If you are just starting out with forex trading, you can do yourself a big favor by simply avoiding making common novice trading mistakes. In this post, we go over some of those mistakes in detail. That way, you can navigate around these potential pitfalls, saving time and money on your trading journey.
1. Trading without a method.
One of the first big mistakes that a lot of newcomers to trading make is thinking that they can jump right into the market without a trading system or method.
In the worst cases, traders might assume that instinct alone is enough to make them profitable.
But in many other cases, traders do realize that they need to make use of price patterns, indicators, or fundamental analysis. But they apply these techniques haphazardly without being systematic and consistent.
You need to have a trading plan with specific rules for entering and exiting your trades, and you need to follow your rules with consistency if you want to beat the chaos of the markets.
2. Risking large percentages of your account.
Money management is also crucial to forex trading success. Profitable traders will tell you that they risk only a small percentage of the money in their accounts on each of their trades. But what does that small percentage amount to?
If you are thinking that the answer is something like 10%, you are way off base. That is a very common mistake among beginners. In truth, 1 to 2% is more what you should be aiming for.
Yes, that does mean that growing your account will be a much more gradual process than you might have been picturing. But it also means you are a lot less likely to blow all your funds on a bad losing streak.
3. Trading with unsafe brokers.
Every day, there are stories about scammers who have hoodwinked beginning forex traders, robbing them of the funds they had saved up for their trading accounts.
It is not too difficult to avoid these unsafe brokers, however. You just need to take the time to research the company you are thinking about trading with. If you can find out their background and regulatory status, you can confirm whether they are trustworthy.
Want to save time? Check out our recommended forex brokers.
4. Trading without testing first.
So, you have a trading system, and now you are ready to start trading with a live account … right? Wrong.
Beginners leap in sometimes without actually testing their systems—or after only conducting the most minimal testing.
Why do you have to test a system if other people have reported that it works? Mostly you are testing whether you know how to put it to work properly. You also are checking how it fits with your scheduling needs.
Conduct backtesting and demo testing before you fund your live account and begin making real trades.
One of the most common mistakes newbies makes when placing demo and real forex trades is overtrading. This can take a few different forms:
- Making too many trades simultaneously, so it is hard to keep track of them or manage your money with clarity.
- Trading across more markets than you can effectively learn about at the beginning (each asset has its own “personality,” as you will discover).
- Placing trades even when the setups are not that stellar. You might be taking “B” and “C” trades when you should only take “A+” trades.
Overtrading is an understandable temptation. When your trading account is small, you want to grow it rapidly if you can. But overtrading will not help you do this. It will only slow you down and teach you bad habits.
6. Overlooking the significance of context.
One of the more challenging aspects of trading is one of the more subtle nuances of analysis, and that is evaluating the context for a trade setup successfully.
In fact, novices can sometimes overlook this consideration entirely. In particular, this mistake is likely to crop up with price action newbies. They may be great at spotting well-formed patterns, but do not pay attention to how market conditions may be shaping up in a broader sense.
How useful a well-formed pattern depends a great deal on whether it is at a swing-high, consolidation, etc. How choppy or smooth the market happens to be is also relevant.
7. Lacking realism.
Another common mistake for beginning forex traders is having unrealistic expectations. Some examples might include:
- Thinking they can win a ludicrous percentage of trades (i.e. 98%).
- Expecting to make millions of dollars in their first year when they are starting out with a tiny account.
- Thinking the journey to becoming a pro trader will be smooth, fast, and easy.
Having unrealistic expectations can be devastating to a novice trader’s account. Those expectations can produce impatience, which can lead to unprofitable decisions in the name of achieving impossible objectives.
Plus, when unrealistic expectations are not met, a trader can be devastated psychologically as well. Quite a few traders give up when they realize that the journey will be longer and harder than they believed.
But if you go into the experience with realistic expectations, your mindset will be more resilient to the challenges you need to overcome.
8. Underestimating the role of trader psychology.
Speaking of mindset, one more common novice forex trading mistake is focusing exclusively on a strategy to the exclusion of psychology.
However confident and centered you may be, trading is an intense experience that will test your resolve and reshape your perception of yourself. Embracing that aspect of forex to its fullest from day one will be a big help. You cannot master trading without self-mastery.
By Avoiding These Mistakes, You Are One Step Closer to Forex Success
You will make mistakes along the way, and that is okay so long as you learn from them. Nobody who ever became a pro forex trader did it without some failures along the road.
Just keeping in mind everything we have gone over above gives you an edge over many other new forex traders.
Avoiding the pitfalls we have discussed should save you time and money, bringing your goals within reach all the sooner.