Common Mistakes by Forex Traders
1. OVER USE OF LEVERAGE- Not controlling speed of market due to over use of leveraging tool. The lower the leverage factor or Gear ratio the slower the move.          Â
GEAR RATIO is a good way to understand leverage. If you have a car in 10th gear it will go much faster than if its in 1st gear. The higher the leverage or gear the faster the speed and the less time to react. It is the same thing with Forex, the more lots, the faster the speed; each lot increases leverage or gear ratio.
Caution: Leverage used correctly is your greatest tool, but used incorrectly it becomes a weapon of destruction and WILL blow you up.
2. LACK OF TRADING PLAN- means that traders do not know what to do if they are wrong nor what to do if they are right. The large floating profit they make may often turn into a large loss, because they did not when know to get out. Trade Defensively and always know your downside and what you are at risk of losing.
3.LACK OF MONEY MANAGEMENT- Trading Forex is a question of what the odds are of being right. This is known as RISK/REWARD RATIO. Good money management means you know your profit objective and the odds of being right or wrong and know how to control your risks with stops.
4. FAILURE TO USE A STOP- Rejection of Ego is perhaps the toughest of all to handle trading. Not only does the market tell you your wrong, which no one wants to be told, but it also takes your money. Stops are a good thing, because of this ever trending market, it cuts your losses and gets you out before you allow your account to be ruined. The stronger your entry the less likely of being stopped out, identifying strong support and resistance lines, will keep you in the position longer and when stopped out be happy you out because you were wrong. Never change your plan, once you move your stop, you have no plan, you lose more.
5. ACCEPT A LOSING TRADE – Many traders lose confidence after a couple of losing trades and reduce their ability to become an efficient trader. This market requires a gradual learning curve so only persistence, trial, and mistakes will help enhance your ability to trade. As a trader your emotional cycles will be like none other, total failure and total rewards almost everyday which make traders unique. If you cannot ACCEPT A LOSING TRADE and realize it will happen more often than not while learning than don’t waste your time starting. Rome wasn’t built in a day and traders aren’t made in a day.
6. HOPE- Lack of proper discipline, is HOPE. Hope is the most devastating of all feelings in trading, because it can lull you in to becoming complacent. You know in most cases when you find yourself hoping, you are wrong, and just get out of market. This requires the most self discipline of all. You were wrong. NEVER HOPE, JUST MANAGE DOUBT!
7. CAPITAL PRESERVATION- Profits are there for the making, but the real key to trading is not making money; it is keeping it. Hold profitable trades and cut losses quickly. It is easier to bask in the elation of a winner than to hope on a loser.
8.TAKING QUICK PROFITS AND LETTING LOSSES RUN – Very common among traders, this is normally a result of no trading plan. After one or two losing trades, you are likely to take a small profit, even though that trade could have been a huge profit maker. This mistake is overcome by using a pre-determined stop to prevent losses from running. Entry in a stalled market allows you to get away with tight stops, reducing your losses.
9. OVERSTAYING YOUR POSITION – Simply failing to take profits at a pre-determined level. If the market meets your price target, adjust your stop above entry, to be in a riskless position and not be at risk of losing profit. Remember, currencies trend a trend means once it breaks it keeps going. Use a trailing stop to maximize profit while enjoying riskless trade.
10. AVERAGING A LOSS – Works with stocks NOT forex. Justifying averaging down by figuring you will have a lower entry price and require a smaller move to break even. Currencies trend and normally you will lose twice as much if the market moves against you, and it usually does.
11. OVER CONFIDENCE – Increasing your commitment, with success, usually leads to disaster. When you are right more often it leads to larger trade sizes, which end up ruining your account. This ruins more trades that a series of small losses. Never try to make back all losses on one trade!
12. OVER TRADING YOUR ACCOUNT – When you are certain that the next move will be a really big one and you risk too much. To prevent this you must have a hard and fast rule that you will not risk a certain percentage of equity regardless of how strong the trade looks. Only trade overweighed with a profitable account will provide the largest gain!
13. CHANGING YOUR PLAN DURING TRADEÂ - when you are most exposed to emotion and greed, you are much more likely to change your plan. If you lift your stop or change your target, you have no plan.
14. TRADING FOR EXCITEMENT, NOT PROFIT(LACK OF PATIENCE) Some traders do not trade for money, they just like the action. Think about it, must you have a trade a day or just an opportunity to make money, regardless of the time frame. The market will dictate NOT you.
Certainly the market will do the unexpected and at times you will lose more than you expected; but if you steadfastly avoid making these mistakes, you must make money. Don’t expect to run a marathon, day one. Rule of thumb; you lose three trades in a row, get up and get away!
Source: First National 4X