12 Classic Forex Mistakes You Shouldn't Make
20 / June / 22 Visitors: 20
In recent years, I have worked for several forex brokers and have conducted many training courses for beginners. This is where I identified recurring mistakes among new forex traders. Here are my findings and my instructions for not making these sometimes fatal mistakes and winning in the foreign exchange market. Also find our comparison of forex brokers in France for forex trading.
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12 tips on how to win in Forex
Avoid the following 12 mistakes:
Neglect of learning
Forex trading is a profession in its own right, and as with all other professions in the world, you must learn it first. Many beginners think that all you have to do is open a trading account and read a few daily analyzes to have the keys to success in your hands. Unfortunately, it's not that easy.
A common mistake I've often noticed is wanting to start quickly without bothering to practice or even learn.
To fix this, you will find many specialized trading books and trainings, which is an essential step for anyone who wants to trade forex.
There are certain rules and knowledge that can only be acquired by learning from a professional. Neglecting this step is tantamount to traveling around the world with a flat tire. We can make some progress, but it won't be for long.
After following this personally, I recommend Philippe Lermy's teaching. You will learn how the foreign exchange market works and what mechanisms move currencies.
Set unattainable goals
Because of ignorance of the markets, beginners often strive for unrealistic and unattainable results. To begin with, a beginner must set himself a single goal: not to lose.
Then if you make 30% a year, you will outperform Warren Buffett who averages 23% a year.
What makes the aforementioned billionaire's results interesting is that he owes his popularity more to the stability of his results than to their level of performance, as his average performance was 23% over 36 years.
I don't think we'd be talking about Warren Buffett today if he planned or announced a 20% monthly efficiency over the last three months.
So try not to lose at first. Then, if you can do it, try setting yourself a small goal,
If you manage to achieve this, you can try to improve performance. Success lies in regularity.
Using too much leverage
The leverage effect multipliers offered by forex brokers are up to 500 to 1!
Using leverage is definitely one of the most interesting aspects of the forex market, but you still need to know how to use it sparingly.
I have sometimes heard that 50:1 or 100:1 is not enough because other brokers offer more.
While there is a theory that the more ammo in your gun the better, be aware that using 10:1 leverage puts your account at risk of 15% daily loss if volatility reaches 1.5% during the day.
At this rate, four or five losing trades in a row can wipe out your entire trading account. Therefore, it is highly recommended not to use leverage when starting.
After several months of practice and more simplicity, it is recommended not to exceed 5:1 leverage, which already seems huge to me.
Do you want to invest in all currency pairs
Diversification can be helpful if you are a cautious investor. As the saying goes, don't put all your eggs in one basket.
But when you are new to Forex trading, it is not possible to properly follow all the currency pairs and the news related to each of them. Each currency pair reacts according to its own parameters.
In the same scenario, no two currency pairs will behave the same way. In order not to get lost, it is best to start by studying one and only one currency pair.
Do not set stop loss
It is not easy to place a stop loss correctly, especially for beginners.
As a result, even if a novice trader takes a position in the right direction of the market, he will lose money on the execution of an inappropriate stop loss. Therefore, the next logical step for a beginner is to stop using a stop loss.
But sooner or later, trading without a stop loss is likely to result in significant losses. This is a very common mistake that causes many accounts to close due to a margin call. Therefore, it is extremely important to put a stop loss on every position you open in the market.
If you don't know how to place a stop loss, there are many courses (free and paid) that will help you better understand how to do it. OANDA will soon offer free webinars on this topic.
Do not apply money management rules
Some newbies are not shocked by the fact that they risk 15% or 20% of their capital on a trade.
The main rule of money management is simple. You should never risk more than 1 or 2% of your account on a trade.
You may have a great trading strategy, but if you don't follow the rules of caution when managing risk, you'll increase your risk of bankruptcy exponentially.
Getting small losses often and making big profits from time to time is a good idea for what someone who manages their capital well should do.
Don't cut losses
A common mistake is to accumulate unprofitable positions without the desire to reduce them. Because cutting losses means admitting that we were wrong. And it's not easy.
I often hear that as long as a position is open, there is no loss (the famous saying "not sold, not lost"). However, the hidden loss is actually a very real loss at time t.
It's usually better to close a losing position, and the sooner the better. Because the greater the loss, the more difficult it will be to close the transaction.
If it can help you, remember this: we don't meddle in forex to be right, but to make money.
This is one of the most common mistakes, and also one of the worst things to do. When the market drops sharply, it may seem logical to double your position to keep costs down.
There is a certain mathematical logic in this reasoning, and yet a trader who goes down the average makes two mistakes: he hopes that an unfavorable situation will become favorable again, and he will think that the price level that was reached in the past will inevitably be reached again soon.
Put yourself in the shoes of those who bought EUR/USD at 1.60 thinking (as many did at the time) that the next target would be 1.80 and then 2.00. Did they average to 1.55? Now look at the EUR/USD curve.
Level 1.60 may be reached in the future, but when? Will traders have enough margin to sustain such losses?
Revenue cut too fast
After a period of losses, and with all the stress this can cause, some cut their profits too early, no matter how small.
As soon as the balance becomes positive, the transaction will be closed.
So we see novice traders taking a €800 loss and once the position becomes €5 profitable, they close the trade, glad they are no longer in a negative situation. You must try to win at least 3 out of 2 risky.
Ignore the influence of the spread
You might think that 1 point more or less on the spread will not change anything.
This may be true for one or two transactions.
But if you make two trades a day for a year, the difference will be 520 pips, or about 26% if you are used to using 5:1 leverage.
Thus, the strategy can be profitable with a spread of 1.5, but unprofitable with a spread of 2.5.
Don't neglect any details.
When trading, sometimes you have to be patient, because you need to look for the right opportunity, wait for market conditions to be favorable for the strategy you are using, etc.
However, beginners often make the mistake of entering a position without following their plans or strategies, because being in the market is more interesting than watching it develop.
Strictly follow your trading plan.
Look for miracle cures
Unfortunately, there is no magic method or error-free martingale.
Many newcomers enter the market in search of an easy way to make a profit without leaving home and without putting in effort.
While it is certainly possible to achieve very good results in the foreign exchange market, there is no easy way to make money in the financial markets, just as there is no chicken and eggs. Keep in mind that 89.4% of retail traders lose money according to the Autorité des Marchés Financiers survey of retail investors in CFD and Forex trading in France, based on results obtained by almost 15,000 French retail traders from 2009 to 2013. Only 10% were able to achieve positive results.
I hope these few lines will get you off to a good start and avoid the biggest mistakes, but don't worry if you make a few mistakes because that's part of the learning too.
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Editorial Manager - Café du Trading
Mark Ruffard is an expert in financial markets and has worked with many brokers and structured product issuers. Throughout his career in the financial sector, he has contributed to the democratization of fair and transparent practices. Today Mark promotes socially responsible investments on his blog Scout en Bourse. An expert on leveraged ETFs and ETPs, he helps readers of Café de la Bourse and Café du Trading better understand how these products work and how they can be used in investment or trading strategies.