Most common Forex trading mistakes and how to avoid them
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Most common Forex trading mistakes and how to avoid them
Let’s be honest - Forex trading statistics can be rough, especially when it comes to inexperienced traders. While large companies and market pros make literal millions off the foreign exchange market, a vast majority of newbies flunk out immediately after their very first setback. It is also quite unfortunate, since it is the persistence that usually ends up paying off at any trading market and especially at the financial one. But, the reality is that no matter how confident the trader seems to be prior to entering the market, they rapidly retreat from the idea of making Forex their primary income source right after they go through even a very minor let-down. There is no single answer to why exactly it happens the way it does, however we can try and take a closer look to what is stopping such a large amount of traders from being successful at the Forex market. Because an actual journey to victory is about an ability to reflect on mistakes and learn the best possible ways of avoiding them in the future. Today we will approach the topic of unpleasant Forex trading experience from every aspect: technical, psychological and practical. Our goal today will be to understand the basics of most common mistakes and see them from a different perspective, a perspective that can even, perhaps, become a winning strategy. Here we are going to discuss the five biggest mistakes new traders make that stop them from becoming successful, including:
Not being fully prepared for Forex trading
Choosing the wrong trading tools
Adopting an unsuitable trading strategy
Ignoring risk management techniques
Practicing failure-oriented psychology
We will both get to the bottom of each of the above issues and learn about measures that can be taken to avoid them, or, if they cannot be fully avoided, discover the ways of how to deal with them in the least painful way. Let’s start with the basics - understanding what is Forex trading and learning to be a trader.
How long it takes to learn Forex trading
The first, and very possibly the biggest, mistake for a lot of new traders is not fully understanding just how large and complex is the idea of foreign currency trading. Look at it this way: would you ever consider building a spaceship without knowing the first thing about engineering? Or start a farm without knowing the stages of plant growth? Probably not. Yet, a lot of new traders get the idea of Forex being a sort of a game, where all that matters is pure luck and timing. And while both luck and timing deserve to be mentioned in any success story, the biggest part of truly profitable trading journey is knowledge. It might sound a bit strange, because the process of exchanging a certain amount of one currency into an equivalent amount in another one sounds very straightforward. But what is a little more complicated is the formation of the price values, which become the foundation of every single trade.
The value of a certain currency is an expression of a variety of factors. It involves the economical situation in the currency holding government, the overall significance and popularity of this currency in the eyes of traders worldwide and also the relationship the currency has with the other currencies it is being paired up with. You might be asking: but why do I care? And the question is simple - the way a certain price value is shaping is pretty much all you need to know to see where the price is going to go next, and what actions you should take in order to gain the most profit. So, we quickly draw to our first conclusion: a successful trader has to understand what is happening at the market and why it is happening. So which approach to take to conquer such a great amount of information?
Of course, you will not start with the way the economics of the United States affect the price value of the US dollar compared to the Euro, for example. What you need to focus on at the beginning is very basic. Learn about how Forex market operates: when is it open, who participates in the process, what kind of transactions make up the trading and so on. Once you start getting a grasp on the essentials, you will find more and more opportunities to get down to more detailed aspects. For example, once you know the definition of the Forex strategy you will most likely continue to find out more about various strategy types and techniques. One of the very good ways to speed up this process is by going through the dictionary of Forex trading definitions - a collection of most terms, both significant and minor. As you get comfortable with the lingo, you will have less trouble reading about more complex concepts in the future.
How long it takes to learn Forex trading? Well that depends on a couple of things. Mainly, we all have different learning speeds and different amounts of time on our hands. This way for some it may take just a couple of hours to completely understand the basics, while for others it will be more like a couple of weeks. The important thing here is to avoid rushing yourself and focus on the quality of knowledge and skills you obtain, rather than their quantity. It is also important to remember that learning is a never ending process and you will most likely learn something new about trading every now and then, even after you’ve been at the market for a while. Also, every trader is unique in terms of their goals at Forex - we all have different ambitions and different expectations, and it is very obvious that we might need different levels of expertise to become successful at what we have planned. The good news is, there are some ways to figure out what path to follow on the market and we are going to come back to it a bit further on, when we get to discussing the various trading strategies.
Now, we will get slightly more technical and talk about the selection of tools traders operate with. More specifically, we will try to evaluate what are the most common mistakes new traders make when it comes to equipping their professional arsenal.
What is Forex trading platform and how to choose the right one
When it comes to the technical side of trading, a lot of what happens to the trader depends on their choice of a broker. Brokers are people and companies, who serve as guides through the market for traders at all levels of expertise and significance. A broker is responsible for processing trades, also referred to as orders, by placing them on the market for their clients. They assist the traders with many things, such as: providing access to trading tools, supplying them with an appropriate amount of trading related info, assisting with financial transactions and more. From that it is not difficult to conclude that choosing a reliable Forex broker is an important step.
New traders tend to be impressionable and easily fall for false advertising and unrealistic promises. However, if you did not skip the first segment of this post, you will have a good understanding of how a broker operates before you start looking for one. As long as you know what to expect from the trading experience in general and from the actions of the chosen broker in particular, it will be easier to evaluate whether what is relevant to you and which broker is going to assist with with what needs to be done. As a general rule, a trustworthy broker is going to be the one that:
Has been around for a while. Brokers who came to exist “yesterday” will most likely disappear just as fast as they appeared, and in most cases they’ll take your money with them. So, you will need to look for a broker that has been serving their clients for at least a decade and has led many of their traders to visible success.
Offers a variety of options. We already know that different traders have different needs, and they will most likely need to choose tools and info sources that are personally relevant to them. Brokers who focus on meeting the requirements of more than just a few categories usually also have more in-depth market analysis reports and a wider spread of services to choose from.
Applies reasonable charges. Of course, brokers also need to make money and it is no secret that this is normally done through certain service charges, the traders are subjected to paying. However, if you come across a broker who seems to be charging for pretty much every little step and demands large initial deposit amounts - this is most likely not the right choice for you. Rule of thumb - information and practice should always be free and anyone should be able to open an account with as low as $10 to their name, because the good brokers are the ones who focus on presenting with opportunities and do everything in their power for those opportunities to be properly noticed.
As you have settled on a broker, move onto the trading platform that they are going to provide you with. What is Forex trading platform is a software that allows you to analyse the market and set up your trades through posting a variety of orders. The brokers tend to go hand in hand with a chosen platform, so as you decide whether to work with a broker or not, pay attention to what platform they offer. Trading platforms can differ on a variety of factors. For starters, there are platforms that cater to specific markets: for example, there are separate platforms for trading commodities. Since we are talking about trading currencies, the platforms in our focus are the ones that accomodate Forex traders. Then there are platforms that cater to the specific needs of a certain group, such as day traders or corporate traders (large companies). In order to have your needs met on most levels, it is best to go with a larger scale platform that gives access to the market to a variety of traders - experienced and inexperienced, long and short term oriented, financially stable and developing.
A great example of a Forex trading platform that delivers to most traders is Metatrader 4. Often referred to as MT4, this platform combines complexity of operation with user friendly interface and an ability to adjust to meet specific needs. In Metatrader there is an option to observe the price chart on nine different timeframes, which is ideally suitable for all kinds of strategies - from instantaneous day trading to long term buy and hold strategies. You can also analyze the market on three most popular chart types: line, bar and candles. What’s more, you can easily switch between the chart types to compare the info and build a more comprehensive outline of the market situation and your upcoming action plan. As you learn more about analyzing the market, you will most likely start using one or a few of the trading indicators - paltfrom’s add ons, designed to extract very specific data in order to discover, confirm or predict a market trend. In Metatrader you will have an option to choose from over fifty different indicators, and again the ones you will need are going to largely depend on the strategy you adopt.
Another trading tool that is worth mentioning, is an automated trading robot. The biggest mistake, surrounding the robo-trading is usually the fact that the software you choose for it has to match your trading style and preferences and traders go into working with the robot without getting to know it first. This way you need to focus on finding a robot that will act at the market the way you would and won’t risk more than you would risk. Other than that, automated trading is definitely a concept that is worth exploring and considering, as it has become highly popular in the last few years and actually replaced a large amount of human traders at the market.
Now that we got a general understanding of how to choose a reliable Forex broker and what is Forex trading platform, it is time to move one to another large and extremely common mistake of both new and experienced traders - choosing an unsuitable trading strategy and refusing to switch to a different one.
Finding the right trading method and how to backtest Forex trading strategy
Forex trading strategies are sets of rules and techniques to follow to achieve certain goals at the market. Many newbies disregard the significance of strategic approach and prefer to act randomly, without a distinctive action plan. Needless to say, this causes a lot of irrational decision making and ineffective choices. Having a strict plan to follow when it comes to currency trading can pay off for a number of reasons, such as:
You know exactly when to start trading and exactly when to exit, which gives you a sense of certainty and discipline. By eliminating the desire to run ahead of yourself, even when it seems like a good idea, traders achieve higher levels of patience and with it - higher income.
You have the right analysis tools and know what to look for on the chart. Based on the choice of strategy, the same chart can mean a number of things to different trades. Additionally, as we already discussed before, different strategies will require the use of specific indicators, which are going to provide the exact data you will need, meaning that by sticking with the right strategy you will assist yourself by removing loads of meaningless market noise - the data that doesn’t carry any significance to your actions.
You will achieve certain stability. There is no strategy that guarantees absolute victories to everyone along the way. However, sticking to a strategy that has proven to be fruitful at certain point is a wise thing to do. Forex market is largely repetitive and every downward movement is always followed by an upward one. By this logic, staying consistent in your decision making and your actions is most likely to result in the most desirable outcome.
But if there is no single win-win strategy for everyone, how do you know which one to choose for yourself? Do you try them all or do you choose the first one you come across and hope for the best? Well, neither. Trying every available strategy is not humanly possible since there are hundreds of them, and sticking with the very first one will most likely lead you to failure. The wisest way to select the right strategy is by first evaluating what kind of trader you are. In order to do this, answer the following questions:
How much can I afford to invest? An individual middle class trader is very different from a large corporate trader, mainly because they are going to operate with different amounts of money. You initial investment amount should be visible enough for you to move along at a reasonable pace, but it should also be comfortable for you to let go off. This means that your budget will not have a huge hole in it in case the first trade you make goes south. Perhaps the best solution is to start small and progress as you go.
How much time do I have for trading? The landscape of your trades will look very different if you have 40 minutes on your hands and if you have 4 hours. Some of us have full-time jobs and family commitments, while for others Forex is what they do all day every day. Based on that, there are also different strategies you can adopt: from the ones that will only require you to process one trade a day to the ones that will demand hours of your undivided attention.
How much risk am I willing to take? Risk is an inevitable part of successful currency trading. But not everyone is comfortable with the idea of going all in on a daily basis. So, before you stick to a certain strategy, decide for yourself on how risky you imagine your trading journey to be. Financial gurus often advise to focus on preservation, rather than growth, and you main task is to find the golden middle between the risk and the reward that will work best for you.
How fast do you want to move? This is tightly connected with all of the above, because investing a small amount of time and money and not taking any risks, will not get you far very fast. However, it is also true that not everyone is entering the market with the desire to get millions in a matter of weeks. That is why it is important to set the exact goals of how much you are looking to make and at what speed you prefer to do it. Slow and steady approach can sometimes be very effective in many areas of life, and currency trading is definitely one of them.
What instruments will you work with? An instrument in Forex trading is a common way to refer to a currency pair the tarder choses. Since all currencies have various price forming factors behind them, it is only logical that they all need to be approached differently. And that is also where the different strategies occur even in regards to the same currency pair, because the perception of the market can be highly subjective.
When you are searching for a strategy to adopt, it is very likely that you will set your eye on a number of methods. There are a few things that will help you decide. For example, you can always try the strategy out in the conditions of the real market and take note how it plays out. This way you can see how the rules of the chosen strategy apply to you personally and what you like and dislike about them. However, in this scenario your actual funds are involved and the success or incompetence of a certain strategy will directly reflect on your account balance. This approach is ideal for the strategies that are widely popular and have been implemented for a long time. But there are also strategies that are less popular and still effective, moreover, there is a chance you came up with your very own trading method - how to check their effectiveness then?
One way to do it is through backtesting. Backtesting is a way of evaluating the productivity of a certain strategy by applying its rules to the past market conditions. We already know that Forex tends to run in patterns and whatever is happening at your current chart has already probably happened at some point before. That is why trying out a strategy in the conditions of the past market events might give you a good understanding of how it tends to act. There are several ways of how to backtest Forex trading strategy. The good news is that in MT4 backtesting can be done manually and there are a few handy instruments built into the interface. The difficulty comes in the process being very meticulous and time consuming at first. Manually moving the chart to the necessary time period and setting up the exact trades can seem like a long and unnecessary procedure, but you will quickly learn that it pays off as it can serve as a great learning tool. The most important part of backtesting is keeping a journal log of each trade you back test. This way you can easily look at the data as a whole and draw your own statistics from the collection of experiences.
Another popular way to figure out what strategy you want to use, work out through the small details and imperfections as well as create your own strategy is by using a free demo account for Forex trading. The answer to what is demo account of Forex trading is very simple: demo accounts are exact copies of real trading accounts with all of the trades and actions happening in simulation mode. Now, while all of the trades are simulated, the market conditions are taken directly from the live market, which means that each trade plays out just as it would in real life. Demo account can be used to learn and practice currency trading skills at first and also to evaluate the effectiveness of various trading strategies and invent your own one. In demo you are not risking any actual money, which gives you an opportunity to stay calm and think clearly - two very valuable qualities for all traders. And the best part of what is demo account of Forex trading is that you can get one for free and use it for as long as you need to. Go to demo to test a strategy or learn a couple of new techniques, and if they turn out to be working - apply the same skills on your live account straight away to achieve similar results.
At this point we looked at the biggest mistakes that often come between traders and their success: underestimating the power of knowledge, trusting in unsuitable software and adopting an ineffective strategy. We are now going to move one to the mistakes that might not seem as important, but they still cause significant damage to the account balances of thousands of traders. One of them is ignoring the importance of risk managing techniques in Forex trading.
Risk management for Forex trading
Many traders mistakenly believe that risk management is a practice of not taking any risks at all. But in reality, avoiding risks will also keep you away from any visible profit and you might end up giving up even faster than a trader who risked too much. RIsk management in Forex is a practice of being aware of the risk you are taking and preparing to deal with the negative consequences, if they occur. There are a few popular approaches to take, and just like with any other currency trading related concept - they can work well for some and not work at all for others. So, you should always keep a hand on the pulse of your trading experience and notice when a certain risk management technique or strategy is not working well for you in order to effectively move on to the next strategy or technique.
One of the most popular risk management techniques is portfolio diversification. Simply put, it is a practice of not putting all eggs in one basket, but applied to foreign currencies. Each currency will have its ups and downs, but this does not mean that you have to go down with it. While waiting for a specific currency to recover and go back up, you can choose to focus your attention on other currencies in your possession and avoid staying inactive and unprofitable. This is also backed up with a fact that when one currency is experiencing a weakening, the one it is commonly paired up with automatically strengthens. This way by getting to know the specifics of adding a number of currencies and investing your time and money in more than one, you are protecting your account balance by always having a source of active income.
Whichever risk management technique you choose, consistency is always a key. It is true for pretty much everything you do on Forex, because having a clear idea of what you are doing and staying connected to your pre-established rules and conditions will definitely pay off faster than trying to catch every wave and follow every trend. Which brings us to the final part of this post - keeping the right state of mind throughout your trading journey.
The significance of trading psychology
Manual traders are more often than not - people. And as people we are subjected to a number of feelings and instincts that sometimes overtake who we are and how we act. Faulty trading psychology is the number one reason why Forex traders tend to fail in large amounts. It is the thoughts like:
“This didn’t work, so it will probably never work”
“I need to be a financial genius to be successful at this”
“I earned a lot today and I will most definitely earn even more, if I keep going”
“I lost today, so I will keep losing”
“I won’t do it because I am not good enough”
All of the above are highly dangerous and toxic - thoughts like these should be avoided at all times. A successful trader is not the one who never has any setbacks, it is the one who is capable of staying calm in every situation and learn from every mistake. This can be achieved overtime, especially if you get into the right mindset - every experience is a valuable one in terms of knowledge. Start small - learn to know when to stop trading and immediately exit the market at the preset point of time. Then move on to trying to see the big picture and reflect on every experience - both positive and negative. As soon as you start seeing your trading journey as a combination of victories and setbacks and value them equally, you will be in the right mindset to achieve any height.
How to avoid most common Forex trading mistakes
To wrap up, let’s briefly go through each one of the concepts we discussed above. A lot of traders quit right after their first defeat and never come back to trading again. While in reality, anyone can become a successful trader, if they are ready to get through several initial steps. You should start by getting to know the technicalities of Forex trading and learn as much as possible about the parts, which in your opinion will concern you the most. Focus on choosing the best tools for your trading experience, including the most effective and easy to use trading platform and a reliable source of information you will use as you go on. Adopt a trading strategy that will meet your requirements and match your comfort level. Also do not hesitate to switch to a new strategy, whenever you feel unsatisfied with the current one. The best way to learn and practice on Forex is by using a free demo account for currency trading - there you can figure out what kind of trader you want to be, which instruments you will work with and what strategies work best for you. Remember to accept risk as an important part of success and approach it with respect and awareness by implementing several risk management practices. And last but not least, try to get into a philosophical mindset and learn from every experience equally, because being able to see the big picture is the main quality of the majority of successful Forex traders.