Although retail traders join the forex market with different prior backgrounds and personalities, most of them end up making similar mistakes. The nature of this activity does not resemble having a 9-to-5 job and because of that, emotional reactions are influencing the decision-making process. Awareness is the first step towards moving forward and because of that, it would be critical to talk about the top 4 common mistakes beginners sooner or later face.
Excessive use of leverage is one of the main causes of underperformance among retail FX traders. Combined with increased volatility in 2020, this can lead to rapid losses, especially since beginners generally have a lower trading accuracy. Professional traders want to be in the industry for a long time and because of that, preserving capital is one of their most important goals.
Using high leverage on a small account might enable placing larger orders, but each time the market will move in the opposite direction, the account balance will swing aggressively, leading to improper trading management.
#2 Trading without a stop loss
Trading forex online without a stop loss is without a doubt one of the biggest mistakes a beginner could make since the downside is not limited by anything. A stop-loss represents a safety net that will be triggered each time the price performance is not as expected. Not even the best traders manage to be right in all trades and losses are part of the game.
Limiting losses and letting profits run is the most appropriate approach that can, over the long run, lead to better trading performance. Choosing to rely on a manual stop loss (closing the trade discretionary) can work only if traders can remain objective even when emotional reactions threaten to cloud their judgment.
#3 Not focusing on trading education
It may be possible that some people have a natural tendency towards trading efficiently, but in most cases, this is a skill-based activity and education will play a critical part in determining the outcome. Unfortunately, beginning traders are aware of this and believe that only with a few pieces of information found online they will manage to trade like the pros.
Technical and fundamental analysis, risk management, crowd psychology, understanding how the global financial system works, and other similar knowledge is what makes a successful trader.
#4 Trading without a plan
A well-based trading plan will provide multiple benefits, including the ability to trade objectively, being prepared for unexpected events, managing risk according to a set of parameters, and adjusting position sizing based on changing market conditions.
One of the first goals of a beginner should be to develop a trading plan and yet, few manage to do it, even those who are getting assistance from a trading mentor. A trading plan acts like a map inside a market that could perform wildly at any point, especially now when risks can arise suddenly, catching most of the traders off guard.