The foreign exchange market (forex) is popular with traders for numerous reasons. It’s highly liquid – with more than $US5 trillion on average traded every day – is open around the clock Monday to Friday and is stable enough for brokers to offer leverage (meaning traders can borrow more against their capital) on trades.
However, it’s also a highly sophisticated market and traders who rush into it can end up making some very costly mistakes. Let’s look at five of the biggest ones made by new forex day traders:
1. Not having a trading plan
If you’re going to become a forex trader, you need a trading plan. Acting without one will almost certainly lead to losses, so before you get started make sure you sit down and write up a list of rules to guide your trading and money management strategies. Here are some of the questions you should be asking yourself before you start forex day trading:
- When to enter a trade?
- What are the criteria you will use to evaluate a trade – moving averages, economic news etc?
- What sort of gains are you targeting?
- Which currency pairs should you focus on?
- When should I exit a trade?
- How much are you willing to lose on a trade?
- Where should you set take profit/stop loss trades?
- How long will you allow your trade to reach the target you have set?
- How much money should I risk on individual trades?
- What is your budget?
- What amount of leverage is appropriate for your circ*mstances and risk tolerance?
2. Not enough research
The world of foreign exchange trading is built on interconnected dynamics. Economics, politics and market fundamentals converge in ways that create opportunities and risks for traders.
Many new traders are lured in by the potential gains on offer but fail to do the necessary research. This is potentially a way to lose money. Successful traders, however, tend to read widely and regularly to educate themselves on trading strategies and keep abreast of potential market-moving events. Here are some of the areas to research on your journey to becoming a trader:
- Economics
- How interest rates and other economic news (such as trade data, employment and activity) affect currency pairs?
- Market fundamentals
- What are the market fundamentals driving movements in your chosen currency pairs? What are the technical indicators you need to be aware of to trade successfully?
- Money management
- What strategies can you follow to maximise profits and minimise losses?
3. Ignoring economic data and news events
News events like the release of economic data and central bank decisions can have a major impact on currency markets. The good news is that many of these events follow a regular schedule so it’s easy to know when they are coming. Of course, that does not mean it is easy to predict what the news will be, or how markets will react.
Trading on the back of a news event before a trend has been established does not fit all trading plans, but it may suit others. It’s a good idea to pay attention to news and events as these can play a crucial role in determining trends in currency pairs
4. Hoping bad trades will come good
One of the worst mistakes new traders make is averaging down: investing more money in a losing trade in the hope of a turnaround. More often than not this amounts to throwing good money after bad and can exacerbate your losses.
The reality is that even if your investment hypothesis is correct, the price of your pair can move against you for longer than you expect. Similarly, holding on to losing positions for too long will prevent you from shifting your capital towards a potentially more successful trade.
5. Taking quick profits and missing out on larger gains
The key principle of a forex day trader is to minimise loses and maximise profits but, just as some new traders hold on to losing positions for too long, many will also diminish returns by taking profits too early. At first glance this might not sound like much of a mistake – you still made money on the trade after all – but doing it consistently will seriously sap your earning potential.
Unfortunately, this is a harder problem to solve than the other mistakes listed here. There are often good reasons to close a trade earlier than planned, perhaps your pair has unexpectedly entered a period of consolidation or perhaps a piece of news has emerged to alter the trend completely.
Nonetheless, many traders miss out on gains by acting out of fear or greed instead of a rational evaluation of the available technical and/or fundamental indicators. The best solution is once again to create a clear, well-thought-out trading plan and stick to it.
Forex trading mistake overviews
Of course, mistakes are an inevitable part of life for day traders, especially people entering the market for the first time. However, being aware of some of these common mistakes will help you prepare better and minimise your errors and, hopefully, boost your returns. If you’re interested in learning more about currency trading, visit our Forex page.
FAQs
The 5-3-1 strategy is especially helpful for new traders who may be overwhelmed by the dozens of currency pairs available and the 24-7 nature of the market. The numbers five, three, and one stand for: Five currency pairs to learn and trade. Three strategies to become an expert on and use with your trades.
What is the 5 3 1 rule in forex? ›
The 5-3-1 strategy is especially helpful for new traders who may be overwhelmed by the dozens of currency pairs available and the 24-7 nature of the market. The numbers five, three, and one stand for: Five currency pairs to learn and trade. Three strategies to become an expert on and use with your trades.
What is 90% rule in forex? ›
The 90 rule in Forex is a commonly cited statistic that states that 90% of Forex traders lose 90% of their money in the first 90 days. This is a sobering statistic, but it is important to understand why it is true and how to avoid falling into the same trap.
What's the hardest mistake to avoid while trading? ›
Biggest trading mistakes and how to avoid them
- Over-reliance on software. ...
- Failing to cut losses. ...
- Overexposing a position. ...
- Overdiversifying a portfolio too quickly. ...
- Not understanding leverage. ...
- Not understanding the risk-reward ratio. ...
- Overconfidence after a profit. ...
- Letting emotions impair decision making.
According to research, the consensus in the forex market is that around 70% to 80% of all beginner forex traders lose money, get disappointed, and quit. Generally, 80% of all-day traders tend to quit within the first two years.
What is the golden rule in forex? ›
Let profits run and cut losses short Stop losses should never be moved away from the market. Be disciplined with yourself, when your stop loss level is touched, get out. If a trade is proving profitable, don't be afraid to track the market.
What is the 2% rule in forex? ›
One popular method is the 2% Rule, which means you never put more than 2% of your account equity at risk (Table 1). For example, if you are trading a $50,000 account, and you choose a risk management stop loss of 2%, you could risk up to $1,000 on any given trade.
What is the 1% rule in forex? ›
The 1% risk rule means not risking more than 1% of account capital on a single trade. It doesn't mean only putting 1% of your capital into a trade. Put as much capital as you wish, but if the trade is losing more than 1% of your total capital, close the position.
Is $500 enough to trade forex? ›
This forex trading style is ideal for people who dislike looking at their charts frequently and who can only trade in their free time. The very lowest you can open an account with is $500 if you wish to initiate a trade with a risk of 50 pips since you can risk $5 per trade, which is 1% of $500.
How many lots is $1000 in forex? ›
With 1:100 leverage, your need to choose ($500 * 0.02) / 100,000 * 100 = 0.01 lots. With $1000 on your account, you will be able to trade ($1000 * 0.02) 100,000 * 100 = 0.02 lots.
Why do most day traders fail? The reason why 90% of retail traders fail is that they ALL think, trade, and gamble the same way. It is a harsh statistic but is very very true. Not many retail traders last longer than 6 months as they do not understand this game at all.
What is the number one mistake traders make? ›
Studies show that the number one mistake that losing traders make is not getting the balance right between risk and reward. Many let a losing trade continue in the hope that the market will reverse and turn that loss into a profit.
When should you not trade? ›
If you can't find a reasonable price level for your stop loss, or you have to set your stop too far away and, therefore, have a reward:risk ratio that is too small, don't take that trade. Most amateurs fiddle with their stop until they think that the potential profit is large enough.
Why am I so bad at forex trading? ›
The reason many forex traders fail is that they are undercapitalized in relation to the size of the trades they make. It is either greed or the prospect of controlling vast amounts of money with only a small amount of capital that coerces forex traders to take on such huge and fragile financial risk.
Has anyone gotten rich from forex trading? ›
One of the most famous examples of a forex trader who has gotten rich is George Soros. In 1992, he famously made a short position on the pound sterling, which earned him over $1 billion. Another example is Michael Marcus, also known as the Wizard of Odd.
Why is forex so hard? ›
There is a steep learning curve and forex traders face high risks, leverage, and volatility. Perseverance, continuous learning, efficient capital management techniques, the ability to take risks, and a robust trading plan are needed to be a successful forex trader.
What is the 531 trading strategy? ›
Clear guidelines: The 5-3-1 strategy provides clear and straightforward guidelines for traders. The principles of choosing five currency pairs, developing three trading strategies, and selecting one specific time of day offer a structured approach, reducing ambiguity and enhancing decision-making.
What is the 3 5 7 rule in trading? ›
The 3–5–7 rule in trading is a risk management principle that suggests allocating a certain percentage of your trading capital to different trades based on their risk levels. Here's how it typically works: 3% Rule: This suggests risking no more than 3% of your trading capital on any single trade.
What is the 5-3-1 rule? ›
The big lifts: The 5/3/1 method uses the squat, deadlift, bench press and overhead press barbell moves. Weekly programme: 4 sessions a week, each session focussing on one of the lifts. Reps and sets: You'll be completing 3 sets of varying reps of 5, 3 and 1 for the chosen exercise over the 4 weeks.
What is the 60 40 rule in forex? ›
The 60/40 Rule Explained
Forex options and futures contracts are considered IRC Section 1256 contracts for tax purposes. This means they are subject to a 60/40 tax consideration. In other words, 60% of gains or losses are counted as long-term capital gains or losses, and the remaining 40% is counted as short-term.
