The foreign exchange market (forex) is popular with traders for numerous reasons. It’s highly liquid – with more than $US5 trillion on average traded every day – is open around the clock Monday to Friday and is stable enough for brokers to offer leverage (meaning traders can borrow more against their capital) on trades.
However, it’s also a highly sophisticated market and traders who rush into it can end up making some very costly mistakes. Let’s look at five of the biggest ones made by new forex day traders:
1. Not having a trading plan
If you’re going to become a forex trader, you need a trading plan. Acting without one will almost certainly lead to losses, so before you get started make sure you sit down and write up a list of rules to guide your trading and money management strategies. Here are some of the questions you should be asking yourself before you start forex day trading:
- When to enter a trade?
- What are the criteria you will use to evaluate a trade – moving averages, economic news etc?
- What sort of gains are you targeting?
- Which currency pairs should you focus on?
- When should I exit a trade?
- How much are you willing to lose on a trade?
- Where should you set take profit/stop loss trades?
- How long will you allow your trade to reach the target you have set?
- How much money should I risk on individual trades?
- What is your budget?
- What amount of leverage is appropriate for your circ*mstances and risk tolerance?
2. Not enough research
The world of foreign exchange trading is built on interconnected dynamics. Economics, politics and market fundamentals converge in ways that create opportunities and risks for traders.
Many new traders are lured in by the potential gains on offer but fail to do the necessary research. This is potentially a way to lose money. Successful traders, however, tend to read widely and regularly to educate themselves on trading strategies and keep abreast of potential market-moving events. Here are some of the areas to research on your journey to becoming a trader:
- Economics
- How interest rates and other economic news (such as trade data, employment and activity) affect currency pairs?
- Market fundamentals
- What are the market fundamentals driving movements in your chosen currency pairs? What are the technical indicators you need to be aware of to trade successfully?
- Money management
- What strategies can you follow to maximise profits and minimise losses?
3. Ignoring economic data and news events
News events like the release of economic data and central bank decisions can have a major impact on currency markets. The good news is that many of these events follow a regular schedule so it’s easy to know when they are coming. Of course, that does not mean it is easy to predict what the news will be, or how markets will react.
Trading on the back of a news event before a trend has been established does not fit all trading plans, but it may suit others. It’s a good idea to pay attention to news and events as these can play a crucial role in determining trends in currency pairs
4. Hoping bad trades will come good
One of the worst mistakes new traders make is averaging down: investing more money in a losing trade in the hope of a turnaround. More often than not this amounts to throwing good money after bad and can exacerbate your losses.
The reality is that even if your investment hypothesis is correct, the price of your pair can move against you for longer than you expect. Similarly, holding on to losing positions for too long will prevent you from shifting your capital towards a potentially more successful trade.
5. Taking quick profits and missing out on larger gains
The key principle of a forex day trader is to minimise loses and maximise profits but, just as some new traders hold on to losing positions for too long, many will also diminish returns by taking profits too early. At first glance this might not sound like much of a mistake – you still made money on the trade after all – but doing it consistently will seriously sap your earning potential.
Unfortunately, this is a harder problem to solve than the other mistakes listed here. There are often good reasons to close a trade earlier than planned, perhaps your pair has unexpectedly entered a period of consolidation or perhaps a piece of news has emerged to alter the trend completely.
Nonetheless, many traders miss out on gains by acting out of fear or greed instead of a rational evaluation of the available technical and/or fundamental indicators. The best solution is once again to create a clear, well-thought-out trading plan and stick to it.
Forex trading mistake overviews
Of course, mistakes are an inevitable part of life for day traders, especially people entering the market for the first time. However, being aware of some of these common mistakes will help you prepare better and minimise your errors and, hopefully, boost your returns. If you’re interested in learning more about currency trading, visit our Forex page.
FAQs
Here are 10 of the most common trading mistakes made by traders.
- Unrealistic expectations. ...
- Trading without a trading plan. ...
- Failure to cut losses. ...
- Risking more than you can afford. ...
- Reward/risk ratios. ...
- Averaging down or adding to a losing position. ...
- Leveraging too much. ...
- Trying to anticipate news events or trends.
The 5-3-1 strategy is especially helpful for new traders who may be overwhelmed by the dozens of currency pairs available and the 24-7 nature of the market. The numbers five, three, and one stand for: Five currency pairs to learn and trade. Three strategies to become an expert on and use with your trades.
Do and don'ts in forex trading? ›
If the market is going up, decide where you want to buy and place your trade, and the same applies if you're looking to sell. You should have a risk-management strategy, with pre-defined stop-loss and take-profit levels. Lastly, you shouldn't trade for the sake of it – being neutral is a position as well.
What is the number one mistake traders make? ›
Studies show that the number one mistake that losing traders make is not getting the balance right between risk and reward. Many let a losing trade continue in the hope that the market will reverse and turn that loss into a profit.
What is the biggest risk in forex trading? ›
Transaction Risk
This is one of the main risk factors in forex trading and is contingent on exchange rate changes. Since forex trading is active round the clock, exchange rates are subject to change before a trade settles.
When to avoid forex trading? ›
Most forex traders tend to avoid trading on major holidays, as well as on days when global news events are breaking.
What is the trick to forex trading? ›
Keep it slow and steady. One key to trading is consistency. All traders have lost money, but if you maintain a positive edge, you have a better chance of coming out on top. Educating yourself and creating a trading plan is good, but the real test is sticking to that plan through patience and discipline.
How to master forex trading fast? ›
Traders alike must keep in mind that practice, knowledge, and discipline are key to getting and staying ahead in Forex trading.
- Define Goals and Trading Style.
- The Broker and Trading Platform.
- A Consistent Methodology.
- Determine Entry and Exit Points.
- Calculate Your Expectancy.
- Focus and Small Losses.
- Positive Feedback Loops.
It's not possible to trade without loses at all, but it is possible to minimize the risks. We gathered a couple of most common misconceptions to tell you how to avoid big losses. Read our golden rules, smile on “genius” decisions – and don't make the same mistakes!
Why do 90% of traders lose? ›
Most traders fail because they do not invest enough time and effort in learning about the markets and trading strategies. They enter the market without a proper plan or strategy, which leads them to make poor decisions and lose money. Another reason why traders lose money is because of emotional decisions.
Biggest trading mistakes and how to avoid them
- Over-reliance on software. ...
- Failing to cut losses. ...
- Overexposing a position. ...
- Overdiversifying a portfolio too quickly. ...
- Not understanding leverage. ...
- Not understanding the risk-reward ratio. ...
- Overconfidence after a profit. ...
- Letting emotions impair decision making.
“Profit Parabolic” trading strategy based on a Moving Average. The strategy is referred to as a universal one, and it is often recommended as the best Forex strategy for consistent profits. It employs the standard MT4 indicators, EMAs (exponential moving averages), and Parabolic SAR that serves as a confirmation tool.
Why do so many forex traders fail? ›
The reason many forex traders fail is that they are undercapitalized in relation to the size of the trades they make. It is either greed or the prospect of controlling vast amounts of money with only a small amount of capital that coerces forex traders to take on such huge and fragile financial risk.
What percent of forex traders fail? ›
According to research, the consensus in the forex market is that around 70% to 80% of all beginner forex traders lose money, get disappointed, and quit. Generally, 80% of all-day traders tend to quit within the first two years.
Why is forex so hard to trade? ›
Why is Trading Forex Hard? The Forex market is said to be hard because it is the most liquid market in the world and billions of people and entities intervene in it. Governments, politics, the weather, public health, corporate expansion or bankruptcy, the prices of foodstuff, everything influences the Forex market.
How much money do day traders with $50,000 accounts make per day on average? ›
However, a widely accepted figure suggests that a successful day trader can pull between 1% to 2% of their account balance per day. For a $50,000 trading account, this equates to approximately $500 to $1,000 per day.
