Trading in Forex can be just as punishing as it can be rewarding if you are not careful. Trading in any aspect requires careful consideration to be able to trade successfully and safely. There are a few common mistakes beginners make in forex trading that you can avoid to ensure trading doesn’t end up costing you money, such as:
- Overleveraging
- Ignoring risk management rules
- Trading without a plan
- Letting emotions control your trades
- Chasing losses or overtrading
- Failing to learn from mistakes
Keep reading to find out how to avoid these beginner forex trading mistakes so you can trade confidently, safely, and be successful.
1. Overleveraging
In simple terms, leveraging is where you borrow money from a broker so that you can trade with a higher amount of money than you actually have, and control a bigger trade.
Overleveraging is a term used when someone borrows a high level of leverage, but the trade goes badly. If the trade doesn’t go as you originally planned, borrowing a higher amount could result in an entire wipeout of your account balance. Take a look at our article, “Leveraging and why it can be dangerous”, for a more in-depth discussion on the danger of overleveraging.
To avoid overleveraging, you first need to have a strong understanding of how leveraging works. If you don’t feel confident with leveraging, you should seek out training or start with the lowest level of leverage your chosen broker offers. That way, should the trade not go as planned, you won’t be hit with too much of a loss.
2. Ignoring Risk Management Rules
Risk management may seem like a mundane task, but it’s vital to be a successful Forex trader. Ignoring risk management rules can lead to severe losses and even jeopardise your trading account. You need to think about a risk management plan that looks at things such as:
- Stop-loss orders
- Position sizing
- Overleveraging
Let’s take a look at each of these risk management rules in more depth.
Stop-Loss Orders
A stop-loss order is where your broker is given an automated instruction (set by you) to buy or sell stock when it reaches its stop price, or a specific amount. If you do not set up a stop-loss, this can leave your trade vulnerable to significant loss should the market move in a way you did not predict.
Position Sizing
Position sizing is where you determine the optimal number of currency units to buy or sell when trading by looking at your overall account balance, risk tolerance, and stop-loss parameters. Ignoring position sizing is a common forex trading mistake which can be detrimental to your trading portfolio, as without it, a single trade could wipe out your entire account.
If you create a strong, disciplined position sizing, you can prevent losses from being detrimental, as you will have created a financial safety net.
Overleveraging
As mentioned above, if you opt for a higher leverage, one that may be too large relative to your account size, this can magnify the potential loss if the market fluctuates in a way you hadn’t predicted. Ensure you only take on the lowest amount of leverage for your account, so that should anything change in the market, your potential loss won’t be as large, and you won’t run the risk of wiping out your entire account.
3. Trading Without A Plan
Whether you’re a newbie Forex trader or a seasoned professional, you still need to create a plan for every trade. Trading without a plan can lead to devastating losses in the same way as ignoring risk management rules can.
Your plan should include your entry and exit strategy and your risk management rules. Write your plan down somewhere that’s easily accessible so you can constantly refer back to it with ease, as well as record and review your progress. Other things to include in your plan are:
- Your objectives and how you plan to reach them.
- The trading strategies you intend to use.
- The risk management tools you have created to protect your capital.
- An outline of your experience, your tolerance for risk, the time you have available to trade, and your budget.
4. Letting Emotions Control Your Trades
Your emotional state should never be allowed to control your trades and this is another common mistake beginners make in forex trading. Sometimes, you might be doing this without even thinking about it. For example, maybe you’ve had a great day and feel that your luck is on the more positive side. You may start to open up trade positions without truly analysing them. On the flip side of this, you could have had a bad day and feel as though your luck is about to get worse. This may drive you to make a last-minute decision, which could be either closing off trades which you’re scared will fail, or backing poorly analysed trades. Both of these examples can lead to poor trades and loss.
Try to keep your emotional state separate from your trades. Remain objective and base your decisions on the trading plan and risk management rules you have put in place.
5. Chasing Losses Or Overtrading
Chasing losses: Trying to recuperate losses by taking on bigger trading risks.
Overtrading: Making too many trades or using too high leverage for their account, resulting in amplified losses.
When you have made a loss, it can be easy to let your emotions take over and motivate you to recoup those losses by taking on greater trading risks. Although if the risk pays off, you’ll be in a better position, you’ll be worse off than you were to begin with if the trade goes wrong. The market is unpredictable, and chasing losses is how you end up with little to no profit and feeling as though trading has failed you.
Overtrading is similar. Although the payoff will be high if all goes to plan, the losses can be doubled if the trade fails. Try not to take on too many trades or overleverage, and stick to your trading plan to ensure you stay objective.
6. Failing To Learn From Your Forex Trading Mistakes
Although this one might sound obvious, you’d be surprised how easy it is to try the same method again and again in the hope that the outcome will be different.
Sometimes, trying again is all it takes for things to click into place and you to find your rhythm in trading. However, this all depends on how big the mistake was to begin with. For example, if you chose a high leverage and now you’re suffering the losses because the trade did not go as planned, it would be detrimental to try the same tactic again. You need to be able to assess your forex trading mistakes and see where you can learn from them and alter them, so you don’t end up in the exact same position.
Learn Forex Trading With STARTrading
If you’re still worried about making beginner forex trading mistakes, a bit of support can go a long way. Here at STARTrading, we are experts in trading across a range of markets and have years of experience helping others become comfortable with it, too. In our trading courses for beginners, we will go over all the basics and teach you everything you need to know so that you can go away feeling confident and ready to try again, but this time with the right set of skills.
We have a selection of events for you to choose from – some online and some in person – a trading ebook that’s free to download, or reach out to us with any support you need.
