If a price can only go up or down, then trading should be easy right? Not quite. Forex trading has the potential for lucrative rewards when managed strategically, but brings equally big risks for those who come unprepared. Staying up to date on forex education, understanding the markets and trading platform, and learning from experienced traders, can pave way for success. Knowing what to do is important but understanding what NOT to do is just as significant.
We spoke to Marc Elison from AxiTrader to reveal the 5 common forex trading mistakes beginners should avoid.
Trading Without a Plan
The most common mistake for beginners is to get into trading without a trading plan. Start off by determining why you’re getting into Forex trading. Is it to seek out a challenge, to earn some extra income, or to turn trading into a full time job? Knowing your goals from the start will shape how you trade and the appropriate strategies you need to devise.
Tip: Start with your goals and go backwards from there. Factor in how much time you can devote to trading, whether you want to pursue high volume or low profit trading and whether your level of knowledge needs boosting before you get started.
As a beginner it’s easy to let an early success cloud your judgement. Being in the zone works better on the sports field then in a forex market, so even if you’ve hit a run of profitable trades, make sure you go forward with a clear head. Don’t allow emotions to take over and dictate your trading patterns. If you are on a hot streak, consider if your decisions are aligned with your trading plan and strategy or if they are knee-jerk reactions looking to continue a hot streak. Remember, it’s your money so take a deep breath and let your head rule your heart.
Tip: Make note of the following questions and consult them before significant trades; Does this fit with my strategy? Is this based on solid information or intuition? Would I regret this decision if I lost on this trade? Asking these questions will help you determine if the decision is financially or emotionally driven.
Leaving Short-Term Trades Open Across Weekends
When it comes to forex markets, timing is key. This means being aware that leaving any positions open across the weekend can leave you at the mercy of significant gapping. It’s natural to encounter uncertainty with overnight gaps and news events that effect price variations. Weekend gaps though create longer periods of uncertainty. Imagine a scenario where a $100 trade risk turns into a blowout worth five times that initial outlay due to unforeseen market influences simply because you had no control over your money until the opening of trade on Monday.
Tip: As a new trader, implement a rule in your trading plan to close any positions on a Friday that are at a higher risk of gapping through your stop-loss over the weekend.
Trading Too Many Currency Pairs
No matter the level of experience you have in forex trading, taking on a new currency pair is a risk. Each set comes with unique traits and characteristics and when your money is involved, you should live by the ‘less is more’ mantra. When you’re taking your first steps in trading, focus on simple processes to help build experience without jeopardising your investment. A common mistake of beginners is to try and trade numerous pairs – this means more decisions and more chance for error. Focus on currency pairs in the market of your choice and do less of the right thing, not more of the wrong thing.
Tip: Starting off with one currency pair will build your confidence, experience and decision making skills until you feel ready to take on more.
Failing to Record Performances
So many beginner traders fail to accurately track their trading history. If you are not tracking your results, then you have no indication of what you are doing right and wrong, and how or where to improve. A good start up rule is to record and compare 20-30 trades at a time, changing your system to improve results. These changes are minimal and controlled, which lessens the risk and results over time in a successful trading system that is tailored to your goals.
Tip: As well as recording your performance daily, add a score of A, B, C and D for each trade. This will help you identify in a visual way the direction you need to head, as pages of numbers can be a little overwhelming at first.