In this article, we will summarize the 8 most common beginner mistakes in the forex market and how you can avoid them. Most traders learn from their own mistakes over many years in the markets.
However, many of them will admit that had they known about these before they started trading, it would have saved them a lot of money. Still, some rules are so difficult to follow that it seems the only way to learn the lesson is to make the mistakes yourself first.
Whether this is the case for you or not, here are 8 typical beginner forex mistakes that hopefully can make your trading journey less painful.
1. Let a short-term trade become a long-term investment.
This is something we often hear about, maybe more so from stock traders than forex traders, but it is nonetheless important to take note of. The trade you took didn't turn out exactly as planned, and to make yourself feel better you instead changed your perspective rather than admitting the loss.
Admitting that you were wrong sometimes hurts your self-esteem, and it therefore feels better to hold on to your position while telling yourself that it will probably come right back next week…or even next month.
Is this a good idea? NO! If the conditions for taking the trade in the first place are no longer present, you should get rid of your position as soon as possible and move on. There is no guarantee that your trade will come back in the future.
2. Use automatic stop-loss.
Forex educators and experienced traders always talk about using stop-loss in your trading. An automatic stop-loss order simply sends your order to the market if the price of whatever asset you are trading hits a predefined level. This sounds like a good idea in theory, because it is supposed to keep you safe and lower your risk in trading.
However, it’s not always as good of an idea as you might think. There can be sharp fluctuations in a currency pair within a single day, and what you will often see is the price dropping down to your stop-loss level before it shoots right back up.
Instead, check the price at the close of each candle. In other words, if you trade on the 1-hour chart, you check the price after each 1-hour candlestick has closed.
If you trade on the daily chart, you check the price at the end of each day. If the price then has crossed your predefined mental stop-loss level, get out of the position.
This way, you remain consistent about when and how your trading decisions are made.
3. Watch the news.
Well, watching some news is fine, but you should be very aware of how it impacts your decision-making. Unexpected news like Trump’s victory and Brexit tends to shake the forex markets, but it is almost impossible to trade these events for retail traders. When something unexpected happens, robots are the first to take action.
Next, the professionals who may get the news faster than you place their trades, before the news finally reaches the millions of retail forex traders around the world.
Therefore, instead of following the news, follow how the market is reacting to the news.
4. Get too greedy.
If you have set a target price for your trade, let's say a typical resistance level where you were planning to take your profit, make sure you do just that instead of holding on to your position in the hopes that it will continue with the strong momentum.
Stick to your plan! The same applies if you are tempted to take profit because you see that you are up a few grand, but still below your predefined target. Do not focus on the money; focus on executing your plan.
5. Get too scared.
Lots of traders like to check news sites constantly in addition to reading discussions on various forums. It’s easy for these traders to get scared when they read negative news or opinions about the positions they are holding.
Again, follow what the market is doing – the market is always right.
6. Focusing too much on not losing money.
Yes, it happens. You can actually lose money on a trade. In fact, your position may take a dip before it goes back up. Visualize how much you would allow your position to move into the red before selling it.
If the currency you are trading goes down to test the support once again, by how much will you be in the red then before you sell? Always keep an idea of this in your mind to avoid selling at the bottom.
7. Buying and selling without a plan.
Buying and selling without any forex trading strategies, plan, or any system is the same as trading with your gut feel. It may score you a win when you are lucky, but over the long term it will lead to guaranteed failure in the forex market. Learn what works. Trade for a while just to learn how the markets work.
Also, make sure to keep a detailed trading journal of everything you do so you can learn what works and what doesn't over time with real-world experience.
8. Not investing enough time.
The more time you spend on studies, jobs, research, or whatever it may be, the better you get at it. The same applies to trading. The market pays you for the time you spend on trying to understand it and educate yourself.
There are no shortcuts to easy money in forex trading – hard work is the only way.
About the author: Fredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He mainly follows the stock and forex markets, and is currently supporting Learn to Trade forex training services