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Top 10 common mistakes and how to avoid them


1. Get rich quick mentality

Novice traders often see Forex as a simple way to become rich in a short period of time, without actually considering the risks and effort that must be put in to achieve such a goal. Placing very large trades in proportion to your account balance in an attempt to make a huge profit is unlikely to be successful in the long term because eventually a trade is likely to go against you, leading to severe losses.

2. Random decision-making

Traders should know where they intend to open and close their position before entering any market, based on a particular system they are following. Setting this ahead of time helps traders to focus on their system and eliminate second-guessing. It can also reduce losses by having stop loss orders in place. It's important to keep in mind that the market may not always agree with where you place an order.

3. Using too much leverage

One aspect of the Forex market that attracts many traders is the opportunity to trade on margin, in other words, leveraged trading. Trading with a small initial deposit will still make it possible for you to open relatively large positions, so it is important not to overdo it when selecting a trade size. Forex is usually traded with a high degree of leverage, which means you are able to provide 1% or less of the actual amount you are investing whilst sustaining profit/losses as if you had invested the whole nominal amount yourself. This can work for you as well as against you. The possibility does exist that you could sustain a loss equalling to some or even all of your initial investment. It is also possible to lose more than you initially invested in your trading account. We do have risk management systems that are designed to help prevent unmanageable losses although these measures still require a responsible approach to trading.

4. Not using a stop loss

Many new traders hold on to losing positions far too long thinking, or hoping, in some cases that the market will turn around. They also tend to get out of winning positions far too quickly to lock in an immediate profit, which eliminates the chance for greater gains. Although it is tempting to have this mind frame, you must have the patience to enter only those trades which you think are opportunistic and follow this up with the discipline to either cut this trade quickly if it turns against you or run with it because you believe in the trade.

5. Trading on emotion

Keeping calm and maintaining a balanced state of mind is crucial when trading in order to remain focused on relevant events. It's important to always remember that the market's actions are nothing personal. It's quite an easy thing to say but very difficult to do especially in the heat of the moment when you have to make a split second decision. Novice traders tend to trade with their emotions and they forget all the things that they've learned.

6. No discipline

Disciplined traders who stick with a tested trading plan consistently will, more often than not, profit over those who trade inconsistently because constant second-guessing ruins the profitability and eliminates the benefits of having a trading plan in the first place. It is crucial that you plan your trades and trade your plan rather than randomly picking out trades on a whim because the latter is no more than punting with only the hope of winning as opposed to having an edge in the markets through the use of a solid, consistent trading system. It's important to maintain consistency with your trading system and follow it up with good analysis of your own processes in order to have a better idea of where you are going wrong.

7. No money management

The main difference between an amateur and an experienced trader is their approach to money management. Professional traders recommend risking a set percentage of capital and never altering that percentage. Risking a set percentage of your total capital on each trade is an advantage in times of repeated losses because it reduces their impact. Amateur traders often disregard this and increase their stakes as they begin to lose more. This type of scenario inevitably leads to loss after loss.

8. Not knowing your market

A common mistake made by novice Forex traders is to begin trading without having sufficient knowledge of their chosen currency pair(s) and how currencies are influenced by global events. Learn as much as you can about how different financial markets impact each other and how they intercorrelate, ie stocks, bonds, commodities and Forex. This knowledge will enable you to make better informed trading decisions when various economic figures are released. It is also important to identify the type of market that is prevailing to allow you to adjust your strategy accordingly and thus avoid entering into losing trades. The more informed you are, the better your chances of trading successfully. Be aware that some market participants have different intentions from the ones you have, for example, hedgers will sell into a market that is rising because hedgers often look for good average prices on large orders in order to risk manage their portfolios. This is in contrast to individual traders who seek to maximise profit on each trade.

9. Not to monitor your positions

It is crucial that you monitor any exposure you have in the Forex market. Having a close eye on how your trade(s) is/are doing will help you maintain control of your trade(s) and help you to follow market movements as they happen. Staying up to date with market developments is a good way to maintain and expand your level of knowledge and understanding of the Forex market. Be aware that the Forex market trades 24 hours a day, so making use of pending orders will be crucial if you want to leave your PC.

10. Trading without a strategy

A significant amount of time should be spent on deciding on your strategy before you place your first trade because this will make it easier for you to concentrate on market events. Most novice Forex traders begin trading without having sufficient knowledge of their chosen currency pair(s), how currencies are influenced by global events and how they plan to take advantage of price movements. It is crucial that you observe the market price action and try to identify trading patterns before risking your capital, with your observations helping you formulate a trading plan and a trading style.

Your trading strategy should take the following into account:

Your motivation to trade is a key aspect because most successful traders do not have profit in mind when trading because thinking about the potential future profit or potential future losses will cloud your decisions in the present . Instead, experienced traders focus on the process of trading rather than worrying about the amount they could win or lose in a trade.

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RISK WARNING: Trading in the foreign exchange markets on margin carries a high level of risk, and may not be suitable for all individuals. The high degree of leverage offered in the Forex markets can work against you as well as for you. Before deciding to trade in the foreign exchange markets you should carefully consider your investment objectives, you level of experience, and your risk appetite. The possibility exists that you could sustain a loss of some or all of your equity and therefore you should not invest money that you cannot afford to lose. Only true excess disposable cash should be used in trading. You should make yourself aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any questions or concerns as to how a loss would affect your lifestyle. Past performance does not guarantee in any way future results.

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