Common Mistakes New Forex Traders Make

Common Mistakes New Forex Traders Make

Everyone makes mistakes; some mistakes are more common than others. While recognizing that making mistakes is part of the learning process, I have listed some common mistakes that new Forex traders often commit, so that when you later make a mistake that you are aware of, you can avoid them in the future.

1. Overconfidence

Overconfidence is the tendency to place an irrationally excessive degree of confidence in one's beliefs and abilities. When you have experienced a few winning trades in the market as a rookie, it is very easy to get caught up in the thinking that money is easily made in the Forex market or that you are invincible. The real danger comes when your overconfidence causes you to place bigger lot sizes, and to lose sight of proper money management.

Overconfidence leads to self-inflated ego or even arrogance, and that has no place in trading success. Arrogance tends to keep a trader too long in his losing trade because he may not like to admit that he has been wrong. Always adhere to your physical stop loss. Mental stops do not work.

2. Lack of Confidence

Lack of confidence often results from trading losses. Your mind tends to assume the worse scenario for each trade, and that mindset can lead to missing out on great trading opportunities. One way to overcome this is to write a motto in your trading journal, and try to go over it in your mind several times a day. Your motto could be something like, "If the trade doesn't work out, it will not harm my capital". Go through your past trades which are recorded in the journal, and learn from those mistakes. Acknowledge that losses are part of the game, and one way you are protecting yourself is through a carefully planned stop. Convince your mind that some risks must be taken in order to profit from the market, and what you can do is minimize the risk, not totally eliminate it.

3. Being The First

It is normal to want to jump onto the trend at the very beginning, and not wait till a later time when signals are clearer and better. From my experience, the later entry can be far better than the earlier entry, especially when you have already missed the initial entry signal. Many traders are so eager and anxious to join in a trend that they are willing to risk potential roadblocks in their trade, such as when the currency price is approaching a level where it is likely to go against them, or prior to the announcement of important news. If you always want to be the first, you end up making very rash and impulsive trading decisions. Go for the higher probability timing than the earlier timing, because it can save you a lot of unnecessary stress and headaches when you see that the market is going against your position.

4. Trading On Tips

New traders may feel tempted to trade according to trade recommendations from analysts because they do not yet possess sufficient knowledge of the Forex markets, or know how to interpret price movements. While reading about tips may be useful, trading on them will, more often than not, lead to losses instead of profits. If tips or what analysts say interest you, do more research on your own and weigh the risks before you risk your money. Successful traders make their own trading decisions.

5. Having Preconceived Notions of Prices

Some new traders have preconceived ideas of what the "correct" currency valuation should be against another currency. They think that if the current currency rate is "cheap" according to their standard, they should buy, and if the current rate is "too high", they should sell. Avoid buying or selling just because you think the exchange rate is "too low" or "too high". Take into consideration both the fundamental and technical factors that drive short-term currency price movements. There is no limit as to how low or how high an exchange rate can go unless there has been historical government intervention at those levels or comments from the central banks about what level they think their currencies should be at. There are always reasons why the price is low or high at that moment.

6. Not Taking Losses Bravely

It is common for new traders to hold on to their losing positions for longer than their stop dictates, in the hope that the current price would eventually move their way. They often have the mentality that even though they are running losses, these losses are not "real" as long as they do not close their positions. Not only must traders accept losses in the Forex market, but they must also limit their losses. Remember that the first goal of trading is to preserve your capital so that you can survive long enough in the game to make profits. The importance of placing stop-loss orders cannot be over-emphasized enough.

Always learn something from your losses, and use that knowledge to make better trading decisions in the future. Losses should not harm your capital if you allocate your pre-determined percentage of the equity to each and every trade without fail.

7. Running a Sprint

Are you running a sprint or a marathon? Don't fall into the trap of being very enthusiastic about learning Forex trading initially, but later suffering from burnout or loss of interest. Such traders, whom I call 'sprinters', could not keep up with the level of commitment and time required of them to monitor and study the markets, and to engage in training and education to learn more about fundamental analysis, technical analysis, and trading psychology. See yourself as a long-distance runner, pacing yourself with the various stages of learning, and not attempt to learn and absorb everything at once. Maintain your level of commitment to learning, because learning is a continuous journey.