Mistakes in Forex trading are quite an ordinary phenomenon that experienced and successful traders treat as inevitability. They learn from those mistakes, optimize their trading systems and revise their attitude to working in the currency market in general.
There are top five traditional mistakes that novices have to and need to avoid:
• the wrong state of mind
• inability and unwillingness to accept losses
• fanaticism (excitement)
• lack of discipline
• absence of a trading strategy
Novices usually think that successful traders are able to open and close trades and predict market movements intuitively, and they make loads of profits from each order. In practice, the situation is much different from what most beginners expect. Such qualities as self-development, discipline and compliance with the rules of a trading strategy prevail in experienced investors just because any other approach would completely ruin their deposits.
At the beginning, the right state of mind plays an important role since it defines a trader's behaviour and his/her attitude to profits and losses. Despite the information propagandised in commercials, Forex trading doesn’t imply instant easy money, but painstaking daily self-perfection and improvement of one's trading system. The awareness of this fact and the acceptance of losses as an integral part of working in the currency market will help novices to keep and boost their capitals.
However, even being ready for losses and having tried demo accounts, most beginner traders are unable to close an order in practice if the market moves against their initial forecasts. The best solution would be placing a stop loss at the level computed accurately before opening a trade, not under the impact of hope or greed. In this case, losses will be fixed automatically as soon as it becomes evident that the initial forecast has proved to be wrong. Nevertheless, some manage to cancel stop orders, hoping that the current movement is just a slight correction and the market would return to the initial path. As a rule, those actions end up in a compulsory closure of the order if large leverage is applied, or in a trader closing a trade independently. In this case, the amount of losses will greatly exceed the initial ones.
Fanaticism is an opposite situation which sometimes causes more problems than the keeping of a loss-making trade. It displays itself when a novice has made the right forecast and the market has moved in the right direction, yielding him/her huge profits. Then, there is a moment when target profits are reached and a trader needs to choose what to do: either to fix profits or continue waiting. As a rule, novices' excitement does not allow them to give up the desire of earning even more, and they continue keeping a position open. At the same time, if the market reverses in some time, they will hope for the right movement again and watch their unfixed profits disappearing. This expectation may lead to sudden losses or stop loss triggering, while fixing the trade at the target level would have yielded real profits.
Another aspect of excitement consists in the fact that a trader may feel inspired and continue opening new unconsidered trades if he/she has fixed higher-than-planned profits. In this case, losses are practically unavoidable.
Novices' trading mistakes
The above mentioned psychological mistakes are based on 2 key ones: the absence of a trading strategy and the lack of the discipline required to respect the rules of the trading strategy. A trading system based on statistical rules and data and developed in advance allows a trader to form a practical strategy and maximize profits. Discipline requires that a trader should follow strictly the trading system and abandon it only in case there are some relevant conditions analysed and predicted beforehand as well.
On the whole, even the least experienced trader can avoid those mistakes if he/she is guided by the following principles:
1. Trading in the Forex market brings about both profits and losses.
2. The number of unprofitable trades may exceed substantially the number of profitable ones, but it may not affect the total of the money invested if losses are fixed in time.
3. Stop orders are one of the most efficient tools to fix losses.
4. It's inadmissible to break the rules of a trading system developed earlier.
5. The presence of a trading system is a must.
6. Making profits from one trade does not guarantee making profits from subsequent trades.
7. Fanaticism and excitement shall be strictly controlled.
8. Money management is an intergral part of Forex trading.
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The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.