The Worst Mistakes to Avoid When Trading Forex

When someone tells you that trading Forex is easy and you can make tons of money with a few flicks of a finger, know that he is either a fool or a charlatan. Before anyone gets to become a successful Forex trader, he will take a lot of knocks and make plenty of mistakes because the learning curve here is as steep as it gets.

If you are new to trading, make peace with the fact that the Forex markets are full of pitfalls, but you can reduce the harm by avoiding the most common trading mistakes, which we have outlined in this article. It's as von Bismarck said, “Only a fool learns from his own mistakes. The wise man learns from the mistakes of others.” Learn from these mistakes and let the profits be with you.

Failing to establish proper risk management rules

There is a popular belief that trading Forex is no different from gambling - trading indeed bears enough similarities with betting on sports, playing poker, or casino games. For instance, most participants have only a faint knowledge of why a certain market would move south or north or why a certain team or an athlete might defeat an opponent. Also, both trading and gambling provide no guarantee of a positive outcome.

But the fundamental difference between the two lies in the fact that the risks associated with trading foreign currencies can be mitigated through money management - a skill, or art, if you will, of reducing the negative impact from wrongfully opening a position after which the market moves in the opposite direction, and scooping up the largest possible profit from the trade in case the market moves in concordance with your prediction. Simply speaking, when gambling, a player has little to no control over his bet once it has been made, whereas a currency speculator could keep a grip on the situation through risk (money) management. Therefore, the failure to learn and apply risk management is the first mistake to avoid when trading Forex.

The trading plan is key to success

Never trader Forex without first establishing a trading plan. Diving into the stormy waters of foreign currency trading without a plan is one of the most common Forex trading mistakes made by many nascent speculators who then see their trading accounts evaporate. We'll go into the intricacies of trading plan composition in the next section of the article, but it's important to note beforehand that, like with risk management, sticking to the plan at all times is a must for all those who want to be consistent at reaping profits from foreign currency trading.

Calculate the risk/reward ratio

Always consider the risk/reward ratio before entering a position. Calculating this ratio isn't overly complicated, though many retail traders tend to overlook it, which usually leads to inconsistent trading and losses even when a trader has a decent percentage of winning trades.

Be mindful of leverage

Leverage risk is another factor that has to be taken into account if you use such an instrument as margin trading that provides means for significantly expanding the asset base and generating greater returns. However, we caution the inexperienced traders against getting involved in margin trading too soon because doing it wrong would be the fatal Forex mistake that could even decimate the trading account and leave you in huge debt if the margin call happens. But if you feel certain about your ability to trade with leverage, then it would be wise to start small; for example, go for the leverage ratio of no more than 1:5.

Liquidity matters

Also, when devising the risk management framework, you need to consider the liquidity risks in different markets. The higher the liquidity, the easier it would be to buy or sell a currency on demand. The major Forex pairs like EUR/USD have excessive liquidity, which translates to smoother price action and faster trade execution.

Small liquidity, on the other hand, could result in a significant execution delay, meaning that a currency won't be sold at the expected price that will lead to reduced profits or even losses. Moreover, when trading some exotic Forex pair with low liquidity, you won't be able to offload large positions without triggering unnecessary price fluctuations. Therefore, in order to avoid making this mistake, try sticking to the major currency pairs like the mentioned EUR/USD, and also GBP/USD, USD/JPY, USD/CHF, and other markets with very high liquidity so that the trades would be executed in a timely fashion.

Elaborating on the trading plan

Many Forex traders, especially those who have just stepped into the game, tend to disregard the necessity to devise a trading plan before making a move in the selected market, which constitutes probably the biggest Forex trading mistake of all. It's essential to treat the process of buying/selling foreign currencies as if it's a real business. Otherwise, it would be nothing more than gambling with its rash decisions, occasional profits accompanied by consistent losses, all of which would happen due to a lack of structured approach.

Naturally, you'd need to have the exit rules in place in order to be able to reap the profits before the market starts going in the opposite direction. In fact, not knowing where to exit constitutes a bigger problem for Forex traders than entering a position, and that's where the properly calculated risk/reward ratio comes in handy. Exit rules apply not only to winning but also to losing trades, because not knowing, or not having enough courage, to “bail out” when the market goes the wrong way is yet another Forex mistake to avoid. Cutting off losing trades without remorse is the foundation of risk management on Forex, so don't ignore it in your trading plan. It's better to lose 50 pips and move on than risk losing 100 or more pips and be forced to hold the bag indefinitely.

Don't get caught in the FOMO

FOMO stands for “fear of missing out,” an emotion that the overwhelming majority of Forex traders experience at a certain point in their careers.

Falling for FOMO is more of a psychological mistake that Forex traders make even if they have years of experience under the belt. It can be triggered by some news and rumors that start circling around Forex communities and social media, the latter being the most dangerous of all because it could easily create an illusion that everyone has already jumped onto the “profit wagon” while you are being left biting the dust. When it comes to the fear of missing out, letting the social and news media influence your mental state and decision-making capability is probably the biggest mistake a disciplined trader can make.

Avoiding the deceitful FOMO is simple in theory: just don't enter the market that had already made a huge breakout past the resistance level and got stretched to the visible extreme. Remember that there is always another day, another market, and another opportunity to enter the position. Shut down your emotions, turn off the greed and let the rally run its course, and enter when the market goes into a retracement. But if you do have an itch that needs to be scratched, feel free to do some FOMO-ing, but only with an amount that you are willing to lose for good. But better stay calm and collective while looking to enter a play on the basis of your analysis and trading plan, not the hot topic on Twitter.

Concentrating on small time frames

Picking the right time frame could be a tricky task for a newcomer. The majority of rookie speculators are too impatient to trade on the daily or even 12-hour time frame because they are eager for action and quick profits.

The thing is that in order to be profitable on small time frames, you should have a profound experience in scalping, which is the most demanding trading style since it requires a lot of mental stamina to execute dozens of trades per day while having to calculate the risk/reward ratio, the spread, position size, and also read the tape, all in a matter of minutes while the price movement is still brewing.

Therefore, diving straight into small time frames can be considered a costly mistake that will lead to a loss of a certain percentage of the account until you figure out the trading style that suits you.

Relying too much on trading signals

Using Forex signals that can be provided by a broker or by an online service might seem like a lucrative one for beginners who don't have enough confidence or knowledge to execute their own decisions. You can handle some other errands or just relax and engage in trading only upon receiving a “signal” - a special message sent via push notification or social media alert . And while the concept of such signals isn't bad in itself: professional traders sharing insight in exchange for a moderate fee, contributing to the good of the entire trading community, the reality turns out to be quite the opposite.

Once you have acquired sufficient knowledge of the markets, you also form confidence in your plan of action. So that when the market takes a wrong turn at some point, you would have more certainty that it would bounce back and continue the way you have foreseen, and the trade that seemed like a loser at first would reward in full later. Whereas making entries or exits on the basis of signals is likely to lead to uncharted waters of which you have no knowledge and plan of action. And this is the recipe for disaster because the trading activity is likely to become erratic if the entry turns sour, and you wouldn't know whether to hold onto this position or cut the losses.

Adding to a losing position

Forex traders sometimes confuse the method called averaging down the trade entry with adding to trade size. The former refers to the practice that involves hedging an open position for the purpose of adjusting the point of entry into a trade. Adding to trade, on the other hand, means providing more weight to the current position that can be either a losing or a winning one.

Adding to a losing trade is considered to be one of the worst Forex trading mistakes when performed by an inexperienced trader who didn't master the risk management discipline. So, don't think of these two methods as the same because adding to a loser usually goes after averaging down goes wrong. You can supplement the losing trade by utilizing the rented orders, by fixing a single position, or by using the Martingale approach. But we won't go further into detail about each of those methods because we consider these techniques to be extremely risky even for seasoned traders, and applying them wrongfully is surely among the costliest mistakes Forex traders make throughout their careers.

But the worst thing that the habit of adding to a loser does to a fledgling trader is that it pushes the buttons that trigger all those harmful emotions and desires like hope that the market will soon reverse and go in the right direction, which then gets superseded by frustration when seeing that instead of expected recovery, the market keeps on heading in the opposite direction while your losses get exponential.

Not keeping your trading journal meticulously enough

Not keeping a trading journal means that you are simply gambling, which is the biggest mistake a Forex trader can make. Remember that in order for the logbook to be as detailed as possible, it has to have all of the following items: the reason for taking a long or a short position in a certain market; the exact time of entry in the market, and the price at which it was made; the established risk/reward ratio; the position size; the price levels at which the stop-loss was placed; the precise duration of the trade; the reasons for exiting the position; the amount of money made or lost on a particular trade, plus the commission and the spread. You may also add some notes that reflect your fundamental analysis and motivation for trading a given currency pair and the general observations of the market.

Overtrading and position sizing

Overtrading is definitely the scourge of nearly all beginner Forex traders who literally get hooked on the thrill of price action. They think that buying and selling foreign currencies more often will result in larger profits and better overall performance, and that's when they are making a huge mistake because, in this business, frequent moves in and out of the market rarely results in a consistently positive performance, unless you are a professional scalper, which is the whole another matter.

In order to prevent overtrading, you need to exercise strict discipline, adhere to the trading plan, and apply risk management rules. Another thing that suffers during the episodes of overtrading is the ability to adequately determine the position size for each of those multiple trades, often going above the recommended 1% - 2% of the deposit, thus deviating from the trading plan and creating conditions for uncontrolled losses.

Neglecting the stop loss

Stop loss is the special type of order that implies exiting the trade some pips below the price at which the position was opened in order to avoid further losses, should a market move in the wrong direction. Perhaps there is no need to say that trading without stop loss, or with the so-called mental stop loss, is a critical mistake that every disciplined Forex trader must avoid.

However, there are also many nuances when it comes to the stop loss placement, not knowing which will result in bad trades. Putting the stop too tight to the entry point is the most common mistake that even seasoned traders often make.

For that reason, always take into account the pair's volatility and leave the market some breathing space. Also, remember that it's better to estimate the breadth of stop loss before assessing the percentage of the deposit that you are willing to risk on a single trade and calculating the position size. A lot of Forex traders do the opposite and let the position size determine the distance to the stop loss. And please, never make the mistake of positioning a stop right on the support or resistance levels - that is a childish error for which the Forex market will punish you soon enough.

Being afraid to cut the losers

The ability to accept losses is an integral part of Forex trader's psychology, a norm if you will, because even the most prominent foreign currency speculators with a great track record get their trades wrong all the time.

Being afraid to lose some percent of the deposit is totally counterproductive for a Forex trader because, in that case, he or she will make another dangerous mistake of holding onto a losing trade or even trying to add to a losing position. Once again, clinging on a losing trade has a lot to do with the hope that the market would eventually reverse in your favor, and as we have already noticed, both the hope and the delusion that you can control the market, or the market oughts to do something, are some of the costliest mistakes in Forex trading. So, turn off the emotions, abandon the hope, and cut off the losers mercilessly.

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