Most experienced Forex traders know that the best trades happen when their gut and their head is completely aligned with the decision they are taking. However, there are several weaknesses that many forex players exhibit, which undeniably lead to failure. If you are a novice forex trader just starting out, you should be aware of some of the common mistakes that occur while forex trading.
Seven Common Mistakes
Contrary to popular belief, there are some forex traders who do not trade just to make money, but for a multitude of less obvious reasons. Here is a list of some less than favorable bad habits that lead many forex traders to their downfall.
Overtrading, Entertainment, Adrenaline Addiction, and Other Reasons
Overtrading can be caused by a lot of motives that can be both conscious and subconscious. Reasons can range from just being bored to not being able to control their trading behavior. But their continued trading suggests that they are in the unsafe part of the continuum, right between risk-taking in a healthy way and straight-out gambling.
You have to remember, that while trading can be fun, it entails some major risks if mistakes are made. Overtrading due to gambling is pretty common in the forex market. However, this habit always leads to a zero left on your trading account.
Poor Risk Management
A combination of poor risk management, bad discipline, and negative risk/reward can destroy a trader’s account. You can run your losing trades far too long, cut your winning trades too fast or pile additional losses into an already loss filled account. These are signs of not having good discipline and following a consistent plan. Before starting your forex journey and taking your first trade, make sure you understand the concept of risk of ruin and how it applies to forex. You must have a clear idea of the limit of your losses before things turn financially too south for you.
Fear of Missing Out (FOMO)
FOMO is one of the most common weaknesses prevalent in novice and experienced traders alike. It simply happens when there is a trade that makes a lot of macroeconomic sense when judged from the surface, and the trader feels stupid if they miss it. To feed their FOMO, traders will then chase the particular trade, when the price is much worse.
For instance, let’s consider a trader has been bearish and short on the USD/EUR pair for 3 weeks. It has dipped multiple times but has recovered back to the top of the range. In cases like these the trader has 2 choices: should he pull the trigger and get out? Or are they afraid of missing out if it finally collapses?
To get past this, always be honest with yourself while exiting trades you think are wrong, all the while ignoring the insistent voices in your head that tell you to do otherwise.
Bad traders have a tendency to get stuck with the same view for far too long. This also depends partly on the time horizon they are analyzing. Long-term traders are much more likely to stick with the same view for a considerable period of time. However, short-term traders need to be flexible and should be capable of trading any currency from both.
If you feel you have a bias when trading certain currencies, identify them, and get used to trading them from both sides. For instance, if you consistently trade AUD long, try a tiny long position one day to see how it feels. To be a good short-term trader you need to flip from long to short and back again, depending on new information that comes in. Sticking with a particular trading view for far too long can limit your trading, resulting in a lot of missed trading opportunities.
Waiting for The Perfect Trade
If you are a risk-averse trader, you can get virtually paralyzed as you wait for the perfect trade in the forex market. To avoid this, fix a particular number of trades every day, week, or month, depending on your time horizon for trading. Take the necessary steps and force yourself to follow this plan. It’s true that setting a quota for the number of trades directly contradicts a tight or aggressive trading mantra. But a trading quota system will force you to venture out of your shell if you are too tight and have trouble regularly pulling the trigger on trades.
As a trader, you should always try to operate close to the middle of the emotional spectrum at all times. If at any point you feel invincible as a trader, chances are you are going to lose a ton of money very soon. As traders feel more and more confident as their performance becomes better, they face the danger of finally turning confidence into a feeling of invincibility, leading to excessive risk.
Many traders are aware of the concept of tilt. It refers to the condition when a trader’s emotions get the better of him/her because they are trading poorly or is experiencing a losing streak. AT this moment, the trader is just betting to recoup losses and not because there is a good trading opportunity.
To manage overconfidence in this context, set up conditional formatting in your profit and loss spreadsheet if you maintain one. Set it to highlight whenever you are over earning significantly, relative to your budget. This can serve as an alert or notification to let you know that you need to reduce risk.
Thinking about Past trading opportunities
Many novice traders dedicate too much time to thinking about past trades. While it is useful to analyze past trades that went against you, never get frustrated about what you did in the past. Remember, once you get flat, it doesn’t matter how the price behaves afterward. Thinking about past trades end up having a negative effect on your future trades, decreasing trading efficiency.
There are many non-economic reasons why people commit such trading mistakes in the forex market. Identifying them and making improvements to avoid them is the best way to progress on your forex trading journey.