Five Stupid Mistakes Forex Traders Make
In forex trading, it is always possible to make mistakes, but some are stupider than others.
Of course, plenty of mistakes are unavoidable and even the most experienced traders can make them by accident.
By minimising our chances of making mistakes, we can hopefully improve our chances of trading success.
In this article, we’ll look at the top five stupid mistakes forex traders make and how you can avoid them.
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Top five stupid mistakes
Here are our top five mistakes forex traders make, and how to avoid making them.
1. Forgetting to use a stop-loss!
This is a seriously common mistake to make and it can be painful when it happens.
Without a stop-loss, you can put yourself at serious risk of losing big time. Sure, you might get lucky once or twice and not make a loss, but it shouldn’t become a habit.
You lose nothing by using a stop-loss. Think of it as an insurance policy.
Remembering to put a stop-loss can sometimes be tricky. The best way to prevent it happening again is to look into why you forgot to put one in the first place.
Most likely you forgot to put one because you got caught up in the action of trading. You may have seen an irresistible opportunity.
This may be a sign of other problems. You need to be in control of your approach to the market. Ideally, you shouldn’t trade based on emotions, you should trade based on facts and probability.
The best way to avoid making such simple mistakes is to slow down and to take more notice of your actions.
One way you can do this is by keeping a trading journal and noting all the actions you take to fulfil a trade.
2. Using leverage at the wrong moment
First things first, leverage is a very risky tool to use.
It’s one of the primary things we’re told when we start trading by literally everyone; leave it to the professional traders! It’s too dangerous!
And it is true. If you’re a new trader, you really shouldn’t be using it.
This is for two reasons.
One is that you probably don’t have enough capital to really risk it. You can empty out your trading account seriously fast using leverage.
The other reason is you probably cannot yet pinpoint when to use it. In other words, you are yet to learn the perfect moments to use leverage.
You cannot just expect to use leverage whenever you want and make a profit. You need to learn how the market moves and what the likely outcomes of that trade will be.
If a trade is only likely to give you 10 or so pips, is there really a need for leverage? No, not at all, all you are doing is adding an unneeded element of risk to your trading.
But there is also a third reason why leverage is not a good idea; you probably don’t understand how it works!
How can you overcome this messy forex trading mistake? Simple, don’t use leverage until you are a confident trader and understand the consequences involved.
3. Abandoning your trading plan
A trading plan is something you should spend a lot of time putting together.
It should be tried and tested, developed gradually to make it highly reusable, promise you a good degree of returns and be personalised to your trading style.
So, why on Earth might you abandon it?
Well, the reason for most people is quite simple; you thought you could make a little more money.
Now, while there is nothing wrong with wanting to make more money, the risk of abandoning your trading plan can result in you entering ‘unchartered waters’.
With your trading plan, you can predict with a level of certainty what way the market will swing. But without it, you most likely will not be able to, putting a lot at risk.
However, there is also another reason why someone might drop their trading plan, fear.
You might have a position open and then suddenly get cold feet and back out of your trading plan.
More often than not, this results in you closing the trade at an undesirable point.
Sure, sometimes your gut instincts are correct, and you got out of the trade before things turn ugly. It is very possible that the currency pair you were trading sinks after you got out.
But what if it doesn’t?
Then there are two likely outcomes. The first being you didn’t lose too much money. While this isn’t too terrible, it can be frustrating.
The second being you lost money and the market shot up after, meaning if you kept your position open a little longer, you would have been profitable.
This can be more than frustrating and can lead you to start hating your every move and be a precursor to quitting forex trading altogether.
You can overcome this by learning to trust your trading plan. Yes, it will take some time and if you still can’t comfortably follow it, it might be time to consider making some serious changes.
4. Listening to other people’s advice
You can learn a lot from other traders, especially those more senior to yourself.
And while discussing trades is great, you shouldn’t accept everything other traders tell you as complete and accurate fact.
It is not necessarily that they are lying, more so that they might be exaggerating or only talking about extreme situations.
Further to this, you have to accept that their trading strategy will be different from yours or that they might simply be wrong about some things.
And then there are people who give you a whole strategy to use at a certain time, claiming that it will make you money no matter what.
Where did they get this information from? How can you trust them? What are the chances of failure?
These are all questions you should be asking yourself before acting on any advice.
A great example of why you shouldn’t listen to other people comes from Jesse Livermore, one of the greatest traders that ever lived.
At one point in his career, Livermore made a huge risk on a tip he received about the cotton trade. He bet big and lost approximately 90% of everything he owned.
As a general rule, don’t listen to what others are saying. Instead, rely on what you can test to be true or false.
If your gut instincts are telling you something is wrong, it might be worth listening to them. Always do your own research, this is always more valuable to you than what others tell you.
5. Chasing losses
Chasing losses is actually a gambling term and has become commonly used in forex trading.
In short, it is when you make a loss and instead of stopping and assessing why you made a loss, you keep trading in an effort to make back what you lost.
Typically, forex traders that do this take up bigger and bigger positions in order to recover their losses which keep getting bigger.
As you can guess, this can become a very serious problem. If you use leverage, it can make the problem a lot worse.
A great example of a trader who did this is Nick Leeson, a floor trader in Singapore who worked for Barings bank.
Leeson made a huge series of losses and hid them in a hidden account and secretly tried to make back the losses by continuing to trade.
His losses caught up with him and were so huge they sent the bank to the history books.
A key thing to remember about people who chase losses is that they are not really trading any more, they are gambling. And in gambling, the house always wins.
If you catch yourself doing this, you seriously need to reassess how you trade.
You can’t even really refer to it as any kind of strategy; strategies rely on data that can be used to make an informed decision.
And that should be the first step you take in reversing this issue. Learn how to make informed trades.
Learn to follow trends and use indicators to find opportunities, don’t put your faith in luck.
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If you remember anything from this article, make it these key points.
- Never forget to use a stop-loss! It’s a super basic thing to do, don’t forget it.
- Keep away from leverage until you know how to handle it. Seriously, leave it to the professionals.
- Have a trading plan and stick to it. Don’t listen to the advice of others and avoid chasing your losses.
- Learn from the mistakes of famous traders. They’ve done it all, even the most stupid of mistakes.
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