Beginner Forex traders: Five common mistakes to avoid
Mistakes are inevitable, they’re part of any learning journey, but in the context of currency trading, whilst some of them are really going to develop trading experience and abilities, some might only prove frustrating and dent profits. Here are five common but avoidable beginner mistakes in Forex.
“A hope and a prayer” is not a strategy that works in this industry. A positive attitude and visualising success might make the days pass more pleasantly, but they won’t make the market blink. For sustained success in Forex trading, it’s necessary to completely do away with gut feelings and spontaneity – this is a strategic environment.
The market is mostly unpredictable: things can change in a heartbeat. With this unpredictability and volatility comes opportunity, but rather than acting randomly, the consistent dedication to a well-defined trading strategy is what separates the winners from the losers.
Solution: Developing a strategy, trusting the process, committing to individual ideals
Failing to cut losses
This is one of the trickiest aspects of Forex trading. When a position is losing value, does the owner sell, or do they hold on and hope for a reversal? The question plagues every trader, but statistical evidence suggests that in the long term, cutting losses quickly when positions dip is the best way to secure profits or minimise losses.
Losses are going to happen, regardless – no trader makes a profit on every single deal, so it’s preferable to take a small loss, rather than gambling on a reversal. Different guides will recommend different figures, but 2% is a good loss limit to protect interests.
Solution: The 2% rule can help keep profits safe and growing
Having unrealistic expectations of trading success
Everyone loves an underdog story – Slumdog Millionaire, Moneyball, The Pursuit of Happyness, The Wolf of Wall Street – the list goes on, but the thing is, for a beginner in Forex, the odds are simply against becoming an overnight success. Rags to riches is a Hollywood fallacy, so it’s important to embrace some realism here.
There are exceptions, but the odds are, like most traders, success will come from hard work, appetite, strategy, and compounding returns over time. Beginner traders need to constantly work on improving their knowledge of the market and how it works, remaining calm when things don’t go the right way, and committing to the trading process.
Solution: Being humble, staying committed, compounding returns, and developing a productive mindset
Focusing on financial gains
Money, money, money – is that all that Forex is about? Well, technically, yes, but hold up. Is it all one should focus on? No! The majority of the super-rich and super successful, those with incredible professional legacies, didn’t get there because they focused on cold, hard cash. They got there because they found the thing they were good at and they worked incredibly hard and committed to being the best at it.
Doctors make lots of money, so do lawyers, but if they focus on the money rather than the practical knowledge, can they perform their jobs to the same level? Not at all.
Forex trading is a long-term activity, not something that’s going to make anyone rich overnight. Playing the long game by keeping risks low is the best way to play the game. So, it isn’t necessary to check one’s phone for prices every five minutes, as long as one has good processes in place.
Solution: Keeping risks low, finding good opportunities, constantly developing skills
Overlooking transactions costs and spreads
Bad news, novices: Forex trading isn’t quite free. Brokers, by nature, make their profits from spreads and commissions, which means that every time a position is opened or closed, there is a tiny percentage to pay. Of course, one might think those trading fees are minuscule, and simply forget them, but that would be a mistake. They really add up over time and can eat into profits.
Most Forex brokers will charge spreads – essentially a fluctuating price that is marginally different from the real market price – giving them a small reward for facilitating the deal. Other brokers offer fixed spreads, or fixed transactions costs with no spread. Each Forex broker has different terms and the onus is on the trader to compare providers, crunch some numbers, and make a well-researched decision.
Solution: Comparing account details and broker offers
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