Trading through an online forex broker offers the novice trader the opportunity to get familiar with the forex market before committing any funds. Because most online foreign exchange brokers offer a free demo account to try out their trading platform, novice traders can experience trading without losing a penny.
Nevertheless, forex trading online in a demo account has its shortcomings. The biggest drawback from trading in a demo account consists of the fact that the trader does not feel financial pain for losses.
New traders tend to make the same type of mistakes despite having experience trading in a demo account. This stands to reason because traders with money on the line tend to get emotional about making and losing money, — which is a big mistake.
Having a good idea of what to avoid when trading in the forex market can save any trader a great deal of grief and money. Below find the top five mistakes made by new traders.
The Biggest Mistake: Trading on Emotions Without a Plan
The two most prevalent emotions in the market consist of greed and fear. Many traders fear losing money or get greedy when they make money. These two emotions can befuddle anyone trying to keep a clear head trading.
The best way to deal with emotions while trading consists of eliminating them. While this may be easier said than done, it makes up the main reason to trade with a clear and concise trading plan.
Trading with a trading plan can eliminate the major pitfall of getting emotional while trading. Having clear rules and an easy to implement trading plan can also save both novice and experienced traders from making many other potentially costly trading mistakes.
More Top Forex Trading Mistakes
Another four of the most common trading mistakes that novice forex traders tend to make include:
- Betting the Ranch – Most forex traders know better than to put all of their chips on red or black, as in a roulette bet. Regardless of how strongly the trader feels about a move, the possibility always exists that they could be wrong. Putting all of one’s trading capital into one directional position has cost many a trader their trading account. Position sizing and risk management make up two key components of any successful trader’s trading plan.
- Trading Against the Trend – Markets tend to trade in trending patterns with the major trend favoring either an upward or downward direction. Generally, the trend can be easily discerned on a long term price chart. Trading against the trend can be likened to swimming upstream, or in a strongly trending market: standing in front of a train.
- Adding to a Losing Position – Many traders have a stubborn streak and think that their market call is correct despite the market advising them to the contrary. These bright people think that by adding to their losing position they will decrease their overall price of getting in and will make more money when the market turns around. Nevertheless, more often then not, the market fails to reverse in time and their positions wind up with a loss. The loss is magnified considerably the more they have added to the position by “averaging” their loss.
- Letting a Winning Position Turn into a Loser – Some traders fail to realize the market trades like a rubber band, stretching one way and then reversing and trading in the opposite direction. Greed often makes the trader cancel their take profit order in the expectation of making more money. This often results in the market trading in the opposite direction and making the profitable trade turn into a loser.