We often talk about what you should do to become a successful trader here on this blog. Everything from getting professional forex trading coaching, to surrounding yourself with other traders, and focusing on mastering one trading strategy at a time.
So, with all of that already covered by us in detail before. We thought it might be time for a post that goes over some of the biggest mistakes new traders make. After all, it is not enough to only know what you need to do to be successful. You also need to know what to avoid.
So, to help you on this, here are the top 5 forex trading mistakes – and how to avoid them:
1. Not having a trading plan
A trading plan is a necessary thing to have for every serious trader. Without it, trading becomes gambling, which is what we definitely want to avoid.
Unlike what some people seem to believe, a comprehensive trading plan is more than just a trading strategy. A trading plan should ideally cover everything from which forex pairs you plan on monitoring and trading, to the timeframes you will be trading on, the money and risk management techniques you will be employing, and lastly the trading strategies you will be using.
As you can see, the plan should be much more comprehensive than a trading strategy. Because, as we have said many times before, having the best trading strategy in the world will still get you bankrupt without knowing how to manage your money and risks.
Therefore, draft a plan and make sure to follow it.
2. Making emotional decisions
Emotions can be a trader’s worst enemy. In fact, professional traders are often fully aware of this, and some hedge funds and trading firms actually hire psychologists to help their traders manage their emotions. Because when emotions get in the way of trading decisions, bad things usually happen.
In order to be successful at trading, you must have a comprehensive trading plan – which includes a robust trading strategy – and be sure to follow it mechanically. Blocking out emotions may take some practice, but it is absolutely essential in order to follow the trading plan you have prepared.
Yet, many people never manage to truly separate their emotions from their trading decisions. If this is you, employing a trading algorithm or some other kind of automated system may be better suited for you than manual trading.
3. Trading too much
The urge to trade too much – aka. overtrading – is a common problem that a lot of new traders in particular struggle with.
The reason traders struggle with overtrading has to do with the fact that they view trading as their job. And as most people who have a job, these new traders think they need to do something all the time to prove that they are indeed working.
What they forget, however, is that a trader’s only job is to make money. And sometimes that involves just sitting on his or her hands waiting. You see, successful trading is often a waiting game that requires patience. As the legendary stock trader Jesse Livermore once said:
“Money is made by sitting, not trading.”
As you now understand, overtrading is a problem that traders need to overcome if they want to be successful.
4. Not accepting losses
Not accepting a loss may be a good thing under some circumstances, but in trading it doesn’t lead to anything good. Because if you cannot accept a loss in trading, chances are you will rather see a trade keep moving in the wrong direction until the pain becomes unbearable, instead of just cutting the loss while it’s still small.
The thing to understand is that losses should not really be seen as a bad thing. Instead, try to consider them as just a part of trading. If you haven’t suffered a loss for a long time, be sure that a big one is probably waiting for you right around the corner!
When you think about it this way, it’s not so bad to lose money from time to time. All traders suffer losses on occasions. And what separates successful traders from unsuccessful traders is therefore how they manage their losses and later recover from them.
5. Having an overly complicated trading strategy
As a rule of thumb, we can say that a good trading strategy is a simple trading strategy. Unfortunately, many new traders don’t understand this, and think that a trading strategy better look complex and impressive if it is any good.
This couldn’t be further from the truth.
The problem with overly complicated trading strategies is that they are usually a result of “over-optimisation” on past price data. As such, the performance of the strategy will look really good when it is backtested on one specific forex pair for example. But this is because the person who designed the strategy has made it more and more complex until it fitted the past data perfectly.
When you then try to test the strategy on a different forex pair than what it was designed for, you will usually see that it performs horribly. And the same goes for future returns on the same pair as it was designed for.
Instead, a good and robust trading strategy should be simple and understandable. This also means that you will have more confidence in the trading strategy, which is important. When you fully understand how a trading strategy works, and why it works, chances are you will be able to stay on course through good and bad times.
This is what eventually will lead to success in forex trading.