5 Common Mistakes Made by New Traders
Tue, 03/27/2012 - 7:47pm
1. Having Unrealistic Expectations It is easy to see why some traders would lack a clear understanding of which goals are actually attainable when actively trading the forex markets. They are excited about the new possibilities a new career as an active trader would open up but have yet to experience any of the difficulties that every trader will encounter. To learn to become a consistent and successful trader requires research, trial and error and dedication to a structured trading plan. This is not something that will occur overnight. Trading is a lifetime experience that will constantly change over time, as market conditions will never remain static. Mistakes will be made and, at times, money will be lost. The important thing to remember is that we are looking to make consistent gains over time. Trading the forex markets is not a “get rich quick scheme.” 2. Over-Leveraging One thing that attracts many to the forex market is the ability to enhance trade sizes using leverage. This is not something that can be done when trading other assets. Increasing leverage will also increase potential profits. But one thing many traders seem to forget is that potential losses are equally possible. Specifically, over-leveraging occurs when a small trading account is used to enter into a trading size that is much larger (some brokers allow 500:1 leverage). The potential problems will occur when the market moves against the trade, and the account, in many cases will drop to zero (a margin call). This event can have a damaging psychological effect on a trader’s mindset. To avoid this, we should never enter into a lot size using leverage greater than 10:1. 3. Over-Trading Another common problem for new traders happens when we are overly enthusiastic about getting into a position and make a decision to get into a trade without a thought-out (and objective) reason. We start to think we cannot make any money unless we are actually in a trade, and often this leads to poor decisions and monetary losses. Traders need to always remember that our winners need to out-pace our losers, so we need to do everything we can to remove poor trades from our ledger. Another problem over trading can create is the execution of too many trades at once, which can lead to a margin call. 4. Picking Reversal Points Often new traders will try to catch tops and bottoms within a larger trend, looking to capitalize on the reversal. This is a difficult practice (even for the best traders) and can be very risky when making the attempt to go against the prevailing momentum seen in the market. 5. Failing to Obey Your Trading Plan All investors need a structured trading plan before committing any money to the market and specifically, this means we must know our entry point, profit target and stop loss level before entering into any position. This, of course will not be the same for every position but every trader needs a set of rules to abide by before any money is actually put at risk. Failing this usually means the loss of an entire trading account.