The foreign exchange market (forex) is popular with traders for numerous reasons. It’s highly liquid – with more than $US5 trillion on average traded every day – is open around the clock Monday to Friday and is stable enough for brokers to offer leverage (meaning traders can borrow more against their capital) on trades.
However, it’s also a highly sophisticated market and traders who rush into it can end up making some very costly mistakes. Let’s look at five of the biggest ones made by new forex day traders:
1. Not having a trading plan
If you’re going to become a forex trader, you need a trading plan. Acting without one will almost certainly lead to losses, so before you get started make sure you sit down and write up a list of rules to guide your trading and money management strategies. Here are some of the questions you should be asking yourself before you start forex day trading:
- When to enter a trade?
- What are the criteria you will use to evaluate a trade – moving averages, economic news etc?
- What sort of gains are you targeting?
- Which currency pairs should you focus on?
- When should I exit a trade?
- How much are you willing to lose on a trade?
- Where should you set take profit/stop loss trades?
- How long will you allow your trade to reach the target you have set?
- How much money should I risk on individual trades?
- What is your budget?
- What amount of leverage is appropriate for your circ*mstances and risk tolerance?
2. Not enough research
The world of foreign exchange trading is built on interconnected dynamics. Economics, politics and market fundamentals converge in ways that create opportunities and risks for traders.
Many new traders are lured in by the potential gains on offer but fail to do the necessary research. This is potentially a way to lose money. Successful traders, however, tend to read widely and regularly to educate themselves on trading strategies and keep abreast of potential market-moving events. Here are some of the areas to research on your journey to becoming a trader:
- Economics
- How interest rates and other economic news (such as trade data, employment and activity) affect currency pairs?
- Market fundamentals
- What are the market fundamentals driving movements in your chosen currency pairs? What are the technical indicators you need to be aware of to trade successfully?
- Money management
- What strategies can you follow to maximise profits and minimise losses?
3. Ignoring economic data and news events
News events like the release of economic data and central bank decisions can have a major impact on currency markets. The good news is that many of these events follow a regular schedule so it’s easy to know when they are coming. Of course, that does not mean it is easy to predict what the news will be, or how markets will react.
Trading on the back of a news event before a trend has been established does not fit all trading plans, but it may suit others. It’s a good idea to pay attention to news and events as these can play a crucial role in determining trends in currency pairs
4. Hoping bad trades will come good
One of the worst mistakes new traders make is averaging down: investing more money in a losing trade in the hope of a turnaround. More often than not this amounts to throwing good money after bad and can exacerbate your losses.
The reality is that even if your investment hypothesis is correct, the price of your pair can move against you for longer than you expect. Similarly, holding on to losing positions for too long will prevent you from shifting your capital towards a potentially more successful trade.
5. Taking quick profits and missing out on larger gains
The key principle of a forex day trader is to minimise loses and maximise profits but, just as some new traders hold on to losing positions for too long, many will also diminish returns by taking profits too early. At first glance this might not sound like much of a mistake – you still made money on the trade after all – but doing it consistently will seriously sap your earning potential.
Unfortunately, this is a harder problem to solve than the other mistakes listed here. There are often good reasons to close a trade earlier than planned, perhaps your pair has unexpectedly entered a period of consolidation or perhaps a piece of news has emerged to alter the trend completely.
Nonetheless, many traders miss out on gains by acting out of fear or greed instead of a rational evaluation of the available technical and/or fundamental indicators. The best solution is once again to create a clear, well-thought-out trading plan and stick to it.
Forex trading mistake overviews
Of course, mistakes are an inevitable part of life for day traders, especially people entering the market for the first time. However, being aware of some of these common mistakes will help you prepare better and minimise your errors and, hopefully, boost your returns. If you’re interested in learning more about currency trading, visit our Forex page.
FAQs
Six common forex trading mistakes
- Not doing your homework.
- Risking more than you can afford.
- Trading without a safety net.
- Overreacting.
- Trading from scratch.
- Trading with emotion.
The 5-3-1 strategy is especially helpful for new traders who may be overwhelmed by the dozens of currency pairs available and the 24-7 nature of the market. The numbers five, three, and one stand for: Five currency pairs to learn and trade. Three strategies to become an expert on and use with your trades.
What is the number one mistake traders make? ›
Studies show that the number one mistake that losing traders make is not getting the balance right between risk and reward. Many let a losing trade continue in the hope that the market will reverse and turn that loss into a profit.
What is the biggest risk in forex trading? ›
Transaction Risk
This is one of the main risk factors in forex trading and is contingent on exchange rate changes. Since forex trading is active round the clock, exchange rates are subject to change before a trade settles.
When to avoid forex trading? ›
For the best odds of a successful trade, there are some times when you may decide it's better to avoid trading forex. For instance, you may wish to stay out of the markets on Fridays and Mondays to avoid gap risk. Some traders may also wish to avoid holding their positions over the weekend.
Do and don'ts in forex trading? ›
If the market is going up, decide where you want to buy and place your trade, and the same applies if you're looking to sell. You should have a risk-management strategy, with pre-defined stop-loss and take-profit levels. Lastly, you shouldn't trade for the sake of it – being neutral is a position as well.
What is the golden rule in forex? ›
Stop losses should always be used and never moved away from the market A stop loss should always be used and just as importantly should be used correctly. The golden rule of Stop Losses is that they should never be moved away from the market once the trade is opened.
Is $500 enough to trade forex? ›
This forex trading style is ideal for people who dislike looking at their charts frequently and who can only trade in their free time. The very lowest you can open an account with is $500 if you wish to initiate a trade with a risk of 50 pips since you can risk $5 per trade, which is 1% of $500.
What is the 1% rule in forex? ›
Enter the 1% rule, a risk management strategy that acts as a safety net, safeguarding your capital and fostering a disciplined approach to navigate the market's turbulent waters. In essence, the 1% rule dictates that you never risk more than 1% of your trading capital on a single trade.
Why do 90% of traders fail? ›
Lack of Risk Management
Unfortunately, many traders fail to implement a solid risk management plan and take on more risk than they can handle. This can lead to significant losses that wipe out their trading capital and leave little to show for their efforts.
Lack Of Discipline
Trading requires a disciplined approach and a clear understanding of your risk tolerance and investment goals. However, many new traders enter the market with a casual mindset, often influenced by the stories of quick riches.
Why 99% of traders fail? ›
The most common reason for failure in trading is the lack of discipline. Most traders trade without a proper strategic approach to the market. Successful trading depends on three practices.
What is the dark side of forex trading? ›
Forex scam risk involves the danger of engaging with fraudulent brokers or falling victim to investment scams promising unrealistic returns. These scams can lead to significant financial losses and erode trust in the Forex trading environment.
How to spot a forex scammer? ›
Unrealistic Promises: Forex scammers often make unrealistic promises of high returns or guaranteed profits. Remember, trading in the forex market involves risks, and no legitimate broker can guarantee profits. Poor Customer Reviews: Research and read customer reviews about the broker or investment company.
What is the safest forex to trade? ›
What Are the Best Currency Pairs to Trade in Forex?
- US Dollar (USD)
- Euro (EUR)
- Australian Dollar (AUD)
- Swiss Franc (CHF)
- Canadian Dollar (CAD)
- Japanese Yen (JPY)
- British Pound (GBP)
Lack of Discipline
Successful forex trading requires discipline and adherence to a well-defined trading plan. However, many traders fail to develop or stick to a trading plan. They may deviate from their strategies, chase after quick profits, or make impulsive trades based on short-term market fluctuations.
What is the number one rule in forex trading? ›
No trading strategy is complete without proper risk management. The 5-3-1 rule encourages traders to limit their risk by only trading five currency pairs and developing three strategies. Additionally, it's crucial to set stop-loss and take-profit levels for each trade and stick to them to avoid significant losses.
What are the common mistakes in trading? ›
Here are 10 of the most common trading mistakes made by traders.
- Unrealistic expectations. ...
- Trading without a trading plan. ...
- Failure to cut losses. ...
- Risking more than you can afford. ...
- Reward/risk ratios. ...
- Averaging down or adding to a losing position. ...
- Leveraging too much. ...
- Trying to anticipate news events or trends.
Improper risk management is a major reason why Forex traders tend to lose money quickly. It's not by chance that trading platforms are equipped with automatic take-profit and stop-loss mechanisms. Mastering them will significantly improve a trader's chances for success.
