The Online FX Trading world can be full of unpleasant surprises for those with huge expectations but little preparation. With its low entry barrier, the online foreign exchange market is one of the world’s most accessible Day Trading markets. With the knowledge, a computer or smartphone, a stable internet connection, and a few hundred dollars, you should be able to start Day Trading.
However, the relatively easy entry is not a promise of making you a millionaire overnight. Effective online Trading can be a rewarding and exciting venture, but if one isn’t careful, it can also be rather discouraging. Avoiding certain forex trading mistakes, whether you’re new to online FX trading, or have several years of experience, can go a long way to keeping your trades on the right track.
The forex mistakes to avoid, discussed in this article, are the reasons many new forex traders do not succeed as much as they would have liked to.
Starting Out Without Any Education and A Trading Plan
Learning about forex is integral to a trader’s success. Online forex trading must be considered as any other profession if you want to be successful at it. Surgeons, for instance, do not perform heart surgery without a 5–7-year degree in medical school, with core surgical training in a hospital. The most common online forex trading mistake to avoid is believing you can succeed without any trading education or experience. Learning the ins and out of the business, then learning how to read and interpret the charts, is crucial to becoming profitable. Unless you educate yourself, trading will be disastrous for your account. The most efficient way to become a successful online forex trader is to access the experience of successful traders. We discussed this at length in our article, The Importance of Forex Education before Trading Online. Investing in forex trading courses, with a well-established forex trading academy, that will give you the right knowledge about online forex trading, and how the markets work, is indispensable. Geldex Invest offers you a wealth of educational content in a variety of forms: courses (both online and in-person), blogs, and webinars, all geared to helping you master forex trading online.
Avoid trading on feelings and whims. Before entering a trade, it’s important to do your homework. Many traders make the mistake of thinking they don’t need a trading plan now, so they will create a trading plan “later on”, or after they start making money, or they can simply “keep it in their heads”. On the contrary to these rationalizations, as a beginner trader especially, you need a trading plan to guide you and solidify your trading strategy. A trading plan outlines your strategy, defining what and when you will trade. It should include what markets you will trade, at what time, as well as the time frames you will use for your analysis and taking trades. Your trading plan should include your risk management strategy, outlining how you will enter and exit trades for both winning and losing trades.
Currency pairs are closely linked to national economies and are affected by a number of factors. Since they are traded almost every day of the week, it implies that there is usually something going on that will move the markets. You should be aware of upcoming events that could affect your trade and have the ability to forecast which way these events could swing the markets. The mistake some traders make as they follow events, is not paying attention to what the technical indicators are showing in comparison to the fundamental event analysis.
Harboring Unrealistic Expectations
A common mistake that online forex traders make is harboring unrealistic expectations. This is also one of the mistakes that beginner traders usually make. This usually results from some unscrupulous trading advertisements, enticing you to become a millionaire overnight by investing just a small amount. Images of “grand” lifestyles, represented by mansions, the latest model vehicles, and travels mostly accompany such advertisements. It is not impossible to make such huge returns on small investments, but at what risk level will one be able to achieve such a feat?
The best way to avoid unrealistic expectations is to have a trading plan. If it yields steady results, we advise that you stick to it, as even a relatively small gain can become large with forex leverage. In effect, as your capital grows over time, a position size can be increased to ensure higher returns. As a new investor, the best way to approach investing in trades, as we have indicated in previous articles, is through a measured approach; going for the smaller yet consistent kind of returns that are not overly high-risk. As you gradually become a more experienced trader, you will be able to increase your risk level after some time, enabling you to master online Forex Trading.
Risking More Than You Can Afford
The practice of taking on excessive risk does not necessarily guarantee excessive returns. A very common forex mistake many traders, especially Beginner traders, make, is failing to understand how Leverage works. Some forex traders make the mistake of not taking their time to familiarize themselves with both Margin and Leverage, and therefore put more capital at risk, than they had originally intended to or planned. Leverage – and its commensurate risk – is a double-edged sword that amplifies the downside as much as it adds to potential gains. The benefits are clear, but the risks are often neglected. When you have a small initial deposit and make a disproportionately big trade based on the leverage you choose, you can experience sizeable losses if the market moves against your position by even just a small amount.
A key part of your risk management strategy is to determine how much of your capital you’re willing to risk on each trade. Ideally, day traders should risk not more than 1% of their capital on a single trade. This means that a Stop Loss order will close out your trade if it results in more than a 1% loss of your trading capital. Professional traders will often lose even less than 1% of capital on a single trade. The percentage might seem small, but this translates into a relatively small amount of your capital being lost even if you lose multiple trades in a row, and is an effective strategy to carry on long enough to develop profitable skills. On the other hand, if you make more than 2% on each winning trade, your losses are recouped.
Trading Without a net
Risk Management should be every beginner’s mantra. The currency market is swayed by multiple factors, from domestic fiscal changes to international diplomacy. Since it’s simply impossible to watch the forex market 24 hours a day, this is why stopping and limiting orders are important; helping you get in and out of the market at pre-determined prices. Trading without a Stop-Loss is a recipe for disaster. It’s how small manageable losses become devastating wipeouts. It’s like saying, “I know I’m going to be right – it’s only a matter of time.” That may be so, but it may take much longer than your margin collateral can support. Setting a Stop Loss costs you nothing; it’s a free insurance policy. Not only is your trading platform able to execute trades when you are not available, but it also enables you to think through to the end of your trade and set exit strategies even before you’re actually in the trade, and your emotions get the best of you. Placing contingent orders may not necessarily limit your risk for losses. Adding to a losing trade with the common mistaken belief that the trend will soon reverse, is a dangerous practice, as prices can move against you for much longer than you expect or hope, thereby compounding your losses.
Emotions Based Trading
Another very common forex mistake to avoid is trading with emotions. Emotions are every Trader’s arch enemy. When you’re trading with emotions, you make decisions based on what you feel instead of what the facts are saying about the markets or about your trade itself. Given; that a loss never feels good. But allowing unsuccessful trades to get to you, makes you emotional and irrational, tempting you to make knee-jerk or follow-up trades that will most likely be outside your Trade Plan. This is referred to as Revenge Trading; When you get into a revenge trade, you’re most likely still seething or too stressed out to make a sound trading decision. Instead of revenge trading, cut your losses, and focus your efforts and energy on analyzing what went wrong, while you figure out what you can do to improve your subsequent trades.
No trader makes a great trade every single time. You need to accept that losses are a part of trading and every other business for that matter. In the long run, when you stick to your trading plan, it compensates for your loss. If it doesn’t, it may be time to review your trading plan and make adjustments. There are two trading statistics to keep a close eye on: your Win rate and your Risk-to-Reward ratio. If your win rate is constantly below 50%, and your Risk-to-Reward ratio is constantly below 1:2 or 1:3, it may be time to make some changes.
Closely related to this common mistake is traders allowing themselves to get overly excited over a successful position, and allowing their emotions to run wild. The euphoria as a result of a successful trade, if not kept under check, can also cloud your judgment and decision-making just as much as running losses. The buzz from a win sometimes leads traders to rush into another position with their new-found capital without first carrying out the proper analysis. This may lead to losses and potentially wipe out the gains you recently made on your account. The online forex market is 24/5, so there should be no rush to make a trade.
Trading Live Accounts from Scratch
Using your hard-earned capital to test a new trading plan is almost as risky as trading without a plan at all. Before you begin to trade with real money, open an online forex trading account you can simply practice on. This is called a Demo Account. On this account, you are at liberty to try out trading plans with virtual funds, as you get a feel of the trading platform your broker offers, and of online forex trading as a whole. Geldex offers you the opportunity to practice what you’re learning from our forex trading academy on a Demo Account specially designed to give you a live account experience. Although you’re unlikely to get affected by your emotions as you would when trading your own money, it allows you to see how you will react to trades not going your way, and learn from your mistakes without the associated risks.
In Conclusion
Many traders enter online forex trading hoping to “score big” in a very short time, and take home a quick fortune, without appreciating the fact that effective online trading should be seen as an investment, where the rules of investing equally apply. When reality bites and they begin generating unexpected losses, manifested by waves of bad decision-making, they eventually begin to realize that profitable trading is a lifetime pursuit, requiring them to acquire the knowledge, control their emotions, and let the numbers and signals determine buy and sell decisions, rather than greed and fear.
Being a committed student of the forex market, doing your research, developing a solid trading plan, managing your capital, and developing great trading attributes such as discipline and patience, will all ensure you have a long and successful trading career. As you progress on your online forex trading journey, you should step back and adjust your plans when the need arises, as you will find it beneficial to implement different strategies at different times on this journey. Heeding the points we have discussed here, should guide you through your evolving skills and plans. Mistakes are inevitably part of life, especially for people entering a terrain they are not used to – beginner forex traders in this instance. But being aware of these common forex mistakes will make you better prepared to minimize your errors and boost your gains.
Once you find a way to consistently make money trading, it doesn’t end there; financial markets are ever-changing and evolving organisms. If you fail to adapt to changing market conditions, you’ll be out of business shortly after. Remember trading mistakes are a part of the journey, and you may be unable to avoid them all at once. Use the lessons learned from these mistakes as stepping stones to better yourself into becoming one of the great traders you admire.
Final
- Dedicate yourself to a career-long journey of Forex education
- Be disciplined; trade the facts, not your emotions
- Use Stop Loss and Take Profit rates to manage risk
- Make use of Limit Orders and price alerts to enter the markets
- Be realistic and not greedy.
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Brought to You by Geldex Invest on behalf of Growell Capital.
