We haven’t talked about typical beginner mistakes for quite a while. Let’s not include here the most basic problems like lack of plan and preparation. I’m pretty sure you already know about that. We’ll get to slightly less obvious problems right away.
1. Holding a Losing Trade for Too Long
Although the market tends to move cyclically and constantly reverse, you cannot tell exactly when this will happen. Fight the urge to wait for the next change of the price direction. You should always close your losing trades timely. I don’t mean that the loss should be taken after the first pip against you. You need to exit the trade at the moment when the losses reach the maximum value that you have set for yourself.
Yes, sooner or later the market will reverse. But if you wait until the last, the level of losses might become critical. Your other open positions may suffer as you run out of margin due to one losing trade. In addition, due to the growing unrealized loss, you won’t be able to open another more promising transaction.
If you find it difficult to overpower yourself and close a trade, use Stop Loss orders. Set them immediately with the opening of a position. So your trade will automatically close once the loss reaches the maximum allowable level.
2. Trade Against the Trend
Many traders are eager to catch the very beginning of a trend reversal in order to get the most out of every trade. Unfortunately, even a prolonged fall or rise doesn’t on a chart guarantee a trend change. The price may continue to move in the previous direction.
There are a number of trend reversal signals in Forex:
- Candlestick patterns such as doji, engulfing, hammer, etc.
- Reversal figures such as head and shoulders, double and triple bottom or top, etc.
- Weakening of the trend strength which shows in a more frequent return of the price to the trend line, etc.
If you don’t want to get bogged down in losses, enter the trade only after receiving a clear signal of a trend reversal and confirming it with one or two methods.
3. Increasing Risk for Profit Growth
An experienced trader doesn’t over-risk the capital. Professionals set their own maximum risk level for each position and stick to it even when the trade success seems to be 100%. The optimal indicator for a beginner trader is 1-2% of the total capital for each position. More experienced traders might rise this percentage to 5.
The only acceptable situation for risk increase here is deliberate quick growth of your initial capital. This start deposit should be small. The trader is trying to bring it to an acceptable volume in order to start making decent profits with moderate risks. In this case, the trader sets the maximum leverage and opens large positions. Remember though that such a tactic is an effective method in the hands of an experienced trader who makes a stable profit in Forex for at least a year. In the beginner hands, this tactic will only lead to a complete loss of capital.
That's all for today. In the next article, we will look at a few more mistakes that will definitely become an obstacle on your way to success.