It can be difficult to learn the high leverage rules of Forex trading, but understanding how the game is played is vital to success. Successful trading isn’t necessarily about intelligence or luck. Rather, it’s dependent upon discipline. Unfortunately, as with any other financial industry, Forex trading is rife with misconceptions that can cost traders considerable amounts of money.
As a high leverage game, traders lose more on losing trades than they gain on winning ones. Therefore, traders must continue refining their own performance to take advantage of the unlimited earnings potential of the market. By staying aware of these 10 common mistakes, you’ll mitigate the likelihood of self-sabotaging your opportunity for success.
1. Lack of consistency.
Making strategic decisions and sticking to your strategy is critical to success. Of course, if the strategy isn’t aligned with the market’s performance, it’s time to rethink the strategy itself. For most traders, random decisions are what hinder performance. Many traders are under the delusion that they have a 50/50 likelihood of winning a trade. While this is technically true, the market can quickly reverse direction.
In other words, trying to chase the market results in a lack of consistency. The result is frustration, which emotionally clouds the trader’s judgment. Although Forex trading provides people with the opportunity to break away from the “rules” of a traditional career, traders must discover the Forex market rules to build a sense of consistency and trading structure.
2. Relying on indicators, fancy tools, and gimmicks.
Beginner Forex traders are tempted to rely on indicators to make a trade, falsely believing that indicators result in greater profits. The reality, however, is that traders must learn how to decipher a “naked” price chart on their own. By reading these charts on a daily basis, traders gain a deeper understanding of market dynamics and how to interpret various indicators. In other words, while fancy tools are tempting, they inhibit long-term growth, as the trader never learns about the principles of price action. Though Forex trading happens online, understanding the “old school” principles is still vital to success.
3. Failing to use a VPS host.
Investing in a Windows VPS for Forex hosting is vital to success. Even a minor delay (a few seconds) because of internet unreliability can cost thousands of dollars over the course of the year. Latency, slippage, and security are all digital issues that traders must be prepared to address. If traders simply rely on their home or office computers, then they’re prone to issues such as power outage or internet connectivity.
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By investing in a VPS hosting service, however, traders increase the likelihood of placing the bid they want at the exact moment they want. Furthermore, since reliable VPS hosting reduces latency, traders are more likely to receive the same quote they anticipated, since there is little-to-no delay in the transaction process.
4. Averaging down.
The natural tendency for new traders is to average down, which is the process of buying more shares of the company at lower prices than the original purchase, thereby lowering the average price paid for all shares. While this isn’t a strategy taught to new traders, the reality is that most new traders have done it at least once. The primary problem is that traders are inadvertently holding a losing position, which costs both money and time.
For instance, with the lower prices, if a trader loses 50 percent of his or her capital, then a 100 percent return is necessary to break even. Averaging down will work for most traders a few times, reinforcing this negative habit, especially if a trader can stay liquid. However, relying on this tactic for the long-term will likely result in a large loss of capital.
5. Not establishing a “stop loss” point.
After a series of success trades, Forex traders might get too confident in their progress, falsely believing that they “control” the market. Beginners who achieve 100 percent correct forecast calculations on their first few trades are prone to this mistake, as they fail to embrace the fact that they cannot predict unexpected market events. Aside from market shake-ups, traders must also consider internet connection, technical glitches, and other unforeseeable issues. By establishing a stop loss point, traders can prevent unnecessary loss in the event of an unexpected crisis.
6. Relying too heavily on the news.
Beginner traders tend to make the mistake of trading right after hearing a positive news headline. News headlines are dangerous, however, because of the lack of liquidity. This means that the market assessment triggers a whipsaw-like action where money turns quickly in either direction, swinging the trade back and forth. In these events, potential losses are greater than usual.
7. Risking too much leverage.
When traders with small accounts attempt to make a big trade, they’re using too much leverage. Even the smallest market move against this position could result in a dramatic loss. In general, the market move spooks the trader, who then closes the trade and cements the sizeable loss.
8. Taking excessive risks.
The higher the risk, the higher the reward, right? No. When it comes to Forex trading, higher risks mean higher losses. Beginner traders should avoid risking over 1 percent of capital. While this might seem like a small amount, it ensures that no single day of trading excessively hurts the trader’s account.
9. Lack of a Forex trading plan.
Many new traders mistakenly assume they don’t need a long-term plan for Forex trading, but rather assume they must only follow the day-to-day movements of the market. While this is partially true, a long-term plan is necessary for success. Establishing a stop loss point, following the 1:1 risk-to-reward ratio, and investing in a Windows VPS are all components of a reliable trading plan.
10. Paying attention to emotions.
Emotional trading is one of the most dangerous practices there is, especially since it’s considered a psychologically reinforcing problem. Whether it’s patience or the ability to simply look at the numbers, traders must be able to block out their emotions to make the most levelheaded decision possible.