Top 10 Mistakes That First Time Forex Traders Make

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Takeaway: Whether you’re new to forex or a veteran of many a trading session, these mistakes can sneak their way into your trading.

Top 10 Mistakes That First Time Forex Traders Make
Sometimes it is important to know your limits.
Source: ForexDictionary
Making mistakes is important. In a very real sense, we learn by trial and error, so making mistakes is part of that process. In forex trading, however, most traders want to minimize the number of errors they have to make before they learn – especially when money is on the line. In this article, we’ll look at 10 common mistakes that sink many beginners before they even get started (and how you can avoid them).

1. Waiting for the Market to Turn

First time forex traders usually have a lot of faith in the positions they take up. Far too many first time traders hold on to losing position way too long because they are certain they are “right” and, if they wait long enough, the market will come around to their thinking. While it is good to believe in what you do, thinking you can twist the market to your will is a sure way to empty out that brand new trading account.

2. Going in with an Idea Instead of a Plan

There are a lot of different reasons as to why a person starts forex trading. However, a common one is noticing that there is a predictable pattern that follows certain news events like a Fed announcement or change in commodity prices. You get good enough at spotting them that you can guess how a currency is going to move after a news event and, next thing you know, you are signing up for an account.

While trading around news is a good idea, it is not a plan. If you go in with nothing but an idea, you won’t know when to take profit when your idea is right or when to cut losses when it is wrong. Yes, ideas are good, but they need to fit in with your overall trading plan.

3. Changing the Plan on the Fly

When a beginner starts seeing positive results from a trading strategy, the temptation sets in to “bend” the trading rules a bit to capture more profits. Tweaking a strategy is part and parcel with currency trading, but it shouldn’t be done in a live account during an actual trade.

4. Giving up too Quick

It can be sometimes hard to keep expectations realistic. You hear stories of hundreds and thousands of dollars being made on a single trade and you want some of the action. High expectations can lead to impatience. Impatience leads to traders going from strategy to strategy, trying to find the big money trade. Strategies take some time to learn and then tweak – there is no “out of the box” solution that will make you a great forex trader in a day.

5. Trading without Protection

When a new trader – or even an experienced forex trader – is taking up a position, there should always be a stop-loss order built in to it. Trading without a stop-loss order is like juggling machetes, it might work out ok, but it can also go very, very wrong. The market can afford to move against you longer than your margin collateral will last. You need to decide how much you are going to risk on any one trade, and then stick with it. (For more on this, check out Risk Management Basics for Forex Traders.)

6. Poking Holes in Your Protection

The temptation to move your stops to keep a position open is a direct product of the “waiting for the market to turn” mindset. Moving stops and changing your trading rules (“just this once”) on the fly is the same as having no protection or risk management at all.

7. Doing too Much

Every currency pair is unique, as is every currency. It is not realistic to start trading all the majors at once, as each has its own economic indicators, psychological levels, character (safe haven, commodity, etc.) and so on. Rather than looking to scale up trading strategy, beginning traders need to focus on a handful of currency pairs and learn what drives them and how to profit from it.

8.Overleveraging

Leverage is one of the main attractions of the forex market. Leverage can take a few pips in profit and turn it into significant sums of money. Unfortunately, it can also magnify losses or result in you getting stopped out of a profitable trade before the trend is established. Just because you can leverage a trade up to 100:1 doesn’t mean you should.

9. Not Studying Enough Beforehand

Forex demo accounts are great ways for first timers to learn by doing, but trading forex successfully requires some book time as well. If you are going to make a serious run at forex trading, you should at least know the basic indicators, the economic reports that influence your chosen currency pairs and have a mathematical system in place for deciding how much you should be risking on a given trade. Forex trading platforms can help you out by automatically adding indicators, but those lines are useless if you don’t know how to read them.

10. Getting Caught up in the Technical Trade

Watching your trades is important, but it is easy to get too caught up in the technical indicators and chart formations to the exclusion of all else. Forex traders have to be adept at processing information from many different sources in real time. A profitable trade based on technical indicators can quickly fall apart on fundamental news like a trade surplus report. So even if you are a technical trader, you need to be aware of the fundamental side as well.

Bonus: 11. Not Keeping a Trading Journal

Things happen fast in the forex market. Trades get stopped out, new opportunities open up and volatility can flare up on headline news at any time. Without an accurate record of your trades, it is hard to see what mistakes you are making during a trading session. As we mentioned before, we learn from mistakes – but we learn much faster when we keep a record of those mistakes and review them to come up with a way to fix them.

The Takeaway

Whether you’re new to forex or a veteran of many a trading session, these mistakes can sneak their way into your trading. Fortunately, many of these have easy fixes centering around discipline and preparation. If you come to the market armed with solid trading plan and the discipline to implement it, you’ll be able to avoid most of these mistakes. As for the mistakes that occur despite you preparation and commitment, documenting them and learning from them will have you well on the way to avoiding them in the future. (For further reading, check out 7 Tips for Successful Forex Trading.)

Did we miss any beginner mistakes that you think should be included? Drop us a line and let us know.

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About Andrew Beattie
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Andrew Beattie has spent most of his career writing, editing and managing financial content as well as more general web site material in all its many forms. He is especially interested in the future of search and the application of analytics to the business world. He has been a long-time contributor to Investopedia.com and is currently venturing forth on ForexDictionary.
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