Forex trading is one of the most common ways of making big money online with little investment. With a proper and consistent strategy, a forex trader can make huge profits with small capital within a short time. Nevertheless, making money through forex trading is not as easy as picking your pants from the wardrobe. They say at least 70% of forex investors lose money. Looks like gambling, right? To get the best out of this growing business, here is a list of the common mistakes that most traders make.
- Using money you cannot afford to lose.
The most detrimental mistake you can make in Forex trading is to put all your eggs in one basket. You should not put all your savings in the forex investment pot. While forex can give you massive income, you may as well lose your entire capital. All savvy traders including Warren Buffet and Chris Kirubi know make mistakes at some point in their trading. Everyone can lose money, and Forex is one of the easiest ways of losing all the money you have. If you had invested in all your money therein, you might go mad. Do not let your money disappear before your eyes – invest only in money that you are ready to lose.
- Trading without a plan
Some traders lose money by taking a position in the market without a trading plan. Of course, a forex trader’s plan should involve an anticipation of losses. You should know when to enter exit the market. A trading strategy does not have to be written, but it must be consistent and reliable. It is unquestionable wisdom to have a written trading plan which includes a list of the things you need to do such as researching the market, listing the tools you will use to analyze the market, identifying signals, and setting stop-loss (S/L) and take-profit (T/P) levels.
- Using too high leverages
One way to blow your account with one shot is to use high leverages. In our lesson on how to set leverage, we said that the best leverage for an account with below $1,000 is 50:1. No joke here. There is a public debate recently about the possibility of limiting forex leverage to 25:1 for new traders and 50:1 due to the increasing harsh reality of people losing a lot of money faster than losing temper. Low levels of leverage in forex trading limits the trader’s exposure to risks. Leveraged trading magnifies a trader’s profits or losses. Thus, if a trade goes against you, losses will accrue to unprecedented levels. Before you know it, everything is gone.
- Not setting entry and exit strategies
Some traders enter the market for the sake of it, or simply because everyone is doing it. Based on your plan, set an entry rule to determine when you should enter the market. If you find yourself trading without a preconceived plan, then you should rethink your forex trading psychology. You may have feelings and sentiments as a human being, but the market knows no emotion. Make sure you enter the market at a level that you have established through technical and fundamental analysis.
An entry statement may read like this: Buy USD/JPY when it bounces off a major support that coincides with the 50% Fibonaci retracement level.
The biggest mistake traders make is to hesitate when the signal is generated. You may become unsure for a minute, and the market moves quickly. You’re left wondering whether you should still trade the same. When you decide, the prices will have already moved beyond your take-profit level and you struggle to find another signal.
Forex traders may also make the mistake of not setting exit rules. In forex, you have to be disciplined. Identify an appropriate point where to take profit or stop loss. Taking too much risks will destroy you, and too much appetite will not spare you either.
- Don’t be Impatient
Once you have set your targets, stick to it. For instance, you may say that you will take profit in the next major support or resistance level within the day. Then your trade looks like it is reversing before reaching that level, then you hastily stop the order before reaching your target level. If you analyzed the market well, do not be clued to your computer making silly mistakes of closing and opening trades anyhow. Wait for your trade to reach its desired level within the time range that you have given yourself.
You should also avoid rushing to every opportunity you see. Expert traders control their emotions well to avoid hasty decisions that may deplete your account like a plague.
- Going against the trend
A trend is important in forex. Some traders err by trading against the trend, believing that miracles will happen and the trend will reverse. If the market is bullish, wait for the prices to reach a dip and buy according to the trend. On the other hand, you should sell on rallies when the market is trending downwards. Make the trend your friend.
- Too much bias
Another common mistake in forex trading is having a bullish or bearish bias. In this case, a trader buys or sells a currency pair consistently despite making losses. Do not wait for your losing positions accumulate gradually. You will eventually burn up.
- Lack of Preparation
One key mistake in forex trading is poor planning. Like any other business, forex trading requires proper organization, planning, and time management. Make sure to set up your Meta trader platform at the right time and do analysis before the market starts to move. This will ensure that you maximize your profits. Do not trade like a grade 5 child who wakes up late and runs to school without preparing, just to find his friends laughing at him for having some sleep dust on his eyes. Make sure that you are always ready for the forex market because the market does not wait for anyone.
- Being too emotional
Forex trading is like war; you have to be mentally and psychologically prepared for it. To win in the war of forex trading, you should avoid the mistake of letting your feelings get ahead of your brain. Being objective is as important in forex trading as tactical preparation in war. Thus, you should control your emotions and use your mental judgment to make decisions.
- Poor or lack of money management skills
The last of the fatal mistakes that forex traders make is poor financial management. Misinformed and uniformed traders tend to use a significant amount of their money on a single trade. Wise traders use only 1-5% of their money on a single trade. This ensures that the investor remains with enough money to trade again after making losses.
In this article, we have answered the question what are the fatal mistakes traders make in forex trading? The answer is generally about the lack of trading strategy, financial risk management, and emotional control. You have to do analysis with a sober mind and be prepared for both negative and positive outcomes.