Forex trading can be intimidating for a beginner, especially if all you have is YouTube knowledge and no actual trading experience. As a result, your first attempt at trading may be an unsuccessful one unless you’re on your lucky streak.
However, it’s normal for beginners to lose their first trades. A last year’s survey has revealed that out of 1,600 Brazilian day traders, only 3% made money. The researchers say that it’s not just about the beginners – 97% of traders who persisted for over 300 days still lost their capital.
Is this the reason to avoid Forex trading altogether? Of course, not.
Usually, first-time forex traders dive right into exchange markets with only a basic understanding of how these markets work. A lack of experience pushes them to make mistakes they are sometimes unaware of.
That’s what we’re going to do here today – make you aware of the most common mistakes to avoid to improve your Forex trading performance.
Let’s dive in.
1. Your Risk-Reward Ratio Equals or Is Below 1
The first mistake, which is very common among first-time traders, is a lack of understanding, how the risk-reward ratio works.
According to Investopedia, the risk-reward ratio is an estimated reward a trader can earn for every dollar they risk on an investment. In other words, this ratio defines how many wins you can get out of your losses.
Ideally, your risk-reward ratio should be higher than 1. For instance, if you’ve invested $100 and got $175 in return, your risk-reward ratio is 1.75 (175/100). If the ratio equals 1 or is below this point, it means you’re losing.
So, always keep a sharp lookout at how much you’re getting in return for your investment. Try running a weekly or monthly analysis of your risk-reward ratio. If you see that your losses are more frequent than wins, you should reconsider your Forex trading strategy. You can also order calculation problems solving.
2. You Don’t Look at the Bigger Picture
Often, first-time traders focus too much on a particular timeframe within which a trade is going on. They think that what only matters is the hours, days, or weeks, but they don’t consider the bigger picture.
What do we mean by the bigger picture here?
The bigger picture simply means looking at the price chart at a ‘higher altitude’ or considering the price movement before trading.
Ideally, you don’t fixate on the hourly position of the price. You should look beyond that and analyze the breakdowns beyond the current price range. And, where there’s a point of rising or declining, you can start trading.
What you need to do is to look at the markets with the approach called top-down analysis.
You start by analyzing the state of the global economy and then move forward to macro trends that bring the best trading opportunities. Then, try identifying support/resistance points on different time frames (from higher to lower). Such a deductive approach keeps you out of unprofitable trades and increases your win-to-loss ratio.
3. You Change Your Trading Strategy Too Often
It’s understandable why you should have a solid trading strategy in place. The Forex market can be very chaotic, and a strategy can be your blueprint to help you stay away from trades that don’t bring you tangible profits.
What the beginners in Forex trading often do is change the strategy if they notice that it’s not effective enough.
Now, there’s nothing wrong with adjusting your trading strategy a bit if it hasn’t brought you any results after a while. But what beginners often do is jump to a different strategy right away without giving it a chance.
The trick here is to train your patience if you want to achieve quality trading performance. If you stick to your strategy amid all the Forex market chaos, it will help you remain focused and not skip trading opportunities that can actually be profitable.
How else can sticking to one strategy benefit you?
We already mentioned that novices in Forex trading often lack the knowledge of pricing characteristics and asset classes and don’t know how to run a technical analysis. Keeping up with the same strategy for a while, even if it turns out to be unsuccessful, allows you to gain all that knowledge and learn from your own mistakes.
Being able to assess and measure your performance is a crucial skill for a Forex trader. But by changing your trading strategy too often, you’re stripping yourself of the opportunity to learn this skill. Here, patience is your biggest virtue.
4. You Take on Too Many Correlated Trades
Sometimes, when a beginner sees trades move in pairs, they might feel inclined to invest in them right away, being under the impression that it’s going to be a double win.
Unfortunately, if you invest in paired or correlated trades, you increase your chances of both winning and losing all of them. Besides, the market can be quite unpredictable – even if paired trades are correlated historically, it doesn’t mean they will remain so in the future.
Does it mean that you should avoid correlated trades altogether?
No, you can still benefit from paired trades if:
- both stocks are moving in the predicted way
- the long stock is moving in the predicted way but is more profitable than the short trade offset
- the short stock is moving in the predicted way but is more profitable than the long trade offset
In general, if you are just starting your journey but want to keep your Forex trading performance stable, it’s better to stick with the trades that are independent of each other if you decide to take multiple ones a day.
5. There is No Stop-Loss
Lastly, a common mistake among many traders, not just beginners, is not having a stop-loss order.
A stop-loss order limits your loss. You use it to buy or sell a certain stock when it reaches a specific price. It’s crucial to have a stop-loss order for every investment you’re trying to make – it gets you out of the trade is growing against the amount you’ve set for yourself.
Essentially, a stop-loss order keeps you out of going negative and losing more money than you have. Another benefit of this order is that it helps you control emotions. With Forex trading, it’s very easy to get too excited. But what you need is to keep your head cool.
Having a stop-loss order for each trade also helps you leave unprofitable trades behind. Sometimes, you might get the feeling that a certain trade still has a chance, but it doesn’t happen that often. If a trade hits the point of a stop-loss order, it’s time to leave it and move forward.
Forex Trading Mistakes: Topic Round-Up
You might feel confident starting your journey as a Forex trader, but you cannot rely on beginner’s luck too much. Rather, keep a sharp lookout for the most common mistakes Forex traders make to keep your performance stable.
Let’s go through these mistakes once again:
- the risk-reward ratio equals or is below 1
- you don’t take the bigger picture into consideration
- you switch between trading strategies too often
- you take on too many correlated trades
- you don’t have a stop-loss order for each trade
Hopefully, our article will serve you as a reminder of these mistakes and help you be more confident with Forex trading.