The forex market is the largest in the world, with a daily turnover of trillions of dollars. As forex trading becomes more accessible, it is no surprise that many retail traders have taken to the forex market to make some extra money on the side. However, not all of them are profiting. In fact, as many as 80% of traders end up losing money.
Traders lose money due to many reasons. Most of them are mistakes made from not knowing the markets, not doing research, and not having a trading plan. Even though these can seem trivial, they can be costly. Below, we will examine the most common mistakes made by forex traders and how these mistakes can be mitigated.
Not having a trading plan
One of the biggest mistakes a trader can make when they begin trading is not having a trading plan. Diving straight into trading and learning by experience is usually not a bad thing. However, in the world of trading, most people cannot afford to make mistakes.
A trading plan is an outline of your boundaries, budgets, and strategies. This means knowing how much money you would like to funnel into trading each month, how much you are willing to lose in a trade, and the exact markets and products you would like to trade. It should also contain your trading goals.
By setting up a clear forex trading plan and most importantly – sticking to it – traders can prevent themselves from making impulsive decisions that could hurt their portfolio health. It can also prevent traders taking on too much risk.
Not doing research on forex
Many traders do not take the time and effort to learn more about the forex market and how trading works. Learning the basics and forex terminology is a good place to start. However, as time goes on, traders need to know much more about the market and trading strategies if they want to advance. This includes becoming familiar with analysis methods, which includes learning how to interpret chart patterns with technical analysis, advanced forex terminology, and factors that affect currency valuation.
Trading too much
There can be too much of a good thing. Even when you are making steady profits, over-trading can create problems. This is because when you over-trade, you can end up venturing into unfamiliar markets, or you can have so many positions open that you are not able to monitor them all. When prices fluctuate or become volatile, it can become impossible to exit from all your trades and make the best possible decisions quickly.
To remedy this, you should only ever make trades you can actively monitor (especially if your strategy requires you of this), and you should never begin trading in other markets without having done thorough research.
Being afraid to cut losses
Many traders tend to hang onto their rapidly depreciating assets and refuse to cut losses as they hope for a rebound. However, sometimes, exiting a trade that is not working for you anymore can be much more beneficial to your long-term portfolio health. Those who cling onto the possibility of a rebound almost certainly never witness one, and they only end up risking more and more of their capital as time goes on.
Trading forex is an exciting way to make extra money and it can be a good way to hone your financial skills. However, it is important to remember that you are trading with your hard-earned money, and you should make trading decisions very carefully. If you are unsure or feel pressured to open positions despite not knowing what is going on, you should always just walk away, do some research on the market and your trades, and you can come back later.