Most trading mistakes are caused by poor judgment and a lack of preparation. When you don’t know where the traps are when trading, you cannot help but fall into them. When you are well informed about which mistakes to avoid, half of your problems are already solved.So how do you know if you are falling into a trap? More importantly, how can you avoid them? Here, we will be going over the top five traps beginners fall into, and how to make sure you don’t fall victim to them.
Trading without a trading plan
Do you trade based on emotions? Despite what Hollywood would want us to believe, trading is not an emotional game. When you let your emotions get involved, your judgment gets clouded.
Beginners always seem to follow a pattern. They trade emotionally, lose some money, get more emotional and lose even more money. Emotional trading is often the reason traders employ robots to do their work for them.
Trading is all about making decisions based on cold, predetermined and well-weighted probabilities. Ensure your tradin psychology is well balanced. The trick is to leave your emotions outside when you enter the trading zone.
Not having a money management strategy
One of the reasons beginners find trading to be so frustrating is that they fail to implement a money management strategy. A money management strategy is the business aspect of trading. It should outline how you treat your capital after you get started. Many traders do not have a clear money management strategy and consequently never build their capital.
Trading must be taken seriously, just like any other business. Do you have a plan for how you will build your account? How much of your profits will you reinvest into the account? You should know if and when you will be withdrawing from your account. It is also important to find out what charges you will incur directly from your trading activities and account for them. These outflows must be incorporated into your overall plan to build up your account balance. If you do not have a plan for controlling the outflow of money from your account, make one now.
Too much leverage
More traders have lost their entire account because of overleveraging than any other practice. Greed causes you to add to the size of a position more than you normally would. When the trend moves even slightly against you, the losses hurt even more. The prospect of making a killing in just one trade is what causes most traders to overleverage.
Leverage is a double edged sword that cuts sharper when it moves against you. Long term success in trading is greatly enhanced by using leverage sparingly.
You can avoid the temptation of overleveraging by setting maximum limits for every trade and never exceeding them. You do not need to use all of the leverage available to you. Most professional traders never leverage their positions more than 8:1. Your sweet spot should be somewhere around this ratio.
Do you engage in excessive trading? Markets punish new and inexperienced traders in the most cynical ways. No sooner have you made a huge profit in one trade than you give it all back in the next few that you take. Most rookies become extremely preoccupied with mimicking any successful trade they make. After a while, greed takes over and they begin taking foolish positions.
Similarly when a trader takes an abnormally large loss, or a series of losses, they begin to focus on recovering their money. This practice is called revenge trading and is a sure way to cloud your judgment and lose more money.
Taking a break and clearing your head after a period of significant gains or losses is very much recommended. The dramatic change in your capital will affect your judgment, no matter whether you can feel it or not. Remember that there is always tomorrow.
Whenever there is a 10% or more change in your capital, (in either direction) in a single day, it may be a good time to stop trading and clear your thoughts, even if you’ve just logged into your platform.
We do not recommend experimental trading for several reasons, including:
1) There is no psychological factor and sufficient experience to manage trading.
Lack of facilities and proper follow up to know the market and its correct direction
In Forex, there are many traps out there that you must be on guard for. What every trader comes to realize eventually is that your account could very well be wiped out if you fall into any one of the five traps outlined above.
That being said, you are now in a great position where you can avoid these five common mistakes. Being well informed and keeping a clear and level head is the best way to ensure your long term profitability in Forex trading.