Common Mistakes in Trading Forex
Every trader has a different personally with different psychological traits. However, on broad level we all have same basic weaknesses on different levels and hence there are some basic trading mistakes which traders make quite commonly. Once or twice is ok but "Don't Do it Again" is the mantra. Let's have a look what goes wrong commonly in Forex trading:
1. Hope - Repeatedly entering the market against the trend
This happens if either the market moves against your expected direction and you expect a reversal or you hope that it should be the time for a correction in the trend. You keep taking positions against the ongoing trend and the market keeps on going in the opposite direction. Remember that market does not follow you, you need to follow the market. Trends always reverse but that reversal is one time during a trend but the continuation of trend is not a one-timer during the life cycle of that trend. Your probability of success is more if you go with the trend.
Essence: Taking decisions on the basis of "Hope" are always bad decisions.
2. Very late entries
Some of us have big appetites risks and some are too risk averse. The extreme of either side goes against good trading decisions. You can never be 100% sure about the direction of the price movement and hence waiting for 100% confirmation of that can never take place. Waiting too long to be sure about the position you are planning to take never helps because by the time we decide to take a position the prices may be on the verge of reversal or major consolidation.
The opposite of the above is also true.
3. Adding to losing trades
This pattern takes place with those of us who are weak in facing any kinds of losses or are gamblers in nature. Emotional attachment with the trades also becomes a reason.
Let's assume that we take a long position and soon the market moves against us and the price starts falling. Expecting a reversal of corrections and you take another position at the fallen prices. It is always possible that market is entering into a long downtrend, resulting into your losses to multiply. Instead of adding to losing trades you should accept the losses gracefully and get out of those.
4. Trading addiction
Trading is a serious business and simple mistakes can make your balance sheet red.
If you are prone to addictions then there is a good possibility that trading may also become an addiction. It should be avoided at all cost. We need to take trading positions when we are pretty sure about the. Please do not confuse this with waiting too long for the confirmation. Trying to be in the market all the time is a big NO, NO. Profit making is not about the quantity of trades but quality of even a small number of trades.
5. Stop-loss orders too close or too far
If you are consciously or subconsciously worried that market may move against the direction of your position, you may keep your stop-loss order very close to cut down your possible losses to the minimum. Or you may put it too far so that your position does not meet the stop-loss in case of a consolidation.
Well, in both cases there is a feeling in the subconscious mind that market may go against us. If that feeling is there then the best option would be to avoid taking a position. However, if you are feel that price action may have some consolidation before going in the expected direction then the stop-loss levels should be optimum. Keeping it too close increases the possibilities of you trade to go into loss even if your analysis was good and keeping to too far may make a loss a big one.
6. Take-profit orders too close or too far
Keeping the take-profit targets too close is an indication that you are not sure about your trade. There is no point in taking such a position in that case, right?
And putting the take-profit orders too far is like trying to kill all the birds with one shot or trying to make all the money with one trade?
Similar to what we talked about the stop-loss orders, either you should avoid taking a position or put an optimum take-profits target. If you are confident about your position then a very narrow take-profit targets cut down the profit opportunities by making a loss in the possible profits. And very high profit targets may cause market reversal before the target is met.
7. Learning from the past mistakes and making a bigger mistake
Learning from past mistake is always required but that should not be done blindly. In a dynamic market like Forex, what was true last time may not hold good in the current, possibly changed, situation.
A simple example is that in a less volatile market you put the stop-loss a bit too far, the trade goes against you and your position hits the stop-loss. By the time you eye another trade, the market volatility goes quite high but keeping the previous trade in mind you put the stop-loss closer. Market is so volatile that before hitting your profit target, it hits the stop-loss. Boom!!!
As another example assume that you have been expecting the market to go up. You go for a long position but the price-action goes against you and you make a loss. You buy again and make further loss. After some time you are so frustrated that you just short-sell. The market moves up and well, another loss. Every new trade is a fresh start. Learning from the past failures and successes is important but those failures and successes should not influence the current trade in the absolute terms.
8. Loving your trades and bias for the market direction or numbers
If you are biased about the market direction and love each of your positions then you would fail to hear what the market is telling you. Be ready to accept the facts that you will have loss-making trades. Even if you make a loss in 50% of your trades, if you are maintain a good risk/reward ration, you will end up making profits. If you win 70% of your trades, you can make very handsome profits. Do not, repeat DO NOT stick to loss making trades and do not have biased opinion about the market direction.
Apart from the direction you also need to avoid any bias about the numbers. The bias from numbers come into the picture in two ways:
- Bias for the price points for profit taking or the profit amount of the trade itself.
- Amount of profits you want to make every day of every month.
9. Trading too big for the account size
It’s practically impossible to pick the peaks and bottoms most of the time. It is always possible that even though your analysis was good the market may go in the oppositedirection, after you take a position, before turning back favorably for you. If the position size is too big then those few pips in the opposite direction may wipe out the account. Always keep an eye on your trading account size and keep an eye on the margin requirement.
10. Varying the trading position size
Let's assume that you have been having a winning streak. Trade after trade you have been making profits. We decide to play it big and multiply our position size - and what? The next trade goes into losses and wipes off much of our initial profits. Whether you are losing or gaining, it's always better to be consistent in the position sizing, according to your account size.
11. Not looking at the long-term and short-term pictures of the market
Let's say that you are following only the daily chart, which is showing a great uptrend. You go and buy without checking a short-term chart, say 4-hourly, which may be showing that a consolidation is taking place. BOOM, here you go again when your position meets the stop-loss order. Keep an eye on the longer-term charts to check on the overall trend and use shorter time frames for deciding the entry and exit points.
12. Trading without stop-loss order- THE ULTIMATE KILLER
The only thing we would like to say about this point is that “SIMPLY DON’T DO IT”.
You have to have enough trust in your analysis to enter the market without the fear of the position hitting the stop-loss orders. And if it hits, you need to gracefully accept it. Most of the retail Forex traders fail because of ignoring stop-loss orders.
Understanding ourselves is the first step before we try to understand the market. If we can overcome these common mistakes in our day-today trading then half of our job is done.
- Common Trading Mistakes