7 Most Common Mistakes Forex Traders Make

7 Most Common Mistakes Forex Traders Make 

I’m sure many experienced traders remember how they crashed their first real account even if they spent years on demos and learning about the FX Market. The truth is that when the majority of us enter the market with real capital for the first time we open “Pandora’s Box” releasing greed, the urge to earn big and quick, forgetting what we learned in the past. Only 5% of traders actually manage to stick these “diseases” back in the Box and never open it again. The other 95% tend to leave something out or, worse, they open it from time to time to check if everything is in “order”.

In fact Pandora means “all-giving” and this is the best trait to characterize any Financial Market. It will give you what you need and want if you court it the right way. Many of you may laugh because I used the term “court” but this is the truth, The Market is actually a lady in every sense of the word, a lady that mesmerizes and attracts us, she’s calling us and we always go to her but if we don’t treat her the right way she will never come to us.

There are 7 mistakes that most traders make when trying to court the FX Market:

1. Overtrading. Wouldn’t be great to wake up one morning in a 30 million $ mansion with a fleet of exotic cars, an army of servants and a billion $ account? It’s every man’s/woman’s dream but unfortunately it will remain a dream for 98% of all living humans on this earth. Overtrading is the result of this dream and it affects us dearly because it will ensure that we will never come close to it. In fact Greed is the main reason why we overtrade, we want money and we want it fast but in this way we will only lose what little we have. I got a question for you and you have to answer it for yourself: Why try to make a million dollars in one day from a 500$ account (chances are 1 in a trillion) when you can make a million dollars in 4-5 years? Stop overtrading, make your own strategy or adopt one and back test it manually, see how many signals you get in a month/year and divide it by two, for example my strategy only gives on average 10 signals every 2 months but I only trade 5 of them. This is the best cure to overtrading and most importantly to greed; if you enforce it upon yourself to freely not enter a wining trade then you are cured.
2. Poor risk/money management. There are two rules in trading the FX Market: the 2% rule and the 6% rule. The 2% rule says that we shouldn’t risk more than 2% of our account on one trade and the 6% rule says that we shouldn’t risk more than 6% of our account on multiple trades. Combining these 2 rules we are allowed to trade only three different positions risking 2% on each. But what do most FX traders actually do? They risk more for bigger gains. This would be acceptable if you have at least 5 years of trading experience and your sheet balance turned out very profitable in the past but it is still recommended you stick to these 2 simple rules all your trading career, better safe than sorry.
3. Trading multiple systems at the same time. This rule is a bit odd in many points of view, especially because it takes several months to back test manually one strategy, back testing 4-5 strategies means at least a year break from the market; unless traders use systems without back testing them very thoroughly. In fact this is the disappointing part with most trading systems posted on the internet; they were meant to help novice traders but what they actually do is to cut their work short. Developing a trading system involves a lot of work and especially back testing (and I don’t mean using software); adopting a strategy implies even more work trying to understand every aspect of it and adapting it to your trading style. In short terms, my advice is: Make/Adopt ONE trading system and test it on a demo account at least 50 times before you introduce it to real accounts and don’t forget the mother of all successful strategies and that is back testing (manually).
4. Trading any currency pair. So far you’ve learned to eliminate greed from your trading, you learned a little bit about account management and you developed/adopted your own strategy, so far so good but what about ADAPTATION, the key to survival. Adaptation means that you developed the necessary traits to survive and most importantly that you know your weaknesses and avoid them. Everything in this world has its weakness, everything is fragile to something. This natural rule applies well in strategies meaning that it could be good for a currency pair and disastrous for another. For example I learned the hard way that my strategy works very well when I’m trading USD/EUR/CHF/AUD/JPY etc but it hits only stop losses when I trade it on GBP based currency pairs. This is my weakness and the only way to adapt was to steer clear from it until I can find a way to beat it. In fact the rule is to test your strategy on a currency pair before actual implementation. Discover your weakness before it’s too late. On the other hand it’s better to trade currencies that you know especially if you are a fundamental trader.
5. Trading both long-term and short-term. There are two types of traders: swing (positions held longer periods of time >1 Day) and intraday (positions held a couple of hours <1 Day). Usually swing trades are better used by traders that have a full-time job, want to spend more time with the family and don’t have the patience/courage to monitor the market every day but still want to make some money from it. Intraday trades are the emblem of full time traders, their only source of income being the trades they make. In my opinion these can be called professional traders because they will learn how to trade the market better and faster than swing traders do and in return they will earn bigger profits. What I recommend for every trader wan ‘a bee is to analyze his personality, intentions and personal life before he actually commits to a type of trading. An advice for intraday traders: Money should never stay still because not invested capital means lost capital. Please direct your attention and surplus capital to the Stock Market on swing positions, this way your money will help the economy and in return (if you made your analysis well) the economy will help you.
6. Trading any period off the day. This is a mistake most intraday traders make because they don’t know when to trade and when to be idle. I will post an article in a few days about “When to trade and when to take your dog out for a walk”. I’ve chosen to make a separate article because this is a very delicate matter and I have to post examples of the market’s volatility in different trading sessions.
7. Too many books about systems and nothing about discipline. I can give you an example of a simple trading system composed only of 3 EMA’s (Exponential Moving Average) that can make good profits but you have to follow 2 pages of rules and check lists before you open a position using it. This is called discipline and without those two pages the strategy would be useless. We humans, in our primal nature and instinct have the tendency to avoid following rules. Sorry, no rebels in the market…did I say rebels, I meant losers because breaking rules here means losing money, losing money is contrary to your goal to make money, and a person who INTENTIONALY sabotages himself is a loser.

Well traders, I hope this article was helpful in developing your trading style, what have you learned?

You now know how to eliminate Greed

You know how to manage your funds and manage your risk

You’ve created/adopted a system

You learned a little bit about your currencies of interest

You are disciplined and you will know when to trade and when to be idle.

Why aren’t you a millionaire yet?