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We always hear about the trading mistakes that beginners make and these newbie mistakes can be avoided by taking enough time to learn and prepare before you start trading for real. But what about the traders who have years of experience in the forex market? Are they perfect or do they also make mistakes in the trading process? The answer is yes, they do make a lot of mistakes and such trading pitfalls are very common as well. In this blog, I will tell you about the 8 forex trading mistakes that even experienced traders make and what you can do to avoid them.
- Taking Unreasonable Risks
In trading, we are always told to take calculated risks after considering the potential rewards that we can earn by winning the trade and the potential losses if the market moves against us. For example, you place a trade with a target of making 25 pips profit and the risk of loss is 10 pips. This needs to be decided after considering your risk/reward ratio and also the monetary value of pips for the chosen currency pair. The pip value can be calculated by using a pip calculator and you can count the pips for every trade based on this metric. Here, the risk is pretty reasonable.
But sometimes, the traders tend to overlook the possible losses or they don’t think much about it as they are too confident about a trade setup. This overconfidence can lead to huge losses as you are not paying attention to risk management. To avoid this mistake, you need to limit the risk per trade to 2% of the account balance and avoid entering trades that have higher risk with a low probability of winning.
- Giving in to Your Emotions
Emotional trading is another mistake that even experienced traders make and this mistake can be costly in the volatile forex market. You should never make trading decisions under the influence of emotions like fear, stress and greed. You will surely experience these emotions during the trading process but when you give into them, you are signing up for losses as you lose the ability to apply logic and take action based on the momentary impulses. Habits like overtrading and placing random trades that do not align with your strategy are signs of emotional trading.
In order to get a hold of your emotions, you need to learn about trading psychology and its impact. There are many things that you can do to focus more on logic and less on your feelings. This does not mean you have to become emotionless but only implies that you should resist the urge to act upon your emotions. Always stick to your plan and train your mind to remain calm in any kind of market situation.
- Not Trying to Minimise the Losses
The third common mistake that many traders make is not trying to minimise the potential losses. You place all the trades with the expectation of earning some profits in the end and this potential profit can be estimated by using a profit calculator. This tool can help you find potential gains you can make in a trade in the base currency of your account. But, you need to remember that it is not practically possible to win all trades that you enter and losses are a part of the process.
So, you must do something to reduce these losses and preserve your trading capital. This is what we refer to as risk management. It is done by placing a stop loss in every trade and limiting the risk per trade as I said earlier. Trading with a favourable risk/reward ratio is also important for risk management. Not taking these steps to manage the risk and limit the potential losses is a grave mistake in trading and you need to avoid this at all costs.
- Not Using a Trading Journal
All traders are advised to keep a trading journal and record all the trading activities in it. This journal can be used as a tool for tracking the progress that you have made so far and also for spotting any mistakes that you make in live trading. This journal can be used as a reference in future and you can evaluate your own performance based on the results you got at the end of a trade. Still, many traders don’t really care about journaling their trades as they already have the trading history on their accounts.
However, you may not be able to recall the logic behind a trade while looking back on the trading history alone. But when you use a trading journal, you can add all the relevant details about the trade which makes the self-assessment easier even when you do it after a long period of time.
We always talk about being logical and focusing on market analysis while making trading decisions. But sometimes, traders think that they are making logical decisions when they are not as they just use fuzzy logic to justify their directional bias. This is another common mistake that even experienced traders make. Hence, you need to double-check the reasoning that you have for the risk that you are taking for trade. You should also use tools like trading calculators, which will help you find accurate trade-related values. Click here to check out different trading calculators available at your disposal.
Besides this, many traders make the mistake of only depending on technical analysis for finding trade setups as they forget to look at market fundamentals. Your technical analysis may become invalid if there is a sudden volatility caused by a news event or economic data release. So, you need to consider all such aspects before placing a trade.
Another common mistake that many traders make is using excess leverage. Beginners are less likely to make this mistake in the initial phase if they know the risk of leverage. However experienced traders who have a profitable strategy might end up using a lot of leverage for quickly growing their account and this can lead to huge losses if they don’t get the expected results in the end.
- Not Testing New Strategies
When you are a novice trader, you will always test the strategy on a demo account before trying it on a live account. But when you gather more experience, you might skip this step and start executing new strategies without any backtesting. This is a huge mistake as you need to test each and every trading technique before risking real money with it.
The last mistake that many traders make is overreacting to trade scenarios and market situations. The currency market is subject to constant fluctuations and the market can shift at any time. But if you start overreacting in such situations, you will end up making silly mistakes in a state of panic. If you have a risk management plan, you won’t have to worry about such changes and being adaptable is the key to success.
Final Thoughts
In a nutshell, both novice and seasoned traders become vulnerable when they make decisions that are driven by emotions. You are more likely to make trading mistakes when you focus on your feelings during the trading process. Most of these mistakes can be avoided by learning about trading psychology.
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