Updated: Jan 24
Trading Forex is not an easy game. If you are looking to start your first-time forex trading, these 10 reasons will help you avoid common mistakes and steer clear of common pitfalls.
Forex trading requires a lot of dedication to learn how to trade and develop a solid foundation of foreign exchange knowledge. It takes time to be able to apply this Forex knowledge to real-time trading experience and confidence in volatile and unpredictable market movements. Hope that in this article, you can learn to avoid the main pitfalls that most traders make and learn from their mistakes.
Insufficient start-up capital
Many new Forex traders are already starting on the back foot. They started trading foreign exchange because they needed more money and wanted forex trading to be a quick and easy way to make huge profits.
Forex marketers have exacerbated this situation by promising the potential for large returns with a small amount of initial capital and encouraging beginners to trade with high leverage. This is very risky and the surest way for you to lose all your funds quickly.
Take it slow and steady wins is the key in Forex trading, and compound your return with growing capital is how we keep our constant winning in the long run. Using this calculation method, you need a considerable amount of capital to get started in order to make a worthwhile profit and still minimize risk.
One thousand dollars is a decent amount to start with if you trade micro-lots. Otherwise, you are just setting yourself up for a potential disaster. If you do not have these kinds of funds, it may be worth it to save until you do and in the meantime hone your skills with a demo account and educational Forex material until you are ready to start trading live.
Beginner Forex traders should risk no more than 1% of their capital per trade. Trading with any more capital than this increases the chances of making substantial losses. You can increase that to 2% as you become a more experienced trader, but you never want to trade with a substantial amount of your capital in one trade. This doesn't mean that you shouldn’t take advantage of the Forex market’s availability of high leverage. While this is one of the strong advantages available and offered to Forex traders in this market.
Poor Risk Management
Poor risk management, and even worse, no risk management is a major reason why Forex traders lose their money quickly. Risk management is key to survival in Forex trading including day trading.
You can be a good trader short a short term and still be wiped out by poor risk management. You need to not only make sure you are following a sound Forex trading plan to make a profit, but more importantly, you want to minimise losses so that you can keep the capital you have. Trading platforms are equipped with automatic take-profit (TP) and stop-loss (SL) mechanisms for a reason. Make use of them! Most of our Tradingquay members rank this as the number one reason for their failure before being consistently profitable.
Not accepting responsibility for losses and mistakes
In Forex day trading, there is absolutely no room for blame for the game. Taking responsibility for your losses and Forex trading mistakes is the most important lesson you can learn.
Take responsibility, you won't waste time and energy blaming anyone, but cheer up after the loss-after all, they will definitely happen.
Instead, decide to move on or quickly reduce losses, or whatever you need to do in the environment you find yourself in.
A big reason many Forex traders fail to make money is they will not take full responsibility for the outcomes of their trades and take the steps to do something about it.
An important reason why many foreign exchange traders fail to make money is that they will not take full responsibility for the results of the transaction and will take steps to take measures in this regard.
Over-trading is one of the most common things that prevent you from making money in Forex trading. Forex traders who enter and exit the market spontaneously and are indecisive in their transactions will not only lose their transactions, but they will also charge more through spreads and/or commissions.
Forex traders do not have to make a lot of transactions to succeed, you only need to make the right transactions.
This is why Forex trading strategies are essential and able to identify the correct conditions for trading. This also applies to day trading.
Poor Forex trade management / no trade management
This has nothing to do with following the trading plan and knowing when to enter forex trade. After you enter the trade is when the difficult part begins. 'The newbie knows how to enter, the professional knows how to exit'. --Traders says.
It is shocking that most Forex traders do not have a Trading management plan, either out of ignorance or because they think they need to be done alone.
But taking this stance is arrogant, and if you think that you can react in the right way even under stress, then you will harm your Forex career. It is logical that when you have something particularly important, such as money, people will behave differently and more emotionally.
By having a clear trade management plan which includes when to open a trade, when to close it, your minimum risk to reward ratio, the percentage you are willing to risk of your account value and so much more. When you are tempted to go on instinct or react emotionally you will be disciplined to follow the plan.
Not having a trading strategy
Anyone who wants to conduct foreign exchange transactions needs to develop a trading strategy or a set of strategies, including appropriate risk and capital management.
Do not place a trade if you don't have a reliable Forex trading strategy. It's better to go to Las Vegas to gamble. You might rather go to gamble and lose it all in the casino.
It is absolutely vital to have an effective trading strategy that you are confident in and know how to identify and apply. Don't just randomly choose Forex trading strategy. In fact, take the time to learn it and master it.
Having a trading strategy will really provide you with the edge you need so you are not distracted by feeling or seeing other patterns or market movements that may not actually be there.
Whether it is day trading, a buy and hold strategy, fundamental analysis, or any other strategy, you must put in the time and effort to get the Forex education required to know them well.
Always remember that becoming a successful trader means that you should continue to make profits in the Forex market. This only happens if you develop the discipline and good habits to win trades consistently.
The success of Forex trading depends on your consistency, and this will only happen when you trade reliably by applying and understanding your trading strategy and related factors.
The only way to achieve success and longevity in the Forex market is to cultivate patience and consistency. Forex traders should not hope to win money in a few large trades. Over time, this will definitely lead to huge losses. Understanding how to make smart, smaller trades every day is the best option.
You must also accept the fact that the loss will happen. No one always wins. Even the best Forex traders may not necessarily win the trade. However, what they did was accept the loss and reduce the loss as quickly as possible to minimize the risk and loss and move on.
Forex trading is a marathon, not a sprint. In the long run, your overall performance is much more important than what happens in a day.
Just make sure to minimize the market risk of each trades so that you can have the funds to trade again on another day.
Yes, you can indulge in Forex trading and day trading, just like indulging in anything else.
Forex day trading in particular will bring a lot of excitement and adrenaline surge, as well as the highs when you win the trade and the lows when you fail.
This emotional roller coaster can be severely addictive. When you start chasing prices and get caught up in excitement and emotions, this addiction to forex trading may cause you to lose money.
Once again, this is why if things don't go well, traders need to enter the market with a clear exit strategy. Chasing price, that is, opening and closing positions without a plan, as opposed to this method, not trading. This is gambling.
When you realize that you are losing control of Forex trades or are too emotional, it is best to withdraw from the trades on the same day and keep your account balance intact. It is best to live another day before trading.
Getting Psyched Out!
This topic covers quite a few different subtopics, but they all deal with the same thing. You let the market and your trading get in your head and mess with your trading plan.
Do not second guess yourself and jump from trade to trade erratically. Pick a direction according to your trading strategy and stick with it.
If not, you can find your trading capital dwindle quickly.
Refusing to Be Wrong
Some trades will just not go your way. It happens. We want to be right and we get upset if we are not, but do not let that psyche you out.
Being wrong sometimes is just part of trading. As a Forex trader, you just have to accept that you are wrong sometimes and move on.
Get used to it because admitting you are wrong and cutting and minimising losses and moving on is a lot easier to take than insisting you are right and ending up with nothing left in your trading account.
These are not the only reasons that Forex traders fail and lose money, but they are certainly the main ones and the ones that are the most common.
Becoming a real student of the Forex market, doing your research, developing a solid trading plan, managing your capital as well as developing great trading attributes like patience will all ensure that you will have a long and successful trading career.
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*Risk Disclaimer: Forex trading carries high risk. Past performance is not necessarily indicative of future results.