The currency exchange is famous for its profit-making opportunities. Today, thanks to computer and trading software any individual has access to these opportunities. However, higher returns always have higher risks. An inexperienced “newbie” may see their balance deplete rapidly or fall victim to recklessness.
An important quality for a good trader is the willingness to take responsibility. Every Forex rookie ought to keep this in mind. Some of your trades will win, while others will lose. The win ratio may not be perfect all the time. So, it is imperative to acknowledge the losses and stay calm. Here are the most common blunders of Forex trading beginners.
1. Poor Trading Knowledge
It is impossible to reap consistent returns from scratch. First, you have to gain adequate experience. According to stats, the most likely winners are self-confident traders with a rigorous risk-management approach. The most common newbie mistake is the lack of practical experience.
Overall, trading for beginners boils down to the same old rule. The more practice and preparation, the better. Rookies need to analyze graphs and make informed predictions. This highlights the value of a moneyless demo account, which unlocks the simulation mode of trading platforms. Before rushing into live trading, make sure your broker is authorized and regulated.
Real Forex puts your own finance at stake. So refrain from taking too many risks at first. Most newbies start with currency pairs. The most popular ones, such as EUR/USD, have ample market liquidity and volumes. This means a seller can always find a buyer and vice versa. The trading of major pairs improves the overall understanding of the process and Forex cash flow in general.
2. Trading without a Plan
Another common error is opening a trade without a plan. With no clear direction, you can make flawed decisions that result in substantial loss. Any thoughtful course of action includes risk management, as well as an entrance/exit strategy for each trade you open.
3. Ignoring Stop-Loss
This order is advisable for any trade. Otherwise, unfavorable price movements could cause sizeable loss. The tool hedges risks, as the trade is executed automatically once a predetermined price is reached. You may set the limit even after entering the trade. This is a vital risk-control measure, as it reduces financial and asset losses in the case of failed trades.
4. Risking Too Much
Success in the currency exchange is based on patience and perseverance. Avoid making an emotional decision at all costs. Weigh the potential rewards and risks before opening a position.
Although it is tempting to ramp up risks for higher returns, this does not guarantee consistency. Unfavorable price dynamics may cause bitter regret. Generally, traders are advised against risking over 1-3% of capital on a single trade. Anything over 5% is a precarious growth rate.
5. Boosting Losing Trades
A common mistake made by newbies is adding finances to losing positions. Meaning if the price moves in a direction opposite to their expectations, they add to the position. The move is motivated by the hope of making larger gains in the event of price turnaround. However, if this does not happen, losses increase dramatically.
With this said, avoid adding to losing trades. Price reversals aren’t as frequent as you would like them to be. For a particular trend to change, it could take months and sometimes years. A proven strategy for price turnaround is to end the trade after the stop-limit value. Losses will only grow larger, the longer you wait to close.
6. Trading Through Shady Brokers
Reputable providers always keep clients’ funds separate from corporate capital. Dubious companies may mismanage your funds. Make sure the organization has an official license to work in your region. Its business should also be overseen by a reliable state entity.
Take time to do a bit of online research. Search for genuine user feedback on the broker and check discussion forums and review sites. Most of the opinions should be positive. Given the freedom of the Internet, it is next to impossible for companies to hide negative feedback completely.
Always begin with a demo account. Check if it works well and without interruptions (e.g., crashing or delays in trade execution). Transition to a live account once you feel ready, but keep the balance at a few hundred dollars. Practice for at least four weeks before depositing a larger sum.
Final Advice: Diversification
A wise investor will hedge their risks by engaging a set of several different assets. For instance, you may trade stocks, derivatives, and currencies at the same time. However, currencies themselves may be diversified. This means selecting pairs that are not correlated – i.e., they move in different directions. This rule applies to currencies and investment portfolios.