According to research in South Africa, as a new trader, it is important to know the most common forex trading mistakes so that you don’t make them. Understanding and knowing beginner forex trading mistakes as a beginner trader is very important.
This article will list the most common mistakes beginner traders make when trading stocks, Indicators, binary options, CDFs, ETFs, Forex, and cryptocurrencies like Bitcoin and Ethereum.
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Forex Trading Mistakes Beginners Make
- ☑️The biggest Forex Trading Mistake
- ☑️Lacking definitive education
- ☑️Not using a Stop Loss
- ☑️Risking more than you can handle
- ☑️Holding onto losses
- ☑️Cutting wins too early
- ☑️Moving Stop-loss orders
- ☑️Failing to adapt to changing market conditions
- ☑️Being unaware of news and data events
- ☑️Defensive trading
- ☑️Not applying proper position sizing
- ☑️Two common parameters
- ☑️Micro-managing trades
- ☑️Not keeping good, clean records
- ☑️Tendency to Internalize losses
- ☑️Money Management
- ☑️Being Greedy
- ☑️Ignoring new data releases
- ☑️Adding unprofitable trades
- ☑️Trading using fundamental analysis without technical indicators
- ☑️Choosing the wrong broker
- ☑️Using excessive leverage
- ☑️Unrealistic goals
- ☑️Going ALL in – Risking it all to get it back
The biggest Forex Trading Mistake
Almost everything in life and business requires some planning, and Forex trading is no different.
Beginning as a trader without foresight is akin to constructing a house without approved building plans, making selling nearly impossible when the time is right.
The most seasoned traders always have a plan before they make their first and subsequent Forex moves.
Your plan will consist of a set of rules that govern your trading strategy and, equally important, your money management.
Having a plan or even a set of plans will help you understand and determine the frequency of your trades, when the right time is to enter a trade, how to exit an unsuccessful trade if required, the time it takes to reach your target, and the amount of money you are willing to risk.
Without this knowledge and plan, you will most likely succeed at Forex trading.
Forex trading advice from the experts about plans
- Clear objectives, outcomes, and strategies keep you focused and disciplined.
- It helps you avoid making rash or emotional decisions
- If you don’t have a plan, you are gambling with your money
- Test your plan in a demo account before making any live trading moves
- Adjust your plan as you become more experienced
- Don’t be afraid to copy the strategies of the top Forex traders
If you keep losing, pause trading and revamp your plan
The best advice you will get about Forex trading is to take note of your win rate and risk-reward ratio.
Your win rate is the number of trades you win, defined as a percentage. If you win 60 trades out of 100, your win rate is 60%. You should always keep your win rate above 50%.
A reward-risk ratio is how much you win concerning how much you lose on average. If your average losing trades are around $50 and your winning trades are $75, your reward-risk ratio is calculated as $75/$50 = 1.5.
A 1 ratio ($50/$50) indicates that you lose as much as you win.
Your reward-risk ratio should always be above 1 and, in the best-case scenario, above 1.25. It is possible to profit if your win rate is a bit lower and your reward-risk ratio is higher.
Consider developing strategies that win more than 50% of the time and offer a higher reward-risk ratio than 1.25.
Lacking definitive education
One of beginner Forex traders’ biggest mistakes is not fully understanding, education, and mindset around how the Forex market works.
Some beginners even think having a good trading strategy is enough, although they almost always lose money. Setting up a business without prior sector knowledge is almost the same.
Getting a good Forex education is extremely important. Beginners tend to read a few trading books or articles and then think they can simply start trading. Trading requires practice and consideration, often taking years to master.
Forex trading is a patience game.
How to avoid making this mistake
- Invest in getting the educational tools you will need (study, read, webinars, training)
- Practice in a simulated environment and do not use real money
- Take all the time you need to fully understand the lingo, rules, and strategies
Not using a Stop Loss.
This is another fundamental concept to consider. Trading in the Forex market is extremely volatile. Some changes can rapidly affect the turn of the trade and are in a contrary direction to your initial trade.
You do not want to be completely surprised, so you want to limit your losses as much as possible. Using a stop function, you place an order to sell a security when it reaches a particular price point (measured in pips).
This tactic is very important if you cannot monitor and keep an eye on your trades.
Once you set up a stop loss on your trades, you have already removed much of the risk from that investment.
If you start taking losses on a trade, the stop loss prevents you from losing more than you can afford.
Other reasons Forex traders use a stop-loss
- Eliminates emotions that can impact trading decisions
- You can’t predict the exact future of the Forex market
- Ensure correct money management
- Eliminate the fear of the unknown
- Reduce anxiety associated with a high-risk environment
Risking more than you can handle
Another cornerstone of risk management is developing a strategy for establishing how much of your capital you are willing to risk with each trade.
Most Forex day traders agree you should risk 1% or less of your initial capital on any single trade as a beginner. This means that a stop-loss order closes out a trade if it results in more than a 1% loss of trading capital.
If you have $ 10,000 in your trading account, you can risk $100 per trade.
Most experts agree that risking more than 3% of your account is too risky.
Shaquan Lopez, Owner of SLFX Trading, explains it like this: “If I had $100 to trade and I lost 3%, then I would lose $3.00. On average, in pips, that’s a 30 pips stop loss, which is what some stop losses should average around, depending on the pair traded.
“Now, imagine having 3 positions set at that risk. If all 3 are lost, 9% of your account is gone. That is $9. Imagine risking more than 3% on your account and losing those same 3 trades. Not looking too good, right?”
Here are some other insights:
- The more you lose, the harder it is to make it back to your original account value
- Don’t put yourself in the position to blow your account; rather, put yourself in the position to recover from a loss
- You don’t have to win all the time. Just watch your win-to-loss ratio
- Make sure that when you have a draw-down period, you have enough money to stay in the game
Holding onto losses
Another one of the most common mistakes that beginner traders make is holding on to losing positions for longer than they should.
If you are tempted to hold onto a losing position too long, think again.
Four reasons you should not hold onto a losing position
- Forex trends can last long, and you risk running out of capital in your account.
- Losing affects your psychology – let go of a loss and move on.
- Most individual traders are highly leveraged, and while you may or may not turn it around, your capital will, in all probability, not last that long.
- At the same time as being in a losing position, your capital is being reduced by reductions on your account from negative swaps on some Forex pairs.
Cutting wins too early
There are also reasons why you should not take wins far too early.
Think about it…why do you close winning trades before you hit the take profit level (even while the trade is moving favorably for you), but will you hold your losses tightly?
The worst part of this mistake is that once you have made the trade, you watch it become a winner.
Four common mistakes of closing too early
- Exiting a trade when it reaches the “breakeven” point. Breakeven is not a win; it is a loss because of the commission you pay to the broker.
- Consistently exiting larger winning positions because you fear the market will pivot.
- Exiting a trade before reaching your planned profit target and taking a smaller profit.
- Exiting a standard trade at a partial loss well before the stop loss has been reached.
Reasons we close too early
- Lack of understanding and training about Forex trading
- A recent run of losses affects your psychology: the fear of losing again
- A negative mindset and belief system
- Wrong expectations about trading and the realities of Forex trading
Moving Stop-loss orders
Another mistake commonly made by beginner traders is moving a stop-loss order to avoid being stopped.
This is the same as trading without a stop loss, so you may as well not have had one in place.
What is worse is that it reveals a lack of trading discipline and can open a floodgate of losses.
If taking a relatively small loss based on your original stop loss is not your original plan, then why would you want to take an even larger loss after you’ve moved your stop order?
The reality is most traders will not, and you’ll keep moving your stop to avoid incurring larger losses until your margin eventually runs out.
It’s important to try and move your stop loss only toward a winning trade to help lock in profits, and never move your stop order toward a losing position.
Another mistake commonly made when it comes to stopping losses is over-trading, which comes in two main forms:
- Trading too often and trading too many positions at once
- This is trading too large position sizes relative to the margin you have available. Even a smaller market move against you can be enough to liquidate an overleveraged position for insufficient margin.
Failing to adapt to changing market conditions
Market conditions are always changing, and it’s important to remember that your trading approach needs to be flexible, too.
For example, if the consolidation range is large enough, price consolidation and breakouts (down or up) may lead to solid profits.
You can adapt more quickly by staying flexible with your trading approach and evaluating the overall market conditions in terms of trends or ranges.
If a trending move is underway, a range-trading style won’t work, just as a trend-following approach will almost always fail in a range-bound market.
The best way to get around this is to use technical analysis to highlight whether range or trending conditions are superior.
Being unaware of news and data events
Whether you are a beginner or a veteran trader, it’s important to be aware of what’s happening in the market and on the global stage.
You may see a great trade setup in AUD/USD, for example, but the Australian trade balance report is being released in a few hours, which could negatively affect your trade.
Making data and event calendar readings a part of your daily and weekly trading routine is critical.
Besides knowing about world events, a forward-looking mindset can also allow you to anticipate potential data outcomes and market reactions and factor them into your trading plan.
Defensive trading
Whether you have tons of experience or are a brand-new trader, no one always wins. Every trader will experience or have experienced losing streaks.
After a few losses, you might find yourself starting to trade defensively. You will, therefore, focus on avoiding losses rather than spotting winning trades.
If you are in this situation, step back from the market and examine what went wrong with your earlier trades. This perspective will give you time to refocus your resources and energy when you feel confident enough to spot opportunities again.
Getting impatient and over-trading
The primary reason new traders are attracted to the world of Forex is sometimes the one thing leading to their downfall.
Most beginner traders think that to make decent money in the markets; they should be trading all the time, 24/7, around the clock. They need a get-in, get-out strategy.
Quick trades become the norm. Action-packed trading becomes the fix. But this is arguably the exact opposite of what you should be doing.
Instead of trading the fast-paced three-minute or five-minute time frame, you would be much better off emotionally and financially by trading at higher time frames, such as the two—to four-hour chart.
Slow it down. Think. In the words of Aristotle, “Patience is bitter, but its fruit is sweet.”
Not applying proper position sizing.
Most professional traders understand that position sizing is critical to success in the Forex marketplace.
It’s also usually the difference between trading successfully and failure.
Usually, experts have a very strict parameter setting for position and sizing.
Two common parameters
Fixed fractional model – risks a fixed percentage of the trading account on each trade.
Fixed ratio model: The relationship between the number of contracts being traded and the profits required to increase to an additional contract should remain fixed.
The point is that they have a detailed position sizing strategy that will tell you exactly how many lots or contracts they will allocate to a specific trade.
Beginner and amateur traders usually allocate risk based on how they feel about their recent trades instead of relying on a pre-planned position sizing model. This is a big mistake.
Micro-managing trades
Another essential part of trade management is possibly one of the hardest aspects to learn about trading.
One of the reasons for this is that the moment you enter a trade, most of your objectives will instantly fly out the window.
Your human nature takes over, and you become biased. This means you see what you would like to see.
Humans usually desire to keep monitoring, adjusting, and micro-managing the position until it becomes counterproductive. Sometimes, doing nothing is the best thing to do.
Remember that trade bias is real. It might be hard for some to believe, but it’s better to be patient than to make costly mistakes.
Not keeping good clean records.
Nearly all successful business owners will tell you that keeping and maintaining good records is an essential part of managing their financial affairs.
You need it for tax purposes and to understand the income, profits, and expenses related to the business. The same applies to Forex trading.
Tendency to Internalize losses
Another one of the most common mistakes that beginner traders make is they will equate losses with failure.
This is especially true for accomplished professionals such as Doctors, Lawyers, and other highly successful individuals.
They are used to achieving success and their goals, and when losses occur, their “hardwired” mentality can be overwhelming.
Anyone who enters the Forex trading world must realize that losses are a natural part of trading. Accepting this reality will help overcome any negative emotions of losing potential trades.
Money Management
Things can get highly stressful in Forex trading quickly.
Forex traders are allowed a lot of freedom in terms of leveraging their accounts, and beginner traders often lack money management and discipline.
A combination of these two leads to high-risk, hazard trading.
Key points to ask regarding Money Management
- Am I investing only my risk capital – Can I afford to lose money?
- What is the maximum % of my total investment that I am willing to risk in one trade?
- What is the maximum amount of trades I can have going on simultaneously?
- What is the win/loss ratio that my strategy aims for?
- Does it comply with my risk/reward ratio per trade?
Setting the wrong goals
Consider this: Which is the right way to approach trading? Doing things the right way regardless of whether it potentially results in less profit or doing things whichever way promises more returns.
If making money is the trader’s only goal, especially at the start of their trading career, chasing money soon becomes the reason for failure.
Usually, chasing money means breaking the rules of your specific trading plan.
In rare cases, breaking these rules may lead to a higher yield. However, in the long run, it almost always results in losing your account balance.
This can happen in one of the following scenarios or combinations: overtrading and overanalyzing.
Over trading
Over-trading usually leads to insufficient capitalization, resulting in a trader using high volumes that are simply too large. Insufficient capitalization is the number one problem when it comes to over-trading.
Over analyzing
Traders can make a really good trade, then overanalyze themselves right out of it.
Overthinking and overanalyzing by having too many external influences or overanalyzing the charts causes you to guess a perfectly sound trading strategy second.
This can either result from not having a strategy in place or not having confidence in your strategy because of inexperience. Either way, you want to nip this in the bud quickly so it does not become an ingrained way of trading.
Being Greedy
This is probably one of the most common Forex trading mistakes a beginner can make.
Do not fall into the greed trap. Many beginners assume they can earn up to 20%, if not more, in terms of return in a year.
Realistically, you cannot expect such high returns unless you are an experienced, exceptional trader with extensive education in Forex trading.
Setting the right trading goals and expectations will help you grow into a better and more successful trader in the future.
Ignoring new data releases
Every experienced trader has a general idea of how certain events and data releases affect the market.
If actual economic indicators differ from those forecasts, currency pairs become extremely volatile.
Due to this, almost all traders, even those who choose not to trade with the trends or on the news, cannot afford to do so.
Ignoring the latest trends and news is one mistake that can easily be avoided if you plan your trades well and oversee your economic calendar regularly.
Trying to average yourself
Losses are hard for anyone to deal with, but they are a fact of trading you cannot control.
Sometimes, people like to take revenge on the market.
Usually, revenge trades are 2-3 times larger than the previous trade which was lost.
As a result, this mistake usually costs a lot more, and losses are inevitable.
Consider that your energy and time can be better spent analyzing unsuccessful trades to improve your strategy in the future; revenge trading is just energy-consuming and not smart at all.
Adding unprofitable trades
This is another relatively common mistake among beginner traders. Sometimes, they are so sure about their trading targets that they become blinded by reality.
Consider this: you opened a buy order, but the market decided to move down.
In this scenario, you are so sure that you have made the right decision to increase the size of your position, hoping that the price will soon reverse.
This mistake multiplies your losses, not your wins.
If you have an open position, you lose the ability to make unbiased judgments, and your actions become your downfall.
A similar event occurs when a trader increases their stop loss order during an unprofitable trade so that the trade doesn’t close with a loss.
Rather, stick to your initial decision. Otherwise, you might lose considerably more than you bargained for.
Instead, analyze what went wrong and learn from this mistake so you can use the information to make better trades in the future.
Trading using fundamental analysis without technical indicators
As a new trader, it might become really easy to get caught up in the day’s news or form a bias based on an article you read or some news you saw about the economic conditions of a particular country or currency.
This outlook doesn’t exactly apply when you are day trading.
Your only goal should be to attempt to implement your strategy, regardless of the direction you are told to trade.
Sometimes, bad investments can increase temporarily, and good investments can decline in the short term.
These fundamentals have nothing to do with short-term price movements. When using fundamental analysis, you get caught up, focus on the wrong concepts, and generally form biases.
Long-term biases usually only cause you to deviate from your original trading plan.
Your trading plan and its strategies can guide you in the market and prevent you from taking any unnecessary risks.
Choosing the wrong broker
It is usually your biggest trade when you choose a Forex broker and deposit money.
If this is a poorly managed decision, the broker is in financial trouble, or it is a trading scam, you could potentially lose all your money.
Take the right time to select the right Forex broker for you.
Five considerations when choosing a Forex broker
- What do you want to accomplish?
- What does the broker offer?
- Use reliable sources for broker referrals.
- Test the broker using small trades at first
- Don’t accept offers of bonuses with services
Using excessive leverage
Leverage and margin trading can be amazing tools. They allow you to invest more money than what is in your trading account, allowing you greater exposure to the marketplace.
However, this concept is equally volatile, as it can easily magnify your losses and your wins.
For this reason, excessive leverage can wipe out your trading capital in one moment.
There are many aspects to consider, especially the psychological one, as traders often act irrationally when they take on outsized positions.
When using high leverage, there is a greater individual risk on a single trade, amplifying the psychological pressure and stress of trading.
Unrealistic goals
Many beginner traders start off trading with the main goal of becoming rich as quickly as possible. This goal generally pushes them into making mistakes that could have easily been avoided.
Focus on staying motivated and disciplined and learning to set realistic goals. This will make you a more successful trader.
If you don’t set realistically achievable goals, all that work will be a source of frustration and disappointment rather than a challenging but achievable target.
To set realistic Forex trading goals, use the SMART method:
S: Specific
M: Measurable
A: Attainable
R: Relevant
T: Timely
This method can assist you with structuring and managing your financial goals when trading Forex.
Going ALL in – Risking it all to get it back.
Even if you have a decent risk management strategy in place, there will most definitely be times when you will be tempted to ignore it and take a larger trade than you would normally.
You might have lost several trades in a row, which then pressures you into wanting to earn some of the losses back quickly.
Conversely, a winning streak can make you feel you cannot lose.
There will always be one trade that promises such good returns that you will be willing to risk almost everything on it.
However, if you risk too much, you are making a huge mistake, and mistakes seem to compound.
Traders use stop-loss orders in the hopes of a turnaround.
Many traders also get caught up in keeping their margin, telling themselves it will turn around and they’ll win big.
If you ever find yourself in this situation, stick to your 1% risk per trade rule and 3% risk per day rule.
Resist temptation, stick to your risk management strategy, and avoid going all in or adding to your position. This will help you become a smarter and more experienced trader.
In conclusion
In conclusion, the “Forex Trading Mistakes Beginners Make” guide is an essential resource for new traders, offering practical insights into common errors such as improper risk management, emotional trading, and overleveraging.
By addressing these mistakes, beginners can better navigate the forex market and avoid significant losses. The article encourages a disciplined approach to trading, emphasizing the importance of strategy, research, and emotional control to succeed in the highly competitive forex landscape.
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Frequently Asked Questions
What are the most common mistakes beginner forex traders make?
Some common mistakes include overleveraging, poor risk management, trading emotionally, and not having a solid strategy.
Why is overleveraging dangerous in forex trading?
Overleveraging can lead to significant losses because it magnifies potential profits and risks, making it harder to recover from losses.
How can poor risk management affect your trading?
Without proper risk management, traders can quickly deplete their accounts, especially if they fail to use tools like stop-loss orders.
What role does emotional trading play in forex losses?
Emotional trading, such as trading out of fear or greed, often leads to irrational decisions and poor trade execution, which can result in losses.
Why is having a trading strategy important?
A solid trading strategy helps traders stay disciplined and make consistent decisions based on data and analysis rather than impulses.
How can beginner traders avoid common forex trading mistakes?
To avoid major mistakes, beginners should educate themselves, practice risk management, start small, and follow a well-thought-out trading plan.
What are the critical tools for managing risks in forex trading?
Stop-loss orders, position sizing, and leverage control are essential for managing risks.
Can beginners trade forex successfully without prior experience?
While anyone can start trading forex, success requires knowledge, discipline, and practice to avoid common beginner mistakes.
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