Trading mistakes are common about beginner traders. When it comes to trading the Forex market, only 5% of traders achieve the ultimate goal of becoming consistently profitable.
The top 5% grow from trading mistakes, they learn an invaluable lesson on every single mistake made. Deep in their minds, a mistake is a chance to try it harder and do it better the next time. They simply realize that trading mistakes can be costly. And in the end, this tiny difference becomes the big difference.
To help shorten the learning process; here are the 5 most common trading mistakes that occur on a regular basis in forex.
Trading Mistake #1: Letting Losses Run
Holding losing positions for too long and closing winning trades too soon.
This is a very common mistake among traders. They tend to hold losing trades for too long and close winning trades as soon as they show some green.
In general, cutting your losses is the most difficult task to do in trading. There are very few people who respect this principle. This is one of the reasons the percentage of losing traders is so big. Traders are not cutting losses when they should be cut!
No one is right all the time. The sooner you’re able to accept small losses as part of trading, the sooner you will be able to concentrate on finding profitable opportunities. If a trade is in your favor, let it run. It is often tempting to close out at a small profit. But sometimes we see that patience can result in greater gains.
After all, what is the purpose of having a trading plan if you are not able to follow it?
Easier said than done, right? The overall purpose of a trading plan is leading to disciplined trading behavior and account growth.
If the market has moved against your expectations, it means you made a wrong trading decision. Realize it and move on. There is no reason to continue with the wrong trading decision. This is what discrete amateurs from professionals.
But if the solution is so simple, why traders are still losing? The answer is human nature.
When trading, it is more important to be profitable than to be right.
In fact, this is not all limited to the trading technicality. Human behavior has a lot to do in trading psychology. Understanding human behavior towards winning and losing bares significant findings. These findings explain why traders have difficulties closing their losing trades when they should.
Let’s take an example to better understand the concept behind it:
Let’s say I offered you two choices. Choice A means you have a 50% chance of winning $1,000 and a 50% chance of winning nothing. Choice B is a flat $450 point gain. Which choice would you choose?
Choice A makes sense. The expected gain of $500 is greater than the fixed $450. But many studies have shown that people consistently choose choice B.
Let’s do it again, and this time we can expect to lose less money via choice B. Studies have shown that the majority of people will pick choice A every single time.
We can conclude that people are willing to avoid risk when taking profits. And willingly seeking it if it means avoiding losses.
Other studies in psychology have shown that people take more pain from losses than pleasure from gains. It feels good to make $200 rather than $600, but losing $600 hurts too much. Many traders are willing to keep losing trades run and hope the market will turn around and move in their favor.
Trading Mistake #2: No Stop Loss Orders
The Forex market is full of fake moves. There is always the belief that “the market is going for your stop, and by the time it reached it, the trend has reversed.”
How many times did you see that happening?
I can tell that this has happened many times for every trader. Many choose to either remove or widen their stop-loss order hoping the market will return around.
Failure to stick to the original trading plan is wrong and will lead to big losses.
Placing a stop loss on each trade helps control risk, and also keeps you away from “averaging down” your trades, which is adding additional trades to a preexisting position as the price moves against you. The more the price moves against you, the more you add to the position. While it might work for you a couple of times, but in the long run, it will surely lead to exponential losses.
The stop-loss mechanism is in place for a reason. It’s to avoid huge losses to your account! Why traders choose to not implement a stop-loss order is something we’ll never comprehend. Markets can move in the blink of an eye, with little to no warning. And without a stop in place, the losses to your account could be catastrophic.
Placing limit orders may not necessarily limit your risk for losses, but teaches you discipline.
Using stop-loss orders is part of a well-conceived trading plan that has specific expectations based on your research and analysis.
Moving your stop-loss order to avoid being stopped out is almost the same as trading without a stop loss in the first place. Worse, it reveals a lack of trading discipline and opens a slippery slope to major losses. Move your stop loss only in the direction of a winning trade to lock in profits, and never move your stop in the direction of a losing position.
Mistake #3: Trading Without a Plan
If you fail to plan, you plan to fail.
Without a plan, you are simply moving from trade to trade with no strategy. It is like starting a business by renting office space and hiring staff but not having a clear and concise idea of what kind of product you are going to sell and how you are going to do it.
In fact, most of the successful traders treat forex trading like a real business. That shows how serious they are about trading and how realistic is their vision of making a living out of the market.
This is, again, one of the most prevalent trading mistakes that destroy novice traders. Many of these newbies often say they don’t need to write down a trading plan because they know what they’re doing, or they will write it later or when they will start making money…I assure them they won’t go that far in their trading journey.
For others, the problem isn’t in developing a trading plan, it is in following it. If you have a great plan but you are not following it, what good will it do you? If you have a mediocre plan that you follow to the letter, you could at least improve it through evaluation. Even worse are those traders who keep going from plan to another just because their friends say it did wonders for them.
A trading plan is your best friend, it is designed to help you achieve your long-term goals by keeping you away from erratic behaviors and deviating from your original goals. It contains all the details of your strategy, your trading style and approach, your risk management rules, and most importantly what to do when the market is suddenly changing course. It not only saves you time and money, but it also gives you emotional support while trading.
Furthermore, having a well-written trading plan helps you track your trading positions and evaluate your performance. This is very important to improve your trading skills and your trading system for better performance. You may be tempted to ignore it, but if you really take the time to develop it then you should have faith in it being the best-suites approach for you.
If you fail to plan, well you are simply gambling. It is impossible to know what you are doing right from wrong.
Even the best trading plan remains only a guide, but the better the guide, and the better you can stick to it, the better success you will have in the long run. Obviously, a trading plan doesn’t guarantee success, but a good plan that is followed will help you stay in the forex game longer than traders who don’t have a plan.
Trading Mistake #4: Having Unrealistic Expectations
Learn to let go of the things you can’t control (the market), and manage those things that you can (your expectations). By doing so, you are able to make rational trading decisions, which would hopefully lead to more wins than losses.
A trader’s unrealistic profit expectations may potentially harm him, even if he has a method that is based on a good set of tools. Unrealistic expectations may lead a trader to commit certain mistakes that those with greater experience and realistic expectations may not commit. In order to achieve a reality-based outlook, a new trader should conduct research on what successful traders are earning, the capital required for those returns, what strategies are used and what risk management system is in place.
In trading, managing what we expect is of utmost importance:
By doing so, you can easily alter your view of the market depending on what price action is telling you. there is nothing wrong with expecting the market to move to a certain level, what is deadly is when you are so stubborn to maintain your view even when price action is telling you otherwise.
Be realistic when setting the parameters of your trading plans. You can do it simply by looking at recent market reactions and average trading ranges. You need to avoid holding out for perfection – if the market has achieved 50 percent of your expected scenario, lock your profits and move on. Remember, your ultimate goal is to make money, not winning a prize for the best trade setup.
Let’s see which approach is healthier in trading: doing things the right way even if it means small profits or doing things in whichever way as long as it potentially promises large profits?
If making money is the trader’s only goal, especially at the early stages of his trading career, chasing the money will soon become the very reason for failure.
Chasing money leads to breaking the rules of your trading plan. In rare specific trades breaking these rules will lead to a higher yield. In the long run, however, which is hopefully your plan for financial trading, it always leads to an empty account balance.
Expectations also bring emotional highs and lows:
Because you naturally expect your beliefs to be right, you’ll feel great when the future matches your expectations and feel bad if it doesn’t.
If you have entered the world of forex trading expecting to become an overnight millionaire, your chances of becoming a successful trader have gone from slim to none.
What a novice trader must accept is that there are simply no guarantees when it comes to forex trading; success comes about through hard work and proper preparation, rather than straight luck. Remember, if you quell your unrealistic expectations, you’ll be a better forex trader for it.
Tons of Forex advertising out there always yield something like “$2,000 properly positioned in the forex market can give you returns of over $10,000 profit” Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated traders a lot more than $2,000.
In addition, they help to create the third fatal flaw: Unrealistic Expectations. Yes, it is possible to experience above-average returns trading your own account. However, it is difficult to do it without taking on the above-average risk. So what is a realistic return to shoot for in your first year as a trader? 50%, 100%, 200%?
Don’t get caught in those unrealistic expectations. The goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year.
If you can manage that, then in year two, try to beat the market. These goals may not be flashy but they are realistic, and if you can learn to live with them and achieve them you will wipe out fast.
Also read about the 7 common psychological challenges in trading Forex.
Trading Mistake #5: Overtrading the Market
Overtrading has two main figures: trading too often and trading too many positions at once. When you trade too often, you always open and close trades the same day wanting to take advantage of every single turn in the market. Thus, you end up with more losses than your gains.
Trading too many positions at once is very dangerous because your trade starts to show some green, you decide to throw on some more positions of the same asset to increase your profit. But what happens if the market suddenly changes its course. You will end up with more losing trades that your account can’t handle.
I’ve seen so many traders overtrade their accounts, not only they increase their stress level, but also they reduce the available margin making their account vulnerable to any adverse movement.
Overtrading not only causes you stress, but it also can deplete your capital in only a few days or weeks! This would be difficult to recover from, not only from a financial standpoint but also from a psychological perspective as well.
Trading with Tight Stop Loss:
Trading often with tight stops and tiny profit targets is actually not that safe and provides an only very minimal profit. Instead, look for trades that give you at least a 1:2 risk-reward ratio. That way you can increase your winning probability and lowering your risk of price hitting your stop-loss order.
Again, as I mentioned in the previous chapter on using stop-loss orders, it is wise to include them in your trades, simply because stop-loss order takes care of closing your losing trades making you less stressed and nervous so you can focus on finding better opportunities.
Correlation and Overlapping Pairs:
Also, be careful about correlated currency pairs and overlapping positions.
Here’s an example: a long USD/CHF position can be the same as a short EUR/USD or GBP/USD, while a short EUR/USD and a long EUR/JPY position net out to be the same as being long USD/JPY.
Trading is not easy, it requires dedication and hard work. If you want to succeed in this business, you need to avoid these 5 trading mistakes by developing good trading habits and staying focused and disciplined no matter what happens in the market.