Anyone with more than a passing interest in the financial markets can now become a forex trader. Forex covers all of the leading fiat currencies around the world, from pound sterling (GBP) to the US dollar (USD). Although forex trading software has made accessing the forex markets easier than ever, this brings with it a host of pitfalls for newcomer forex traders. For every big shot that makes a fortune on the forex markets, there is someone else that has made a silly mistake and lost money.
If you’re looking to dip your toes into the forex waters, here are some of the most common mistakes newbie retail traders make to give you a chance to avoid them yourself. If you can avoid the following trading mistakes, you’ll stand a much better chance of making long-term profits in the forex markets.
Not having a trading plan
The saying, “failing to plan is planning to fail” is never more relevant than in the world of fx trading; there are 182 forex pairs available to buy and sell across majors, minors, exotics and metals. When you’re just starting out as a retail trader, you’ll have no idea about the nuances of every individual currency pair. Some novices make the mistake of thinking that currency pairs trade randomly, so their chances of securing a winning trade are random too. That couldn’t be further from the truth. Although newbies may have some winning trades and some losing trades, there is always a reason why the market moves in the way it does. The best way to trade forex is to plan each trade meticulously. Pinpoint the ideal entry point and understand where you will close your trade if it goes for you or against you. Trading at random means you will never be prepared to manage your profits or your losses.
Placing too many trades
Trading too many markets, or overtrading as it is known in the industry, is a major problem for beginners. Novice traders enjoy the thrill of being ‘in’ the markets. If you find yourself considering executing a trade that doesn’t meet your normal entry criteria, that’s when you’ll know that you’re overtrading. Newcomer traders also pay little attention to risk management. Traders should only risk 1-2% of their trading bank on a single trade in order for your bank to handle losses and mature when those profits arise.
Failing to cut losing trades
Novice forex traders may be inclined to let losing trades run in the hope that their positions will recover in time. This isn’t always the case and losses can and will often increase if you don’t cut losing trades. Always ensure a calculated stop loss is set up to guarantee that you only lose a small percentage of your trading bankroll on any losing trade.
Listening too much to market analysts
Of course, experienced analysts in the financial markets are very useful for those just starting out in forex. They will often alert newbies to market signals for ‘buy’ and ‘sell’ opportunities with various forex pairs. However, try not to become too reliant on the market analysts for your trading angles. Try to form some opinions of the markets yourself first before seeking analysts’ views to validate your entry and exit points.
Learning from your initial forex trading mistakes is vital to ensure you become a long-term winner in the forex markets. There are many skilled retail trades out there that can spot good forex trading opportunities but simply don’t have the risk management skills in place to manage profits and losses efficiently. Take your time and feel your way into the markets and you’ll soon gain the confidence you need to prevail.