Beginners Guide – Common Mistakes To Avoid While TradingMistakes are a part of learning, and we all make them when we deal with something new. Yet, mistakes can be quite costly in trading, so beginners should know the typical trading mistakes and try to avoid them right from the start.
Trading Without A Plan
This is the most common mistake made by beginners. You like something about a technical setup, and the next second you make the trade. Trading is a sure way to deal damage to your account.
Instead, you should focus on a trading plan which should include price targets for taking profits and cutting your losses short. The market situation could change, but you’re prepared to react if you have a thorough plan.
Avoiding Stop Orders
Stop orders help traders take some profits off the table or cut potential losses in case the position starts to move against them. Some traders avoid these orders as they are afraid to be “stopped out”, but beginners should use them. I’d also note that stop orders provide traders with an opportunity to get out of their desks for some time instead of staying glued to the screen for the full length of the trade.
Failing To Cut Losses
This mistake connected with the previous one, “Avoiding Stop Orders”. When the trade goes the wrong way, a trader may hope that the position will change its course, and fail to exit at the price determined in the trading plan.
With a determined stop order price, a move in price signals a change in trend. The situation may get out of control, with losses growing fast. To avoid this scenario, a trader should be ready to cut losses at a predetermined price without hesitation.
Making Trades With Bad Risk/Reward Ratio
The potential reward in every trade should be bigger than its potential risk. If you stick to this simple rule, your trading would be profitable even if only half of your trades are profitable.
Sometimes, beginners see a “sure thing” and enter trades where the potential risk exceeds the reward. This may work out well a couple of times due to blind luck, but this strategy is a sure way to lose money in the longer term.
Taking Positions Of Uncomfortable Size
Sometimes, beginner traders get greedy and put too much money into one trade. They are not prepared to see bigger numbers jumping around on their screen, so ordinary market volatility makes them sweat. As a result, mistakes made and money lost.
The simple way to avoid this mistake is to stay close to comfortable position size. Of course, a trader should progress along the trading journey, but position size increased week after week rather than doubled or tripled because a trader feels lucky today.
Excessive Focus On News
News has a big impact on the foreign exchange market – traders react to economic reports, central bank commentary, general political developments.
Beginner traders should keep in mind that market’s interpretation of news is the only thing that matters, while their opinion will have no impact on market dynamics.
A trader may believe that strong economic data from the Eurozone should be bullish for EUR/USD, but the market’s opinion on any given day may be different. Failure to respect the market’s opinion will lead to a loss, so traders should always focus on the market itself rather than on their own interpretation of the news flow.
While an excessive focus on news will likely hurt your performance, ignoring news is not an option. You should always know about important economic reports and the time of their release because such news is often market-moving.
Changing Trading Strategies
Any trading strategy needs time to show its potential. If a trader fails to stick to one strategy for a material period of time, he will never be able to find out whether it works or not.
Besides, constant shift between trading strategies creates confusion and chaos, which is bad for your trading account. Once you have chosen a trading strategy, you should use some time to check whether it is working well in current market conditions.
Making Trades For Fun
The goal of trading is to make money. If a trader’s goal is to feel the excitement of global markets, he’s on the path to losing money.
Sometimes, beginner traders get bored and start making trades for fun., This does not end well. To maximize the likelihood of a profitable trade, a trader must wait for the correct setup according to the trading plan.
Failing To Keep A Trading Journal
A trading journal is a great way to learn about markets and your trading. Once you have enough data, you’ll be able to analyze what works well and what does not work.
Keeping a trading journal may look like a tedious task, especially after an unsuccessful day. But, your efforts will pay off as the trading journal will provide you with unique insights about your strengths and weaknesses as a trader.
Adding To Losing Positions
Adding to losing positions to average down is a big mistake for beginner traders. Beginners should learn to cut their losses, while complicated strategies that may involve averaging down are suitable only for advanced traders.
The key thing to keep in mind is that adding to losing positions increases risk in a trade that is already going in the wrong direction, and this is dangerous for beginners.
Getting Emotional While Trading
While movies often show traders, who throw their laptops out of the window, this is not something that you should replicate. If you get too emotional, you should stop trading until you calm down.
Sometimes, traders get “mesmerized” by markets and start making trade after trade even if they are losing money. You should avoid getting into this state of mind, so you should move out of your desk at first signs of strong emotions.
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