The forex market is the most traded financial market in the world. It’s relatively straightforward and quick to open a trading account and start trading. However, many traders fail to succeed in forex trading because they commit the same mistakes over and over. If you’re looking to make a forex investment, then read on to discover these seven common trading mistakes newbie forex traders make and how to avoid them.

Getting into trading without knowledge

Many new traders are guilty of initiating trades before having a good understanding of how forex and the forex market work. Understanding how trading works is critical and it can take some time to learn certain things like seasonal trends, the different economies, and global news and events that affect the market.  

For new traders, the urgency to jump into the excitement of the market can override the need for thorough market research, but this may result in a very expensive lesson. 

Trading tip: Make it your goal to research and learn about forex trading before entering the market. You can use this course to learn the building blocks for succeeding with forex trading and you can read these eBooks to learn the fundamentals of trading.

Trading without a plan

Beginner traders tend to jump from trade to trade without a forex investment plan or they stray from their plan and trade on emotions and whims. Conversely, experienced traders will follow a trading plan that they spend time developing and refining. 

A trading plan will help you define several things including your trading goals, strategy, market analysis method, and how much capital you’ll invest. It will also help you define how you will handle the psychological pressures that come with trading. 

Trading tip: Stick to the plan. It’s easy to ditch the plan, especially when the market moves against you but being able to stick to the plan is what will give you the discipline and skills you need to succeed in trading.

Trading without risk and money management rules

Just like with the trading plan, beginner traders tend to start trading without any risk or management rules or they ditch them once they start to trade. It’s vital to have these rules before you begin trading because they help protect your capital and earnings. Some top risk and money management rules include:

• Setting maximum daily or weekly losses and closing all trades when these limits are reached. 
• Using stop-loss and take-profit orders. 
• Setting and sticking to a risk/reward ratio. 
• Using proper position sizing. 
• Keeping your risk level constant to match your risk appetite. 

Trading tip: Define your money and risk management rules right from the start and incorporate them into your trading plan. This will help you offset any trading losses with sizeable gains and will help you become a profitable trader in the long run.

Over-leveraging and using excessive margin

Leverage and margin allow traders to open positions with more money than they have in their trading accounts but many new traders often get carried away with what seems like free money. They don’t understand that both leverage and margin can easily exacerbate losses on losing trades as much as they magnify wins. 

It’s important to understand how both margin and leverage work to avoid risking money that you can’t afford to lose. For instance, if you’re using a 100:1 leverage ratio, all it takes is a 1% adverse move to wipe away your capital. 

Trading tip: Leverage and margin are tools and should be used accordingly. Just because a broker offers high leverage doesn’t mean you have to use it all. You can easily balance your risk and probability of earning by using lower leverage.

Overtrading

Many beginners try to grab too many opportunities in the market which results in overtrading. Overtrading increases the chances of making poorly executed trades and will likely result in compounding losses. Two common types of overtrading are:

• Opening orders too often. A trader opens more trades in a bid to potentially earn more. However, opening orders too often gives you less time to react to market movements and puts you at risk of losing more than you make.

• Trading with excessive volume. This usually occurs when a trader uses excessive leverage to try and maximise their profitability in one go. However, as already highlighted, over-leveraging can magnify losses.

Trading tip: In trading, it’s impractical to trade every good opportunity that comes your way. It’s important to learn to stick to your trading plan even when it seems like you can potentially take advantage of many opportunities.

Ignoring demo trading

Some beginner traders start practising on a live account with real capital before they know how trading works. This means they not only make many mistakes, but they also increase the risk of losing all their capital in a very short space of time. 

Demo trading allows you to get familiar with trading and to understand how trading platforms function. It also helps you to test and refine your trading strategy to help you succeed.  

Trading tip: Open a demo account and learn how the market works. A practice account will help you to develop the essentials you need to succeed in trading by allowing you to simulate live trading without risking any capital.

Using automated trading software

Many newbie traders tend to search for automated trading software to help them make precise trades. In reality, automated software is better suited to experienced traders who already have a robust strategy and absolute rules for trading. For beginners, automated trading can actually result in big losses.

Trading tip: As a beginner, opt for placing your trades manually. This will help familiarise you with the dynamic forex market and avoid depleting your capital.

The bottom line

By avoiding these seven common pitfalls and being patient and disciplined, you can improve your chances of succeeding in forex trading. Ultimately, not all mistakes will be avoidable and losses are inevitable in trading, however, it’s important to learn from any mistakes and to continuously refine your strategy.