To be successful in the Forex market, a trader should keep himself updated with new market techniques as well as the techniques to overcome the emotional obstacle. There are many general trading mistakes that most of the traders do in the forex market. Of them, we will discuss the top 5 trading mistakes to avoid by traders in the Forex market.
Many new and emerging Forex traders enter into the markets with high-profit expectations. However, they may quickly find that making a consistent profit is not as easy as they expected. In some cases, this realization is quite discouraging, mainly due to the human emotion in Trading.
There are indeed many professional Wall Street traders who have made many trading mistakes. However, the key to being a successful trader is to study their mistakes and learn how to minimize them from going forward. Making mistakes is a process to learn something, but it’s unacceptable to repeat those mistakes.
The following article takes a look at five trading mistakes that a trader should avoid.
Top 5 Trading Mistakes to Avoid
As we know, making a mistake is a part of the learning process. But repeating mistakes is a bad practice. To be a successful trader in the forex market, a trader should know how to overcome the errors. However, understanding the mistake and how to overcome it is an important activity that a trader should keep in mind.
Therefore, a trader should always work hard to avoid trading mistakes. In this section, we will see the five trading mistakes. If you see their errors in you, you should learn how to eliminate them as soon as possible.
#1 Lack of Training
Before entering a trade, you should have better preparation. There are a few traders who perform the necessary education before moving into the markets.
If you want to know why newbie forex traders fail, the primary reasons are the lack of preparation and training. Trading is the most robust profession to earn easy money. The Forex market is hugely competitive, and it is challenging to maintain an edge in the market, even with preparation. So, you can imagine what may happen to those that do not take the necessary training to prepare for the Forex trading. Beginner traders are indeed mostly ill-equipped to face the market.
They feel as if they can make their desired profit within a short time. However, as they do not have any type of routine before the trading session, they cannot manage it. It is like we would never expect an inexperienced and untrained soccer player to play like Lionel Messi. That seems almost too obvious for every sector. However, when it comes to Trading, new traders usually forget this.
In forex trading, you are competing with major institutions, hedge funds, Central Banks, and other market professionals who are very expert. Therefore, you cannot compete on the same playing field without suitable preparation. You should do a lot of homework each day to understand the market you are planning to trade.
Whether you are a technical trader or a fundamental trader, you should have a proper education from a reputed institution. After that, you should follow a daily routine, so that when your desired setup occurs, you can execute the trade flawlessly.Furthermore, calculating the probability is very important. In price action trading, traders often use an oscillator to maximize profit by increasing probability. However, there are no rules for a secondary indicator. You have to choose that suits you most.
#2 Trading Without Stop Loss
The primary role of a Forex trader is to be a Risk Manager. The first duty of a forex trader is to manage risk above all else. Therefore, Traders should use the best ways to manage risk by stopping loss on every trade. Besides putting stop loss in every business, you should monitor the level with the change of market conditions.
Many novice traders prefer mental stop loss. They don’t put the level in the chart but make a plan to exit for an injury or worse if the market reaches the predetermined level. As the forex market is very volatile, this concept may put additional risk on the investments.
Using actual stop loss rather than the mental stop loss is perfect for fighting in the market with proper sustainable possibilities. If they have determined the invalidation level on trade, no additional time should be given on the trade. Therefore, a hard stop should have been preferred as a part of the risk control mechanism.
Moreover, the second argument for not using stop losses is that you are not sure the market will go your way. You should follow what mentioned below:
“The Certainty in the Forex market is Uncertainty.”
There is a possibility of substantial unexpected losses for not using stop losses. Therefore, for all types of traders, this trading mistake is entirely avoidable.
#3 Trading with Poor Risk to Reward
Many beginning traders believe that the best trading systems have the highest win rates. As a result, they gravitate towards strategies that have a maximum win rate. However, these strategies may contain huge risks that may ruin the total investment.
Let’s look at two examples below with a high win rate strategy and a moderate win rate strategy:
Strategy A wins 70% of the time, and the average Win to Loss is 1:2. That means the amount per winning trade is half of the losing trade. Strategy B wins 40% of the time, with an average Win to Loss is 2:1. That means the winning trade ratio is two times higher than the losing trade.
Which strategy is more profitable?
The right answer is B.
Now let’s take a look and see why B is preferable:
The Trade Expectancy for Strategy A: (assuming $ 1000 Average Win)
(Winning % X Average profit Size) – (Loss % x Average Loss Size)
(.70 x 500) – (.30 x 1000) = $50 per trade
The Trade Expectancy for Strategy B: (assuming $ 1000 Average Win)
(Winning % X Average profit Size) – (Loss % x Average Loss Size)
(.40 x 1000) – (.60 x 500) = $10 per trade
Traders should not believe the higher win rate systems than lower win rate systems. Moreover, traders should focus on the Risk-Reward profile for each trade besides the win rate.
#4 Trading with Emotions
It is a widespread mistake that many traders face. Emotional Trading is when a trader allows personal emotions to impact their decision-making. Sometimes it can be helpful, but in most of the cases, it brings into a lousy trading idea.
Most traders may agree that having proper control of their trading emotions is one of the essential traits in the Forex industry. Emotional Trading often involves breaking away from the trading strategy. Removing emotion from Trading is hard to process. Emotional Trading is a psychological tendency that impacts trading decisions. Sometimes without you may even realize, and is an aspect of behavioral finance, the tendency to make irrational financial decisions. Someone with a strategy should follow it and not make any decision based on emotion or ‘gut-feeling’.
A trader needs to know how to identify signs of emotional Trading. Hanging on to a falling price because it “owes” the trader a return. Hiding from price updates for fear of loss is the third sign. Moreover, Trading without a stop-loss is the fourth.
#5 Not Maintaining Trading Journal
Every successful Forex trader will tell you that keeping and maintaining good track records is essential. It is good to have a robust record-keeping that allows a trader to know the consistency of the account’s growth.
As a trader, our revenues are profits from our winning trades, while our expenses are the losing trades. We cannot determine the improvement of our business unless we do not maintain a detailed trading journal.
Therefore, a trader needs to maintain a trading diary and review it regularly. It is one of the best trading tips that a trader should follow. At the same time, consider the trading journal and change the trading plan according to its result.
If you are serious about Trading and want to consider it as a real business, you have to start with a commitment to have a trading journal. If you find yourself improving consistently, remember to get measured, and advanced.
Conclusion
In this article, we have discussed the top 5 trading mistakes that traders make. The first step to fix your errors is to understand them. Take some time and go over the common trading mistakes and see which ones are relevant to you.
You should make an effort to work on improving every area of your weakness. Keep in mind that there is no final goal in Trading. We all should work daily to improve ourselves. Even the 30 or 40-year old veteran in the trading business is learning something new and continually learning to increase their trade efficiency.
If you spend sufficient time for self-reflection and an honest effort to make incremental improvements, you have a chance to get success in the markets.
Fund Developer 