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Avoiding Common Mistakes

Becoming a more experienced Forex trader involves a lot of trial and error. Mistakes will be made and lessons will be learned. Below are a few of the areas in which new traders commonly make mistakes. Avoiding mistakes is not a cut and dry process, but increasing your awareness of the potential trouble spots is a big step in the right direction.

Controlling Emotion

If you’ve ever placed a real trade or have faced a big decision in life, it should come as no surprise that emotion plays a big part in determining what to do—including when to buy or sell. While it is nearly impossible to remove emotion entirely from trading decisions, a lot can be done to control it. Controlling emotion allows for a clearer picture of the task at hand. It will also allow for a more thorough analysis of the trade from all sides and may help provide the discipline necessary to stick with your trading plan.

An easy way to help control emotion is to get in the habit of thoroughly planning an entire trade—its entry and its exit—BEFORE placing it. Going with a gut feeling is very easy to do, but often leads to a different type of feeling: pain. Knowing exactly what the plan is beforehand allows a trader to place trades with conviction, to be firm with an exit strategy, and to stay consistent with their risk tolerance.

A simple way to prepare for a trade ahead of time is to keep a trader’s journal, which can be as basic as a notebook kept near the computer where trades are planned out. A journal entry would contain the entry price, exit prices (both limits and stop losses), and a reason for making the trade. After the trade has been recorded in the journal, then it is placed for real. Once the trade has been executed and closed, you should record the result in the journal. This tedious record-keeping makes it easier to see what has worked and what has not, so that going forward you can attempt to mimic the successful trades and avoid the unsuccessful ones.

Understand margin and leverage

Another common mistake new traders make is trading without a true understanding of margin and leverage. By reading this book, you have already taken the first step to avoiding this mistake. It is of upmost importance to know what the margin requirement is for each new position opened. Always be sure to provide ample cushion for open positions by having sufficient available margin at all times.

Trading with no more than 10% of your account balance is a good start in providing such a cushion. Many new uneducated traders will often use upwards of 90% of their available margin on one position. These traders are often doomed for failure, as even the smallest move against will cause the account to fall below the margin requirement and cause a dealer liquidation. The Forex market is in a constant ebb and flow. Leaving sufficient available margin allows you to weather the small showers while waiting for the sunny days.

Trading is not a race

It’s not necessary to go for the gusto on every trade. When planning trades, think about reward to risk ratios. Reward to risk ratios represent the ratio of the number of pips a trader is looking to profit versus the number of pips they are risking. Ideally, the ratio should be greater than 1. For example, a trader who sets a limit order 100 pips from entry and a stop loss 50 pips from entry is employing a 2 to 1 reward to risk ratio (100/50). This is an example of a good reward to risk ratio and could represent a pretty good trade. An example of a not so good reward to risk ratio would be a trader who sets a limit order 100 pips from entry and a stop loss 500 pips from entry (1 to 5). This trader is taking on way too much risk.

Think of trading as a business and treat it as one. A CEO who pays £100,000 for a chance to make £10,000 will probably be chastised. On the other hand, however, a CEO who earmarks £10,000 for a chance to make £100,000 will probably be commended. This is a good mentality to keep in mind when trading. After all, in business and in trading the goal is the same: to make money.

After finalising your strategy and doing your research and analysis, start trading slowly. There is no shame in trading a single mini lot. Setting tight stops and looking to take small profits will allow you to progress at a slow pace and learn through both your winning trades and the losing ones.

The Forex market is a market unlike any other. It’s sheer size and global reach provides opportunities for traders around the clock and brings world news, economics, and socio-political events right into the trading room. Forex traders see the world differently. A Forex trader will wait for a weak Yen before booking that trip to Tokyo. They will wait for a weak Pound before buying a Saville Row bespoke suit. Welcome to the world of Forex trading, and good luck.

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