Forex is the largest trading platform in the world, and it’s natural for beginner Forex traders to feel overwhelmed. As a result, their expectations of success can be dashed very quickly right at the start. The level of failure is very high in the Forex marketplace.
A majority of new traders drop out after just a couple of years on the playing field.
Though, that doesn’t mean that Forex trading is impossible or completely exclusive. Since it is a marketplace open to all individuals regardless of qualifications, success is a matter of practice. In addition to regular commitment, your Forex trading expertise will come from knowing the tricks of the trade.
Also, by being aware of the common mistakes made by Forex traders, you can sidestep the initial hurdles.
Much like with other kinds of stock trading, there are similar mistakes. Forex traders make. We have listed these in detail to help you prepare better for your Forex trading debut.
1. New Forex Traders Don’t Pay Attention to The Market
With a demo account or by taking a few courses, you can easily acquire trading skills. While these skills are necessary to begin trading, the application part is more complex. This means you cannot generate profit unless you can use your skills in the market context.
Keep in mind that the market trends always determine the price action. If you continue to ignore the market and overlook what the trends indicate, you will likely fail.
What does it mean to ignore the market? An example to explain this is when a trader insists on buying a certain currency, which isn’t likely to generate profit. For instance, if you invest in long EUR/USD despite the fact that the pair is at new lows.
At this juncture, it is recommended that you instead pause and reanalyze the circumstances.
Another important part of listening to the market includes assessing additional information. There is always a great deal going on in such a huge marketplace.
You will have to conclude which information has a greater impact and determines the price action. It is better to switch your position in light of new information, rather than being stubborn.
2. New Traders Prefer Failure Over Acceptance of Mistakes
Whether it’s trading or any other interaction in your personal and professional life, admitting a mistake is challenging. Accepting that you are wrong can be difficult, and that’s why so many of us avoid it.
This is especially true in a high stake’s environment like the Forex marketplace when a single mistake can cost you profits, admitting that error can be frustrating.
More specifically, Forex traders often slip up by developing biased preferences for certain currencies. While this isn’t a mistake in itself, it can lead to losses if traders refuse to readjust their techniques. Instead of assessing the loss, rookie traders continue to stick to these old patterns.
By sticking to a losing position, traders might satisfy their egos but lose out on profits. This kind of emotional investment when it comes to trading is dangerous. It isn’t something you should take personally, and exiting a lost cause is always recommended.
Not to mention, time is of the essence if you need to exit a losing position.
Consistent profits are only possible if you root out the hesitance to admit your errors. Making beneficial trades is always the goal; however, you must understand that the results are not entirely up to you.
Also, you can learn from the mistakes that other traders have been making. By staying vigilant and being observant, you can gradually improve. The learning curve requires the development of each skill sets as well as psychological preparation.
3. Trading Without Enjoying It
The first thing that every aspiring Forex trader should ask themselves is why they want to trade. While trading for profit is a legitimate goal, those who don’t enjoy the process are not likely to get far.
Gaining expertise in the Forex marketplace means being driven and passionate about learning. You can’t expect to become a better or successful trader unless you inherently enjoy the sport.
A major part of enjoying Forex trading involves being curious at every turn. Without a true appreciation for the craft, you can’t practice effectively. Thus, the development of your technical skills will always be limited.
Additionally, with actual love for the trading process, you can put in more time. To be able to master trading and understand market trends, this time commitment is a necessity. If trading feels like a chore, you will eventually call it quits and do something you enjoy more.
Especially if profits are slow, enjoyment can ensure that you stick around till you become a consistently successful trader.
4. New Traders Have Unrealistic Expectations
Having expectations when you start trading is crucial. It gives you a set of goals to pursue. However, unrealistic expectations will only boost your overconfidence and send you crashing at the first signs of failure.
Keep in mind that defeat is a regular part of the trading process. This means that you are likely to witness several losses before you become a successful trader. While you can learn faster and develop your skills consistently, there is no way to completely evade losses.
If you are a rookie trader and think a loss indicates a lack of success, this is a common misconception. At the first instance of loss, giving up is a mistake that can abruptly end your Forex trading journey. Instead of feeling frustrated at an unexpected loss, try to assess what went wrong.
Once you have accepted that loss is inevitable, the trading process can teach you much more. There may be several losing streaks that cause you a tough time. However, you can’t let this get you down irrespective of your level of experience.
Lastly, you will have to realize that not every trader can become a Forex trading champion. You might not make it big; however, you can still expect consistent results. This is possible once you realize the importance of hard work and accept your potential.
What Is Managing Leverage?
Apart from these 4 common mistakes, new traders are likely to make, and managing leverage is fundamental. Leverage is another factor that poses the risk of failure. While this isn’t something you can always control, knowing about it can help.
The system of leverage is part of the Forex trading setup. It is often seen as a double-edged sword. While, on the one hand, it improves your trading capacity and increases returns, it can also backfire. The total financial risk is much greater in such cases as well.
Forex traders are allowed to leverage up to 400:1 with their accounts. This can be hugely profitable in many trades. However, on the flip side, it can lead to massive losses if the trade goes wrong.
Although leverage is something traders have access to, restricting the amount you use is prudent. Getting carried away and mismanaging leverage is something rookie Forex traders are likely to do. This is a mistake that combines their unrealistic expectations with failure to be attentive and refusal to admit error.
Failure in Forex trading is often caused by undercapitalization when it comes to the magnitude of the trades you make. If you have an interest in controlling larger quantities or feel greedy, leveraging can become dangerous. Trying to influence larger amounts with lesser capital can force you into a financial risk that makes you vulnerable.
An example of unwise trading can involve 100:1 leverage, which can go into a 100% loss. This loss is possible with just a change of -1% in the price. This example exposes the fragility of risky leverage since 100:1 is such a common leverage ratio.
Even a small loss in such cases can only lead down a path of more losses. It will decrease your account balance and add to the leverage ratio.
Keep in mind that leverage doesn’t just exponentially increase your losses. It additionally adds to the transaction costs. It does so by being calculated as an additional percentage of the total account value.
For instance, let’s say a mini account using 100:1 leverage with an account of $500 buys 5 mini lots.
These lots are of a currency pair that has a 5-pip spread. In such a case, the trader would have to pay $25 for transaction fees. This is calculated as 1/pip multiplied by the 5-pip spread and further multiplied by the 5 lots.
Before they even start trading, they have incurred some extra costs. It should also be noted that the more the leverage, the more the transaction fee charged. This percentage calculation will only hike up the costs as your account value decreases.
No amount of insight and psychological readiness can equip you to deal with shifting market trends like these. So, if you want to trade successfully, understanding macroeconomic and political risk factors are necessary.
Endnotes
By keeping track of the most common mistakes, you reduce your chances of failure. Having the right mindset as you enter the marketplace can boost your success more than you think. Since trading is a mental activity above all, navigating this space requires considering economic and emotional factors.
