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The 7 Most Common Forex Trading Mistakes

Apr 7, 2008
When trading currencies online, there seems to be no end to the mistakes a beginning forex trader can make. Beginning traders are always the most susceptible, but experienced traders can often revert back into bad practices as well. Here are some of the most common trading mistakes listed in no particular order, and how to avoid them.

Predicting instead of reacting. Otherwise known as overconfidence. This usually happens after a winning trade or two. The trader starts to think that if he can enter a trade sooner, he will get more pips. He begins to believe he can pick the top or bottom before the market reveals it to him. So instead of reacting to what the market is telling him, he starts to predict what the market will do. He enters a trade and the market continues its move, which is against him. Now, does he admit he was wrong and close his position, or does he add to it?

Adding to losing positions. Here is an extension of predicting instead of reacting. Look, you just entered a trade and the market is going against your position. The market is telling you, you are wrong. Now is the time to close your position, not add to it. If you add to your losing position, you are making at least two incorrect decisions. First, you are predicting the market will turn around. Second, you are hoping the market will prove you right because you are unable to admit you made a losing trade. Losing trades are a fact of life in the forex market. You weren't wrong, simply, your edge didn't play in your favor on this trade. Close your losing position and move onto the next trade.

Insufficient capitalization. Forex trading is already highly leveraged. Insufficient capitalization just magnifies the potential problems you can face. If you read about the famous and big name traders, they never use more than 1% - 2% of their trading capital on a position. Get out a calculator and let's see... 1% of $10,000 is $100. So as a position trader who might have a stop-loss order of 100 pips, you can only trade one mini lot of one currency pair for each $10,000 in your trading account. That is, if you want to trade like the pros. Do you have $10,000 in your account? Why do forex dealers boldly advertise you can start trading with only $250 then? Because they are in business to make money, and if they can convince you to commit trading errors, they stand a much better chance that they will soon have your money.

Overtrading. A close cousin of insufficient capitalization. Knowing that very few currency traders trade with sufficient capital in the first place, they further compound the potential problems by trading too actively and in too many currency pairs. Spreading themselves too thin you might say. Potential problems include loosing focus and margin calls. Getting a margin call is a very irresponsible position for a forex trader to be in and is a direct result of overtrading, over leveraging, and insufficient capitalization. This is as close to the perfect recipe for failure as you can get.

Not using stop-loss orders. There are very few times when not using stop-loss orders is the correct action to take. Large traders with several hundred or more lots don't want to advertise where their stops are placed is one. The other might be scalpers whose stop is only 10-15 pips away. By the time they figure the math and enter it in the system, the price might already be there or even past it. And some forex dealing stations won't let you place stops closer than 15 pips anyway, especially in fast moving situations. Other than those times, you need to put stop-loss orders in on every position. It is in your own best interest to protect yourself. I know, some people whine that their stops are always being run by the dealer. A whole article could be written on stop-loss order management, if not a complete chapter in a book. Let's just say for now, don't put them where everybody else does, and don't put them too close.

Trading as a hobby. Golf is a hobby and it costs you money to play. Horseback riding is a hobby and it costs you money as well. The point is hobbies cost money, business makes money. You need to treat your forex trading as a business if you ever hope to make money on a consistent basis. That means keeping records, keeping a trading journal, and have a written business plan. You wouldn't invest money into a start up business without first seeing a business plan, so why would you invest money into your own trading account without the same thoughtful consideration.

Not having a trading plan. This is one of those catch-all mistakes. If you have a written trading plan, and follow it, you will already have identified and hopefully eliminated all of the above mistakes. If you don't have a written trading plan, you are almost assuredly making some, if not all of the above mistakes. Maybe not all at once, but even occasional mistakes add up quickly. Do yourself a favor and don't put on another trade until you think through and write down the response for all of the above mistakes and any others you can identify, as well as entry and exit rules. Then follow it.

These are just some of the many mistakes you can make as a forex trader. You need to take responsibility for yourself and your money and act in your own best interest. The currency markets are a zero sum game and the many players are out to make a profit. Don't let them profit with your money. Do your best to eliminate the above mistakes, and you will go a long way to ensuring you are the one who profits in the forex market.
About the Author
James is a successful online currency trader and also runs the popular website http://www.todayscurrencytrading.com. Go there now and you can sign up for his FREE, "Currency Trade of the Week".
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