When learning a skill for the first time, you are bound to make mistakes. All this means is that you have the capability to learn in order to improve yourself.
Forex trading is such a skill. Beginners tend to make mistakes, and this sometimes leaves them disheartened. However, these mistakes are nothing to be ashamed of, as they happen to most beginners, even those who ended up thriving in Forex trading.
Still, it is always nice to learn from the mistakes of others. If you can avoid making the common mistakes, then you can save yourself some time and money in the long run.
Common Mistakes in Forex Trading
Not Sticking to a Trading Plan
Most beginners may start trading without even having a trading plan to begin with. They just trade according to their gut or their vague understanding of market trends and indicators based on instruments that they may not even fully understand yet.
On the other hand, veteran traders have a clearly defined plan at all times. They know when to enter and exit a trade. They have a cap on the amount of capital they are willing to invest and the maximum loss they are willing to take. They stick to this plan, even if the market suddenly undergoes a fluctuation that could tempt them to deviate, as they have experienced firsthand that deviating from the plan, more often than not, ends in failure.
Even when beginning traders formulate a plan, they do not necessarily stick to it. They are often rattled by sudden shifts in the market. After a couple dozen experiments in deviation, they will understand that it is best to stick to a plan.
Averaging down refers to the practice of betting more money on a currency pair that is already losing you money in the hopes that it will eventually appreciate. The idea is that, when the currency depreciates, it becomes cheaper to invest in it, so when you do, the average amount you invested in it decreases.
While this strategy may work sometimes, it generally does not. All it does is dig you into a deeper hole than you are already in.
For day traders who must make sure they are in the money within the day rather than after a long period of time, averaging down can be really tempting. This is because the hope is that the currency will take a turn for the better within the day. What you need to realize is that all averaging down does is lose more of your money, preventing you from engaging in trades that are more rewarding.
Instead of averaging down, it is better to just get out of the trade while it is still early. That way, you can use your money on more worthwhile trades.
Reacting Too Early to News
Any trader with common sense knows that world events, particularly those in the news, affect the value of currencies. As a result, traders are always on the lookout for political and economic developments that could give them insight into the market. However, a veteran trader knows that acting too brashly to world events could be a huge mistake.
When a major political event or natural disaster occurs, it is usually predictable that the market will be affected in some way. What is less predictable is how exactly the market will be affected. You would be surprised how some events have the absolute opposite effect on the Forex market from what a lot of people expect.
After a major event, the market usually undergoes a period of volatility. Beginning traders typically trade right away, risking the market at its most volatile. On the other hand, veterans know to wait it out, striking when the market is in a much more stable state.
Not Calibrating Expectations
With all the promise of Forex trading, some traders develop unrealistic expectations. This usually comes from believing that they have studied the market so well that they can make reasonable predictions based on their rational understanding of the market.
However, a veteran trader understands that the market can often be illogical. This is why, again, a trading plan is absolutely essential to successfully trade in the Forex market.