7 Rookie Forex Trading Mistakes
is one of the most challenging ventures a person could probably undertake in their life. Going to the gym and building muscle won't help you, nor will going to university and getting a fancy degree. This job requires psychological features of strength, which most new traders do not have, and sadly may never get. Successful trading basically comes down to how disciplined you are. You might have the best strategy in the world but if your head isn't in the right place, you will end up making the same Forex mistakes as everyone before you and just end up being another statistic.
Most traders are disappointed with the unlimited money making potential of the market against their own performance, and are acting out of emotions like desperation, greed or fear, trying to close the gap. Here are 7 classic 'tell-tale signs' that a trader is self-sabotaging their chances of success. Can you reflect on any of the following?
1. Random Decisions/No Consistency
You've got a 50/50 chance of winning a trade right? I mean the market is either going to move up and down, so if you take an educated guess you should be able to make money yeah? Well for those who have tried this will have no doubt discovered that lack of consistency in trading is not lucrative. Sure the market can only move in one direction, but for how long before it reverses. You get plenty of days where the market will move up, down, back up then down again. How many times would your stop have been triggered chasing price around like this? It would be super frustrating. Most people find Forex trading very attractive because it give a person complete control, breaking free of all the rules from their day to day life. Unfortunately the Forex market requires rules, structure and consistency at an even more intense level than your daily life does. So if you're looking to operate "rule free", then trading is probably not for you.
2. Trading Under Emotion
We already spoke about trading being the ultimate psychological challenge of life. A lot of the market participants are human aside from all the trading algorithms, so the market is one giant psychological machine. If you display emotional weakness, the market will exploit your emotions and use them against you, taking your hard earned money. A lot of traders take on Forex trading because they want to use it to fix some underlying financial problem in their life, or just want to generate fast money. Trading for the wrong reasons will make you vulnerable to emotional fueled mistakes because you've got "too much at stake". It's important that you only enter the market with the investor attitude, looking to gain positive ROI
over a sensible amount of time. The market should not be the solution to get the debt collector off your back.
3. No Experience
Like any other profession, Forex is something that takes time. You can't expect to walk into a job, inexperienced, and expect to be promoted to the manager the next day. Forex trading requires a learning phase essential to conditioning yourself, and to build a compatible mind-set for the markets. Trading is probably unlike anything you've ever experienced. Your day to day life does not prepare you for it. The logic learned from the outside world can't be applied successfully to the markets, the two just don't mix. Before throwing in large amounts of your savings into the markets, make sure you've had a good dose of experience first. The statistics tell us that a high amount of traders blow their accounts, and that figure will be even more dominant for new traders. If you're new to the industry, its best you invest smaller amounts first to "get your feet wet" before jumping in the deep end.
4. Trying to Understand too Many Things/Over Complication
Generally in the outside world, the more complicated something is, the better it is. Think of computers, the more complicated they get, the better they perform thanks to technology advances. Trading is not like that, if you make your trading complicated then you will end up becoming a vegetable. There is a huge amount of trading systems out there, and most of them are just too intense. Too many of these systems bring in all these extra external variables onto the charts. Things like indicators, expert advisors, economic figures or other "magic" trading tools. All the extra data on your chart makes the system confusing, overwhelming and frustrating. Multiple variables often conflicting with one another, so the more you bring in, the harder chart analysis becomes. Simple works better in the market guys, that's why I am a passionate price action trader, working of raw price charts. If your chart looks like the cockpit for NASA's space flight control, then it's probably a time for a change. Clean up your charts, and switch to a trading system that makes sense to you. Something that's logical, straight forward and doesn't have a negative impact on your day to day life.
5. No Use of Stop Losses
This is a big no no! There are some traders out there who don't use a stop loss because they think their broker is out to get them. This sort of paranoia is not healthy and isn't going to any favors for your equity curve. Using no stop loss means 100% account exposure, depending on how big your position size is and how much leverage you pumped into your account, this could be very dangerous. There are a lot of accounts running on high leverage, and one wrong move could make a deadly blow to a trader's capital. A stop loss defines your risk in the market, it's your safety barrier in case your trade doesn't work out. No matter how good you think a setup is, or how certain you are that a trade is going to work out, there is always that element of uncertainty and the risk of the market moving against you. Your stop should be placed at a price level where if you know the market crosses, the trade didn't work out and to automatically remove you from the trade. Don't be stubborn, or trade in denial, thinking the market is going to turn back around for you. You're only putting yourself in the running to take a much bigger loss than expected.
6. Not Giving a Trade the Chance
Ever taken a trade which has moved into profit, freaked out at the first sign that the market is going to move against you and liquidated your position only to find that the trade matured into much greater profits anyway? This is basically the "fear of losing money" and although you did walk away from the trade with some profits, it's not going to help you remain profitable in the long run. It's all about risk/reward ratios, you need to use positive geared money management to ensure your winning trades make up for any previous stop outs, plus extra. You can do this by aiming to return much more than you risk on each trade you place. 1:3 risk/reward is my "golden risk/reward ratio". So I aim for 3x in returns on what I risk on each trade. E.g. If I risk $1000, I set my profit target to return $3000. By being consistent and applying 1:3 risk/reward ratio on each trade, I only need to win 33% of my trades to turn a profit in the long run. By cutting trades off early, you are putting yourself at an unnecessary disadvantage by inducing a negative risk reward ratio into your overall money management model. You've got to understand that the market doesn't move in straight lines, the market is going to zig zag its way up or down the chart. Most traders can't handle the fact that their trades might move back to break even, or possible dip back into the negative before expanding into profit.
7. Ignoring Larger Time Frames
One factor a lot of traders tend to neglect is analysis of the larger time frames. Most new traders are drawn in by the hype of high frequency trading. Personally I think high frequency trading strategies like scalping and day trading are very high risk approaches to the market. When you look at the lower time frames, you're basically looking at noise, and it's hard to really see where the market is going. The noise is created by the bigger players of the market using Forex to perform their normal international business. Wall Mart orders some plastic shovels from china, well a Forex trade needs to happen and the size of their order is going to contribute to the market noise. My point is, the low time frames just don;t offer any real clarity. HFT systems are an attempt to ride these market vibrations by being quickly in and out of the market. These systems also usually aim for small amounts of reward compared to the risk taken. We've discussed how bad negative risk/reward can be for long term trading success. If you've found a long term scalping, or a day trading solution that doesn't burn you out mentally, then all the power to you. I find the higher time frames much easier to analyse, offer setups with much lower risk and more reward potential. They also require much less time in front of the trading screen, so it doesn't negatively affect my day to day life. Who wants to spend hours and hours on end in front of price charts, not me! If you've read this article and can reflect on some of the points discussed then it's time for change. You're not a bad trader if you make mistakes, but you are a bad trader if you continuously to make them. You can't expect to become a successful Forex trader overnight, you've got to take the same psychological journey as all other traders do. What doesn't kill you, should make you stronger. Don't dwell on your mistakes, learn from them and let them mold you into the successful trader you've always aspired to be.
By The Forex Guy