One of the most effective ways of realising success in the forex markets is to focus on eliminating mistakes. Yes, there is highly effective advice to follow on how to make the right decisions, but if you’re going to stand a chance of being profitable in the long term, you first need to learn how to avoid making the wrong trading decision.
Here are five leu mistakes to make sure you avoid. If you manage to avoid these five mistakes, you will instantly see significant improvement in your success rate.
Mistake #1: Lack of Research
This first one may sound obvious, but too many traders, even those with years of experience, fail to heed the imperative for research.
Currency pair rates are affected by global, regional and national economies, and in today’s never-ending news cycle, there is always the latest piece of news that either confirms economic trends or seems to counter them.
Before placing any trade, make sure you’re aware of:
- Current news regarding the economies of the pair you’re trading.
- Upcoming data releases or planned government meetings from the economic calendar. The Forex Factory economic calendar is a good place to watch out for these releases.
Don’t skip this step, ever. Even if you think you’re onto a flawless strategy. Because there’s no such thing.
Be aware though that there is a lot of baseless advice and hysteria that dominates much of the discussion around the markets today. Over time though, you will learn which news sources and analysts you can trust, and which to ignore.
Mistake #2: Not Accepting Losses
Confidence is a critical part of success for day traders. Without confidence, you’ll deviate too often from your strategy.
Closely related to confidence is the idea that losing is part of the game.
Losses can tempt you to throw strategy out the window and make unnecessary trades to recoup your most recent loss, especially if you’ve had several losses in a row.
Mistakes lead to irrational decisions, which lead to more mistakes. Stop telling yourself you can turn it around fast. Instead, learn how to deal with losses.
Dr. Van Tharp is a research psychologist who performed an analysis of the difference between losing and winning traders. Dr. Tharp listed as one of the critical beliefs that are common amongst the world’s top traders that it’s okay to lose money in the markets.
Marty Schwartz, a trader famous for turning a $40,000 account into $20 million, said this about learning to accept losses:
“What is the ultimate rationalization of a trader in a losing position? ‘I’ll get out when I am even.’ Why is getting out even so important? Because it protects the ego. I was able to become a winning trader when I was able to say, ‘To hell with my ego—making money is more important.’”
Learn to accept that losing is part of the game. If you chase losses, you’re not trading anymore. You’re gambling.
Mistake #3: Not Having a Maximum Risk Amount
One of the most important concepts in risk management is being aware of how much you’re willing to risk. There is an unwritten rule in day trading that says you should never risk more than 1% of your total capital on a single trade. Some professional traders will take it up to a maximum of 3%.
Get familiar with margin and leverage to make sure you know how much you’re risking on every trade. If you’re not familiar with these concepts, one day you’ll make a mistake and put more at risk than you’re willing to lose.
In addition to having a percentage you’re willing to risk on each trade, you should also have a number you’re willing to risk per day. These maximums will serve you well in the long run. If you don’t deviate from them, you’ll give yourself every chance to stay in the game long enough to develop a winning strategy.
Mistake #4: Not Using A Demo
Many things indeed change when you move from a demo environment to a live account. For one, the emotions of trading with your own hard-earned money can’t be replicated by trading virtual funds on the demo.
Also, many brokers won’t replicate the live trading environment exactly on the demo environment. They may use their best trading conditions that may only be available on their best account.
With that said, the demo remains one of the truly best ways to practice your strategy and sharpen your grasp of the markets.
If you can’t trade successfully with calm emotions and favourable trading conditions, you won’t be able to trade with real money and higher spreads.
Once you consistently make a profit on your demo, it becomes a matter of keeping your emotions in check and securing the most favourable trading conditions on your live account. A calm, cool-headed trader who’s aware of their trading conditions should be able to replicate their demo success, provided it is borne out of a sound, solid strategy.
Mistake #5: Choosing The Wrong Broker
The most important research you’ll ever do in all your trading is career is the research you do on your broker.
Some unregulated brokers will use every trick in the book to part you from your money. Also, other brokers that are simply poorly run may be in financial trouble, with no indemnity insurance to protect your funds if they shut their doors.
When you choose your broker, test their services with small volumes first. Make a withdrawal to see how soon you receive your funds, if you are charged any transaction fees, and if you receive the full amount you requested.
Another important tip is to check out your broker’s customer support. This is important because the worst time to find out that your broker offers poor customer support is when you need it most. So before you get yourself into such a position, visit their customer support channels, ask a few questions, make sure your questions are answered promptly and professionally.
Above all, choose a trusted, regulated broker. An FCA license from the UK is a good sign that your broker is being held to the highest standards of financial regulation.