The foreign exchange (forex) market is the largest and most liquid market in the world, with over $5 trillion traded daily. With the allure of high leverage and the ability to trade 24 hours a day, forex trading appeals to many beginners. However, it is also one of the riskiest markets due to its volatile nature. Beginners often dive in head first without proper education, resulting in costly mistakes. In this post, we will explore some of the most common mistakes beginner forex traders make, and how to avoid them.
Not Having a Trading Plan
One of the biggest mistakes beginner forex traders make is not having a trading plan in place before putting on trades. A trading plan includes things like:
- What currency pairs you will trade
- What time frames you will trade on
- What technical or fundamental analysis methods you will use
- Your risk management rules (stop losses, position sizing, etc.)
Without a plan, beginner traders tend to make emotional trading decisions which often lead to losses. Spend time developing a detailed trading plan and stick to it. This will help you stay disciplined in your trading. Test out your trading plan thoroughly in a demo account before using real capital.
Overleveraging
One of the appeals of forex trading is the high leverage that brokers offer, such as 50:1 or 100:1. This allows traders to enter larger positions with less upfront capital. However, high leverage can also magnify losses very quickly if the trade goes against you.
Many new forex traders blow up their accounts by overleveraging, putting too much capital at risk on a single trade. It’s critical to use proper position sizing and only risk 1-2% of your account per trade. This will help you survive the inevitable losing trades. Don’t fall into the trap of thinking more leverage means easier profits.
Chasing Losses
When beginner traders suffer some losses, they often attempt to chase their losses by opening larger positions to try and win their money back quickly. This reckless behaviour usually just compounds the losses.
It’s important to accept losses as part of trading, and stick to your risk management rules, rather than chasing losses and revenge trading. Often, the best thing to do after taking a loss is to take a break, reflect on what happened, and wait for the next trading opportunity. Don’t let emotions take over your trading decisions.
Lack of Patience
Patience is a virtue in forex trading. Experienced traders know that it’s best to wait for high-probability setups to appear, rather than try to predict every market movement.
However, many new traders lack patience and feel compelled to be in a trade at all times. This leads to overtrading and opening marginal positions. It’s essential to learn to identify high-probability trading opportunities through analysis and have the patience to wait for them to develop. Remember that not trading is also a position.
Trading Too Many Currency Pairs
It’s easy for new forex traders to fall into the trap of jumping from currency pair to currency pair searching for trades. While the forex market is huge, realistically no trader can properly analyse more than one or two currency pairs at a time.
Stick to major pairs like EUR/USD, GBP/USD, and focus your analysis there. Trading too many pairs makes it difficult to get to know the nuances of each pair and establish solid trading strategies. Pick one or two pairs, learn their unique price action, and become an expert trader in those pairs.
Not Using Stop Losses
Neglecting to use stop losses is one of the fastest ways for beginner forex traders to blow up their accounts. By not using stop losses, you are exposing your capital to unlimited risk.
Always implement stop losses on every trade, placed at logical technical levels. This will limit your downside in the event of an unexpected adverse market movement. Only risk capital you are comfortable losing on any single given trade. Don’t fall into the trap of thinking “it will come back, I’m sure of it!”
Ignoring the Trend
Many new traders go against the prevailing trend out of a belief that markets will quickly reverse. However, the trend is a trader’s friend – it’s best to trade with the trend rather than against it.
Study the higher timeframe charts to determine the overall market trend. Then look for trading opportunities in the direction of that trend. Going against the trend usually has a lower probability of success. Don’t pick tops and bottoms, wait for trend confirmation.
Trading forex profitably is challenging but can be extremely rewarding. By knowing some of the most common mistakes beginners make, such as not having a trading plan, overleveraging, chasing losses, impatience, trading too many pairs, not using stops, and ignoring the trend, you can avoid making the same errors. Follow good risk management habits, implement a strategy, and remain disciplined in your trading. With practice and patience, you give yourself the best chance for trading success as a forex beginner.