Most of the mistakes made in Forex trading are made with the intention of increasing the returns on investments but result in significant loss of profits and even of initial investment capital. The driving force behind these losses is often impulsive and emotion based decisions rather than a trader sticking to a well thought out, tested and researched trading strategy. Acting in the moment rather than considering the long-term effects your decision can have is a very common mistake in Forex trading.
Overusing leverage or risking more than you can afford to lose is a pitfall that way too many traders fall into. It is so easy to use leverage with the hopes that it will multiply your profits by thousands. This is a very appealing idea to any trader. The mistake though, is to not consider what will happen if the trade ends in a loss. Once you multiply your losses by thousands, they are so much more painful. Excessive risk is a problem because it doesn’t usually lead to excessive returns. It is recommended to set a limit of risk, usually 1% of your total capital per trade. When a single trade ends in a loss it can devastate your portfolio if your risk is too high. When you limit the amount per trade, you are much better able to control the total amount of your losses.
Not using a safety net when it is available is a huge mistake. Stop losses and limits are meant to be used to protect your assets. Entering and exiting the market at predetermined prices is the safety mechanism to use when you cannot watch the market all day every day. No one can be involved in Forex trading 24 hours a day so setting up automation is the next best thing. Using these preset prices can prevent you from making rash decisions as well as protecting you when you cannot be watching the market.
Trading either immediately before or after financial news is revealed is often dangerous. Traders think they can predict what an upcoming report will do to the market and unless the trader has done extensive research they might jump to the wrong conclusion. Sometimes there are follow up reports that change the movement and unless the trader takes those reports into consideration he might make a wrong move. The same goes for trading right after the news hits the financial world. If the trader does not give the market time to settle he can lose large sums in the trying to take advantage of the hairpin turns that often happen following financial announcements.
Of course, the best way to prevent making these common Forex trading mistakes is to do your research. Learn as much as you can about how to trade Forex. Test your strategy thoroughly in demo trading and see if it works. Follow experienced successful traders. Learn how the market has moved in the past and how the pairs you are interested in trading behave in different circumstances and hopefully you will avoid making major mistakes.
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