ForEx trading can be difficult. But it doesn’t have to be. With enough research about what to – and what not to do – you can be on your way to becoming a success story! Of course, there’s always a risk. But that can be minimized as long as you don’t do the wrong things.
The main reason ForEx traders fail is that they don’t stay focused, don’t evaluate risk, and don’t conduct proper research. You might even be making the same mistakes over and over!
Read on to see what not to do and how to prevent these mistakes. You can also find advice on how to get ahead of the curve and make sure you are getting the best value for your time.
Risk Too Much Capital
High risk, high reward. The temptation is there when trading ForEx. The lure of making millions in a short time is definitely there for young or inexperienced traders.
While putting more money in means you could make a lot in profit; it also means there’s a lot more to lose. Most trading professionals go with the rule of never investing more than 1% of your entire capital per trade.
It is true that you can invest more in ForEx trading in general, just don’t do it per trade. This approach actually gives you a lot of flexibility. Say you’re investing 20% of your capital. That allows for 20 trades at 1% each. There is a significantly higher chance of reward.
The next sections are on:
- Putting your eggs in one basket
- Excessive position sizes
- Ignoring risk aversion
These are all similar concepts, yet all play a slightly different – yet pertinent role- in trading. Particularly when it has to do with risking too much capital.
Putting All Your Eggs in One Basket
The concept of investing among many different trades is a concept known in the trading world as diversification. It allows you to create a portfolio made of various investments.
Diversification is a way to protect you from “overexposure,” which happens when you have your entire amount invested in one or two currency pairs, and one drops significantly.
This leaves you high and dry because there isn’t enough left to cover your ratio. The same principle applies to a student when they make a bad grade at the beginning of the semester and end up with a C because of one bad assignment.
It also helps to diversify so that if you’ve invested a portion of your portfolio in a very volatile or liquid market, you could have more stability overall.
Even investing in a mix of volatile and stable trades is a great way to provide steady growth. And bad days with one stock don’t always mean you will definitely have a bad day with another.
It could be a great day. In fact, lower costing trades generally perform better in the long-term. Therefore, diversification is key.
Excessive Position Sizes
Assuming you follow the step about “not keeping your eggs in one basket,” it’s important that you don’t invest too much PER trade as well. Especially if you’re just starting, you want to make sure you don’t go crazy on a stock – no matter how much faith you have in it. As distant of an issue as it may sound, it’s not that “out there” for people to lose everything through trading.
It’s tempting to think that you know what the chart will do after you’ve had a little experience. The truth is, even the most experienced traders never exactly know what the chart will do – they can only make educated guesses. There’s much to be said (and seen from) risk management and patient trading.
A good way to practice is through demo accounts or small position sizes. Maybe you should consider doing around a hundred or so trades with small position sizes to get a good feel for how the market works.
A demo account is so easy to sign up for and is even easier for practice than small position sizes. This way, you know you can take risks or do things you wouldn’t normally do with your actual money.
Demo accounts allow you to test for what truly works and create the best strategy for various currencies and volatilities.
Even if you only have a couple of trades, you still have to look at the risk associated with the currency pair. If you’re looking to make fast cash but risk losing a lot, you could go for something with a higher risk. This is best for experienced day traders.
However, if you’re trying to make money over time with low risk, you may be better suited for stocks than ForEx. Regardless, you should also know that no matter what you invest – despite high or low volatility – investing is ALWAYS a risk even if you’re investing just a small amount.
If you want very little risk, you could invest in U.S. Treasury bonds, but you won’t gain very much either. And it’s definitely not going to provide the gain you are likely seeking with ForEx. Remember that just because a nice return is flashing in your face, a huge risk profile might also be just beyond the horizon.
Trading With the News Cycle
This is so common. It’s the reason the markets fluctuate in the first place. Interesting news (whether good or bad) contributes to a fluctuating stock market and excited traders. If you pull out immediately or immediately invest after hearing news, you may be shooting yourself in the foot.
The market may even react in the opposite way you thought it would. If you’re invested in a currency pair and scared of something happening in the news, don’t panic. News always seems more dramatic than it is.
Your best bet is to stay invested in something that was slowly climbing because it’ll likely recover as fast as it fell (when everyone realizes it wasn’t as bad as they thought). Let the market stabilize and compare the charts to where they were before the news broke. Be calculated and strategic, not reactionary.
With a fluctuating market, you need to be stable. As we just discussed, the market could move in ways you wouldn’t always predict, so you need to be prepared with a strong mentality and solid strategies.
Just because the market may sometimes seem like you’re gambling, a good strategy may move you forward in a business-like direction. Stick to what you know, and you’ll prevail.
If you have the expectations of high returns that the ForEx market all too frequently gives, you’ll always be disappointed. Don’t be greedy and know when to move and when to stay.
The bottom line is: when you’re near the top, get out. When you’re not ready to get out, based on the indicators (not your feelings), hold off.
Trust In Promoters
Genuine stock promoters are few and far between. Typically, they give you misinformation for their benefit. Whatever you do in your trading career, don’t listen to them. Or, if you do, err on the side of caution.
They work to convince people to invest in something to build up the stock and sell their shares. They may seem like a genuinely helpful person, but it’s important to keep an eye out and discern the difference between a friend and a promoter.
Losing Sight of Strategies
Getting caught in the moment is the plight of the modern trader. It’s easy to succumb to looking at recent news and fluctuating trading patterns. But, if you have a solid strategy already, all you have to do is stick to it.
There are two main ways to maintain these strategies:
- Have a trading plan
- Keep a trading journal
Buying Without a Plan
Simply entering the market at a good time doesn’t necessarily mean you’ll earn. If you have luck on your first-ever trade, you may earn a little bit and get hope for future trades. This false idea of trading may mean you lose in the future because you just “trade by feel.” It then becomes a sort of ritualistic trading plan, rather than one based on research and proven strategies.
Form a plan, trade, and be consistent if you want to get anywhere with your trades. This false hope could cause you to lose everything if you have a winning streak for reasons you don’t actually understand.
Then, you will get a little scared to pull out because you want to make more, and greed may lead to your downfall, as the market is no longer beneficial. It’s very simple to establish a plan. Just see the section below.
How to Establish a Trading Plan
Learn the trading plan that works for you. Demo trading and a little research can help you establish an effective plan.
In your plan, you need to determine:
- Entry and exit points you think will work the best for you
- The amount you plan on investing
- How much loss you can handle
- Price goals or targets
- How much you can risk
- At what point should you stop; in that the trade is fighting against you?
As long as you focus more on sticking to your strategy and maintaining discipline (rather than getting distracted by fluctuating charts), you will more often than not succeed. Remember to be consistent in that you pick one strategy and stick with it, rather than skip around and get confused as to what worked. Make sure to test new strategies out through demo accounts.
Not Keeping a Trading Journal
The only way to ensure you’re keeping sight of your strategies is to document everything. Note each trade – the entrance and exit points, and your gains. You can use technology to your advantage and take pictures of your trades, screen record, or take screenshots if you’re using a smartphone.
Take notes regarding the chart you found and the setup and tools you used in that trade.
Trading Difficult and Unclear Patterns
Sometimes, the stock’s history makes it clear what you need to do and what will happen. You can see straight lines and make predictions without many tools or much legwork. However, this isn’t always (and isn’t frequently) the case when it comes to trading.
There are also false patterns that can sometimes look like a pattern when they’re not. That’s where indicators can help you in that they can notify you and make it incredibly clear through calculations, rather than intuition. Indicators make trading a little more objective, calculated, and scientific.
Trading On Emotion
Fear, hype, or other types of emotion are the pitfall of traders. People are motivated by money and emotions; therefore, the more objective you can make your trade, the better trader you will be. Tools, calculators, news, and charts are the most beneficial assets to trading to allow your mind to be focused and your judgment unclouded.
Entering a Trade Based on Your Gut
Entering based on a “gut feeling” is similar to trading based on emotions. It’s harder to tell because your gut is the deciding factor that follows looking at the facts.
However, you can practice trading enough through demo accounts and small trading amounts to start to get a “feeling” for a good trade. Intuition to know when it’s time is actually gained from experience.
Try not to look at the intuition guiding you to make money, but more the “I’ve done this before, and I know what I’m doing” type of intuition. It’s the difference between confidence and cockiness. This is knowledge and experience-based intuition.
Establish criteria or a set of rules to follow each time that may fill you with the feeling it’s the right time to trade.
Following the Crowd
In addition to the “trading on emotion” trope, there’s something even worse than listening to yourself: listening to others. This doesn’t mean you should ignore good advice from experienced traders. It means you shouldn’t do what everyone else is doing.
Especially if you start following them for particular ForEx pairings, you’ll easily crash alongside all others who fell victim to popularity as well. The result of following what everyone else is doing means you likely haven’t built a solid strategy and are allowing others to get in the way of what you have researched and know is right.
By following people blindly, you may end up paying way more than you normally would or get into a position that’s about to fall (for the same reason that everyone else is doing the same thing as you).
It’s this type of slightly ironic, very counterproductive trading that will set you back when your time could have been spent otherwise learning.
This is also a drawback of joining a trading group, as people think others may know more than them, and the blind start to lead the blind. You may actually want to move in the opposite way – if a trade has too many people flocking to it, drop it before if plummets, and you’ll still have a chance.
Selling Too Quick
Sell too quickly, and you won’t give yourself a chance to earn. Allow yourself the chance to ride the wave of a currency pair that’s on the rise.
Don’t be fearful, be vigilant aware that it could go down, but don’t act on your fear immediately. Analyze. Use the experience and tools you have, and determine if you should hold onto this one.
If you see it starting to go down, then it may be a good time to sell a little short – and still profit. Learn about the line of resistance and, if nothing else, pay attention. If it goes down, it could be time unless you are open to that much risk.
Entering the Market Too Late
You get home after work. You’re tired, but you still want to trade. So, you enter a volatile currency pair and try to gain a little bit. But the truth is, if you join too late, you’ve already missed the mark for a successful trade.
Not only that, but you don’t really have time to watch the fluctuations enough to allow for growth.
Taking Too Long to Sell
On the other hand, taking too LONG to sell can be just as harmful. At least if you sell too early, you can have more control over whether you’ve made something. If you wait too long because you think you’ll get more (even if you had the chance to get some already), this mindset will overtake you.
If you had a chance to win, you should pull out. If you feel you’ve been in too long, you’re probably right. Fluctuations don’t take all day – they happen very quickly. If you’re still unsure, remember: when in doubt, then pull out.
Sometimes, traders get a bit of an ego as well. They start to lose – not even break-even – and cling on with the hope they’ll get a bit more before the market closes in 20 minutes. This is unrealistic and detrimental.
Passing the denial stage of grief is a good start and learning to accept and learn from that day’s loss is best for you long-term. If you realize it’s too late (i.e., you should have already pulled out):
- Admit you’re wrong and remember that experienced traders don’t always get it right 100% of the time.
- Accept your fate. Don’t fight it. It will only get worse.
- Get out
- Document your loss. Sometimes it’s a reason you can’t discern, but you may be able to find something you did wrong the more you practice and learn
- Learn from it
- Set up a system to remind yourself of what to do differently. Have a reference sheet, notepad, post-its… whatever it takes
Buying Stocks With No Volume
It’s simple and should be common sense: currency pairs need volume. However, in an ironic twist, traders fresh or seasoned make the mistake of looking at price only and completely dismissing volume. Tempting as it may be, price isn’t going to get you very far before you look to trade.
Think of money earned as the end result. Volume is a key component that drives that result forward. The effort needed to move a currency pair is the volume.
Without movement, the pair goes nowhere. Without volume and, in turn, movement, a pairing can’t be profitable. That’s why you have to look at volume and not price.
Also, beware of currency pairs moving a lot with only a little volume. This is an indication that they’re temperamental and not profitable. You can use plenty of tools to combat this, and it’s the key to picking a good currency pair.
You want the volume to be good for the price, and you can research all types of facts and figures to make sure you’re keeping up with the averages.
Ignoring Stop-Loss Orders
Use “stop-loss” orders or, as some call them, “stop orders.” These are basically an order you have with the broker that means that you have a limit or sort of “budget” for trading.
It indicates when the market is too volatile and is headed in the opposite direction you want to go. In normal trading, it’s shown by a change in stock prices. But in ForEx, it’s indicated by being a certain amount of pips from when you first started.
This concept is basically like when you go over budget. You sort of ignore that pressing electricity bill due tomorrow to buy some new shoes right now. Then, you repeat that mentality, and it spirals downhill from there. The way stop-losses work is that you set your own guidelines, and at a certain point, the order will automatically cut off and take you out of the trade.
This is important because while you may think it’s part of the ebb and flow of trading, it also means you’ll likely lose more than you gain. You don’t want to throw everything away and hope it’ll work out; you want steady growth.
Because you can set the perimeters for stop-losses, you can set a tight stop-loss order to have it stop before it’s too late. This is the smartest trading decision you will make. Too much risk is really a loss in trading. It’s also pretty easy to cancel the stop orders.
You may think you still have time and should cancel the stop order with the hope that the price will suddenly go back up, but this isn’t a good idea. It’s tragically tempting and defeats the whole purpose of setting the order up in the first place. When you’re at the point that you think you can cancel the order, you’ve already lost anyway.
Even if you trade for a living and constantly watch your computer, it doesn’t mean anything. Maybe you stepped away for “just 2 seconds,” and there was a sudden, unexpected plunge in the market.
You never know with trading, no matter the market, volatility, or currency pairs. If the currency pair starts to go downhill a little, some people panic and pull out quickly before you even realize what happened.
Lack of Preparation
You’ll hear time and time again: trading is not for the weak. It seems like it’s pretty simple: sit in front of a computer and make sure you buy low and sell high. But, trading is much more complex than that.
You have to keep up with trends and news constantly and learn how to use tools. As with any discipline in life, there will always be people with more experience or more ability than you.
That’s not to discourage you or say you can’t learn to be a top trader, but a common mistake traders make is they think they can skim an article and use their intuition for some great trading. The truth is, each person trading has a different level of preparation.
Some people are dedicated and track time zones and news, so they can wake up right before the markets are opening to know precisely what’s going on. Then, they trade right off the bat (another mistake) before they’ve even reached for the coffee.
Here’s what to do before the market opens:
- Keep up with news
- Create a watchlist
- Have a strategy
- Look at patterns that do and don’t work for you
- Be consistent
Obviously, this needn’t apply if you’re a pretty casual trader and aren’t too worried about intense competition.
But if this is your job (in that you’re self-employed), it’s a lot of work to keep up with everything. Wake up early and get a leg up on the market. You have the advantage to a casual, uninvolved trader as long as you:
- Trade strategically
Trading isn’t easy, and as you can see, there are plenty of mistakes that can be made. But there’s also money to be made. The reassuring part is that even the most knowledgeable traders haven’t managed to reach that 100% every time perfect trade. Be patient with yourself, and stick to the rules.
Don’t be so greedy that you end up with a bad strategy and do worse. Simply remember what you learned. Also, make sure you don’t get too clouded in your judgment. Even if you do fail – which will inevitably happen – learn from your mistakes.
Enough preparation, research, and practice are the ultimate school when it comes to learning ForEx. Remind yourself of what not to do, and you’ll be on your way to making money – maybe even making a career – from trading.