Being a beginner in the forex market means you will be making a lot of mistakes as a part of the learning process. There is nothing wrong with making mistakes in the initial period but there are some major mistakes that you should not be making as a forex beginner. The currency market is huge and volatile, which makes it a risky place for an average newbie.
When you enter the forex world without enough knowledge, you may make some costly mistakes which can be a turn-off for most traders. In this article, you will be reading about some of the most common mistakes that novice traders make along with some practical tips to avoid them.
1. Not Spending Enough Time to Learn
New traders often make the mistake of jumping into trading without taking enough time to learn about the market and develop their skills. They are so eager and impatient to enter the market that they end up skipping the most important lessons that one has to take to graduate as a forex trader. Forex trading does not require a degree or course completion as anyone can start trading by signing up for a trading account with a forex broker. But that does not mean you can get away with it in the fast-moving market. You have the responsibility to learn on your own and not doing so is the biggest mistake that a beginner can make.
2. Absence of a Trading Plan
Another mistake that you should never make as a beginner is starting off without a solid trading plan or strategy. Many newbies think that they can just try trading based on what they have learned without a well-defined plan to follow. This will only make you confused and overwhelmed in the end as the forex market is a dynamic space, and you cannot think of building your trading career without an actionable plan to begin with. Placing random trades without a definite goal and lack of a trading system indicates the incompetence of a trader which is dangerous.
3. Not Paying Enough Attention to Risk Management
As I mentioned before, the volatile nature of currency pairs makes forex trading inherently risky for anyone irrespective of their skills or experience. Even an expert trader will encounter losses when they fail to manage the risk. Hence, not paying enough attention to risk management as a beginner puts you in the danger zone for real. But unfortunately, many first-time traders underestimate the risk and end up in trouble later on. It’s important for newbies to determine the profits they wish to make in advance and then trade accordingly. For this, a pip calculator can come quite handy, as it helps traders know the pips they need to capture in order to make a certain amount of profit.
4. Not Setting the Optimal Risk/reward Ratio
If you want your trades to be truly rewarding, then you need to set an optimal risk/reward ratio which sets off the risk that you take for each trade. Many beginners tend to forget about the importance of risk/reward ratio and focus more on the win rate which is not an ideal approach in the opinion of experts. Having a high win rate is harder than you think and taking excess risk for earning small profits indicates you need to work on your risk/reward ratio.
5. Not Studying About Trading Psychology
Trading psychology is one of the most important aspects that you need to study before getting into forex trading. Trading psychology teaches us to focus on logic and rationality instead of relying on our emotions. Emotional trading is truly damaging for a trader and not having knowledge about trading psychology truly puts you in a risky position while trading.
6. Trading Without Analysis
Market analysis is the very first thing that you need to learn about as a forex trader. This involves both technical and fundamental analysis. Technical analysis is about reading the patterns on the price charts to recognize market trends and fundamental analysis is done by paying close attention to the economic news events and data releases that have an impact on the currency prices. So, trading without analysis is like playing a blind game of luck which makes you a gambler instead of a trader.
7. Wrong Timing
Sometimes a beginner has enough knowledge, has spent enough time to develop their skills, and even has a solid trading plan or strategy to follow. But they still fail to attain the desired level of success because of wrong timing. Timing plays a key role in the success of your trades, and you should not be trading until you find the best time to trade based on your strategy and trading style. Don’t trade for the sake of trading and make sure it is the right time to place the trade based on the real-time market situation.
8. Taking It Easy
Trading in the volatile forex market is a serious business and you should be able to approach the market like a professional. Taking it too easy and trading for fun is the worst mistake that you can make as a beginner. You should not think of trading as something simple and stepping into the market as a newbie should be done with a lot of caution.
9. Not Keeping Track of Your Trades
The last mistake that I want to mention here is not keeping track of your trades and not recording your trades in a journal. A trading journal is one simple tool that allows you to look back on your trades and spot the mistakes that you make. Once you end your trading day, calculate your P&L using a profit calculator and add it to the trading journal so that you know what you have achieved or lost on that trading day. Also, write the reason behind taking the trades so that you know if you were right and where you made mistakes.
Tips to Avoid Trading Mistakes
1. Don’t Rush and Take Your Time to Learn
Forex trading surely has a steep learning curve and rushing the learning process will only make you more prone to making mistakes. So, the first tip here is to not rush the process and take your time. All of us have different abilities and speeds when it comes to learning and grasping something new. So, being slow and steady should be your motto as a new trader in the forex market.
2. Come Up with a Plan and Make Calculated Moves
A trader who enters the market with a well-defined plan surely has an edge and thus higher chances of success. You need to make calculated moves for each and every aspect of trading as that makes you professional and systematic.
3. Practical Learning on Demo Accounts
One thing that I discourage forex beginners from doing is trading on a live account without trying out the demo account. Demo accounts are the safest place for practical learning, and it also gives you a realistic trading experience without your real money being involved. This would be a perfect place to practice and polish your trading skills without the fear of losing due to newbie mistakes.
4. Use Risk Management Tools
One of the mistakes that we mentioned before is not paying enough attention to risk management. This mistake needs to be avoided at all costs and for that, you need to use the simple risk management tools that allow you to stay on the safer side. Stop loss orders, take profit orders, optimal position sizing, and limited use of leverage are all considered to be effective tools for managing the risk without sacrificing your profit potential.
5. Choose an Ideal Risk/reward Ratio and Stick to It
The next tip is to choose an apt risk/reward ratio based on your profit target and risk profile. Your trading style and strategy should also be considered while setting the risk/reward ratio as they should align well with the ratio that you follow for planning your trades. Some traders also tend to take very little risk, which is also not the right approach as it restricts the profitability of your trading system.
6. Always Rely on Analysis and Logic
One thing that you should not trust as a trader is your own emotions and feelings. You should only rely on analysis and logic while planning your trades. You need to follow your plan and improvise when needed as following your heart will lead you nowhere as a trader. Being rational is one quality that takes a forex trader closer to success and it also makes you less prone to losing your mind. Learning about trading psychology along with the technical and fundamental concepts prepares you for facing all the challenges you come across like a pro trader.
Now one last thing that I want to say about trading mistakes is that you don’t need to beat yourself up for every mistake that you make as a beginner. Making mistakes is humane and you will always get opportunities to correct them later on, once you identify where you went wrong and learn from it.