Forex Basic

The Most Common Forex Trading Mistakes and How to Avoid Them

Trading forex can be a rewarding and exciting challenge, but it can also be discouraging if you are not careful. Whether you’re new to forex trading or an experienced veteran, avoiding these trading mistakes can help keep your trades on the right track.

Skipping the Trading Plan

You must have heard something about the positive effects of having a trading plan. Well, financial markets are no exception, and not having a Forex trading plan is one of the most widespread mistakes that Forex traders make. Possibly, the reason for this is due to traders not having a clear understanding what a trading plan looks like at all.

Undermining Money Management

Things might get hectic in Forex trading quickly, because Forex brokers are allowed a lot of freedom in terms of leveraging their trading account, while beginner traders lag behind in terms of money management discipline. A combination of these two leads to high risk, hazard trading.

Here is a couple things a trader needs to ask themselves, to avoid making this Forex trading mistake:

  • Am I investing only my risk capital?
  • What is the maximum percent of my total investment that I am ready to risk in one trade?
  • What is the maximum amount of trades I can have open simultaneously?
  • What is the win/loss ratio that my strategy promises?
  • Does it comply with my risk/reward ratio per trade?

Trading without a Net

You cannot watch the forex markets 24 hours a day. Stop and limit orders help you get in and out of the market at predetermined prices. This not only allows the trading platform to execute trades when you are not available, but it also makes you think through to the end of your trade and set exit strategies before you’re actually in the trade and your emotions get the best of you. Placing contingent orders may not necessarily limit your risk for losses.

Overreacting

A loss never feels good. It can make you emotional and irrational, tempting you to make kneejerk follow-up trades that are outside your trading plan.

No trader makes a great trade every time. Accept that losses are part of the reality of trading and stick to your plan. In the long run, your trading plan should compensate for that loss; if not, review your plan and adjust.

Trading from Scratch

Using your hard-earned capital to test a new trading plan is almost as risky as trading without a plan at all. Before you start trading real money, open a forex practice account and use virtual funds to try out trading plans and get a feel for the trading platform you are using. Although you will not be affected by your emotions the same way you will be when trading your own money, this is also a chance to see how you react to trades not going your way and learn from your mistakes without the risk.

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