With more than $5 trillion trading on average, the forex market is the biggest financial market in the world. While trading in the forex market, many mistakes can be made. These mistakes will inevitably lead to losses or an inability to trade profitability. To avoid these common mistakes, traders need to be aware of them and take steps to avoid them. Understanding the logic behind these mistakes will help both novice and experienced traders limit their losses. So before starting your trading journey, have a look at these 10 big mistakes that most forex traders make and gather the learnings to have successful trading.
- Trading Without a Proper Plan
Lack of a trading plan can be a high risk. Without it, it’s difficult to know when to enter or exit the market. Trading in forex requires devising a trading plan that outlines all your trading strategies to make money. Your forex trading plan should include the currency pairs you will be trading on, your investment goals, markets you will trade, the time frame for analysing trades, your risk capacity, and so on.
Your plan should incorporate your trading decisions, starting from your strategies to risk management and your exit plans. Once you make a proper plan and start implementing them in your trading journey, you are surely going to have a better risk-free trading experience. In a volatile market like forex, a plan can help you to keep your trades in control and avoid losses. Without a plan, your trading can look like a gamble and may land you in the worst situations that you can’t afford.
- Choosing the wrong broker
For forex trading, you need to have a broker. Choosing a reliable and trustworthy broker after due research is crucial to having a smooth trading experience. Before considering a forex merchant account provider, you need to consider numerous things to avoid making wrong decisions. Look for a platform that facilitates easy deposits and withdrawals, 24/7 customer support, provides flexible leverage and holds a good reputation in the market.
- Trading without a stop loss
Stop orders are an essential part of any trading strategy. They limit losses by automatically selling an asset when it reaches a certain price point. Forex merchant account providers offer a stop loss which restricts losses in volatile markets if the currency price starts moving in an opposite direction as compared to the one specified initially.
With a stop-loss order on your trades, you can reduce your investment risk substantially. Even if you start making losses on your trade, the stop loss averts you from losing more than you can afford. Thus, having a stop-loss order for every single day in your forex trading is crucial.
- Misunderstanding leverage
Leverage refers to the use of borrowed money to make larger trades in a currency. Though it is helpful in many cases, it can be riskier too. As it requires less personal capital, traders try to generate greater profits by trading forex since it offers high leverage.
Managing the amount of leverage is extremely crucial as using it can land you in both gains and losses. If not managed well, the losses can be more than what you can afford. So, you must use it whenever it’s too important and you are sure about your trading decision.
- Trading without adequate research
The biggest mistake that traders make is not doing enough research before they start trading. Forex traders should spend time researching the market and finding out what they are comfortable with trading to find the best trading opportunities.
The currency markets are highly sensitive to the news and development of the world. You need to keep yourself updated with the current market trends and future scenarios before starting your daily trade. The more you upgrade your fundamental analysis of the trading market, the wiser is your trading decision. Having proper information about the direction of the market will help decide your trades by minimising the sudden shocks.
- Trading on Emotions
Emotional trading can result in irrational and unsuccessful trading. All decisions should be taken after proper research and calculating the risks involved in the market. The emotion-driven actions aren’t backed by any technical or fundamental data. Hence, it will only lead to risks of losing out money.
- Poor risk management
Risk management plays a key role in forex trading. Considering the risk-to-reward ratios is important. Traders often overlook the positive risk-to-reward ratios. A positive risk-to-reward ratio like 1:2 means the chances of your potential profit being double the potential loss on the trade. By setting a ratio, traders can clearly understand their expectations and trade accordingly.
- Not reviewing trades
Traders should maintain a trading journal to review their trading plans and decisions. Having a trading journal helps in identifying the mistakes along with the successful facets. They can also change the strategies they are using to maximise gains and minimise losses. With a trading journal, the understanding of the traders about the market enhances. They can highlight their errors and devise their strategies after rectifying them in the future.
- Risking beyond your affordability
Whether it be forex or any other financial market, risks are inevitable everywhere. But with proper planning and risk management, it can be avoided. The key point of your risk management should be determining the amount of capital you are willing to risk.
Day traders should risk less than 1% of the capital on any single trade. If you can afford to lose more than that, you should set a mark for yourself. You must stop immediately if you reach the peak point of your risk. With discipline and proper strategies, these risks can be mitigated. But, as a trader, you must play with the money that you have set aside and avoid being greedy.
- Inappropriate trading strategies
Forex traders often make the mistake of trying too many different strategies at once. Trading multiple strategies at once can lead to confusion and indecision which can lead to traders making a bad decision and losing out money.
These are some of the most common mistakes that both beginner and experienced traders can make. But with proper planning, execution, and knowledge, one can mitigate the risks involved in forex trading and enjoy a smooth and risk-free trading journey.