Both new and experienced forex traders can be prone to the same mistakes. There are many different ways in which your judgement can be impaired and you can lose objectivity, and invariably these will affect the profitability of your trading. Here we look at some of the most common forex trading mistakes.
Not planning properly
Your trading plan is the foundation of long-term profitability, and a point of reference in the heat of your decision-making. Without a plan you are simply moving from trade to trade with no strategy to achieve your ultimate profit targets.
Not sticking to your plan
It’s one thing to draw up a plan, quite another to see it through. Particularly when you see a forex trade performing well or poorly, it can be tempting to run your profits or chase your losses. Just remember that your plan is designed to help you achieve your long-term goals.
Poor risk management
If you set your stop orders too far away you introduce a far greater level of risk into your forex trading. Monitor your risk not only per trade but also across your whole forex portfolio. Could you survive if all your open trades failed? Conversely, setting your stops too close might not be a good idea as your trades might close out on a minor move before your predicted trend occurs.
Not learning from experience
You need to build your knowledge through trading in order to build your confidence as a trader. Don’t commit too much of your capital until you have gained this experience. Build as you go along.
Not setting targets
Both in the short term and in the long term you need to have targets. For individual trades you need to set your exit points, and for your forex trading as a whole you need to set profit targets. Otherwise you have no basis for closing trades, which will impair your decision-making, and you are not measuring your performance against your own ambitions.
Spreading your interest too thinly
There are many forex pairs to choose from: majors, minors, exotics. You don’t have to trade them all! Most successful forex traders focus on a number of pairs they understand well. This can be a more economic use of your valuable time.
Trading too much
When your trades are in profit you may find yourself tempted to strike while the iron is hot and place some extra trades, thus undermining your original trading plan. Remember, the fact that you’ve had some successful trades doesn’t mean that everything you touch will turn to gold.
Trading too little
On the other hand, you may find yourself paralysed by the endless choice of possible trades. Waiting for the perfect, surefire trade will be a long wait. Once you have a trading plan don’t be afraid to start trading, with appropriate risk management measures in place.
Looking for the perfect system
A trading system should not replace your own judgement. If there was one infallible system that suited all trading styles, don’t you think everyone would be using it?
Using a system you don’t understand
There are many forex trading systems out there, from the simple to the highly complex. You need to understand the principles behind any system you choose to appreciate how the system fits your trading style.
Trading old news
The key to trading the news is timeliness. You need to trade before the forex market has responded to the news. Wait too long and any adjustment will already have occurred.
Confusing strike rate with profitability
A high proportion of winning to losing trades counts for nothing if your winning trades all carry a small profit and your losing trades a heavy loss. A high strike rate may be good for your self-esteem but high profitability will be good for your bank balance.
Not accounting for trading costs
The width of the spread is an unavoidable cost of your forex trading which you should account for in your trading plan, taking note of the fact that less popular forex pairs are typically traded at wider spreads, and thus a higher cost to you.
Lack of patience
Your analysis won’t always be throwing up trading signals. Your trading plan may require you to wait for the right opportunity. Don’t be tempted to place some trades just for the sake of seeing some action. The successful forex trader knows when to wait.
Getting swayed by emotions
Losses are a natural part of your trading life. How you respond to these losses determines your long-term performance. Equally, when your trades are running well you need to keep a clear head and an eye to your long-term goals.
In the heat of the moment you can easily let your emotions get in the way of your judgement, but by doing so you are straying from your plan. Remember, your trading plan represents your best judgement of how you can achieve your forex trading goals.