything that doesn’t kill me makes me stronger, which if transferred to trading, may mean that making mistakes you will get bumps that will give you tremendous experience and will teach you how to effectively trade in the financial markets.